##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



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



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POZEN Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 an
accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    x  Yes ̈No



The number of shares outstanding of the registrants common stock as of July 20, 2005 was 28,915,511.



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##### Table of Contents

POZEN Inc.

(A Development Stage Company)

FORM 10-Q



For the Three and Six Months Ended June 30, 2005



INDEX



|                             |  |                                                                                                                                                         |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                                                                                         |  | Page
|PART I.                      |  | FINANCIAL INFORMATION                                                                                                                                   |  |     
|                             |  |                                                                                                                                                        
|Item 1.                      |  | Financial Statements (unaudited)                                                                                                                        |  |     
|                             |  |                                                                                                                                                        
|                             |  | Balance Sheets as of June 30, 2005 and December 31, 2004                                                                                                |  | 1   
|                             |  |                                                                                                                                                        
|                             |  | Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 and Period From Inception (September 26, 1996) Through June 30, 2005 |  | 2   
|                             |  |                                                                                                                                                        
|                             |  | Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 and Period From Inception (September 26, 1996) Through June 30, 2005           |  | 3   
|                             |  |                                                                                                                                                        
|                             |  | Notes to Financial Statements                                                                                                                           |  | 4   
|                             |  |                                                                                                                                                        
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                   |  | 8   
|                             |  |                                                                                                                                                        
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                              |  | 28  
|                             |  |                                                                                                                                                        
|Item 4.                      |  | Controls and Procedures                                                                                                                                 |  | 28  
|                             |  |                                                                                                                                                        
|PART II.                     |  | OTHER INFORMATION                                                                                                                                       |  |     
|                             |  |                                                                                                                                                        
|Item 1.                      |  | Legal Proceedings                                                                                                                                       |  | 29  
|                             |  |                                                                                                                                                        
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                                                                     |  | 29  
|                             |  |                                                                                                                                                        
|Item 6.                      |  | Exhibits                                                                                                                                                |  | 30  
|                             | 
|Signature and Certifications |  | 31                                                                                                                                                     
|                             | 
|Exhibit Page                 |  | 32                                                                                                                                                     



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



POZEN Inc.

(A Development Stage Company)

BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                           |  | June 30, 2005 |              |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                     |  |               |              |   |                   |   |              |  
|Current assets:                                                                                                                                                            |  |               |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                  |  | $             | 17,741,788   |   |                   | $ | 51,764,129   |  
|Short-term investments                                                                                                                                                     |  |               | 19,467,365   |   |                   |   |             |  
|Prepaid expenses and other current assets                                                                                                                                  |  |               | 445,464      |   |                   |   | 1,064,032    |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total current assets                                                                                                                                                       |  |               | 37,654,617   |   |                   |   | 52,828,161   |  
|Equipment, net of accumulated depreciation                                                                                                                                 |  |               | 296,625      |   |                   |   | 467,688      |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total assets                                                                                                                                                               |  | $             | 37,951,242   |   |                   | $ | 53,295,849   |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |               |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                                       |  |               |              |   |                   |   |              |  
|Accounts payable                                                                                                                                                           |  | $             | 831,071      |   |                   | $ | 2,330,349    |  
|Accrued compensation                                                                                                                                                       |  |               | 1,425,776    |   |                   |   | 1,182,848    |  
|Accrued expenses                                                                                                                                                           |  |               | 1,041,014    |   |                   |   | 1,626,829    |  
|Deferred revenue                                                                                                                                                           |  |               | 7,865,000    |   |                   |   | 8,680,092    |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                                  |  |               | 11,162,861   |   |                   |   | 13,820,118   |  
|Long-term liabilities:                                                                                                                                                     |  |               |              |   |                   |   |              |  
|Deferred revenue                                                                                                                                                           |  |               | 4,573,000    |   |                   |   | 7,764,978    |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                          |  |               | 15,735,861   |   |                   |   | 21,585,096   |  
|Common stock, $0.001 par value, 90,000,000 shares authorized; 28,915,511 and 28,852,743 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively |  |               | 28,916       |   |                   |   | 28,853       |  
|Additional paid-in capital                                                                                                                                                 |  |               | 146,161,596  |   |                   |   | 146,161,655  |  
|Accumulated other comprehensive loss                                                                                                                                       |  |               | (7,485       | ) |                   |   |             |  
|Deficit accumulated during the development stage                                                                                                                           |  |               | (123,967,646 | ) |                   |   | (114,479,755 | )
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total stockholders equity                                                                                                                                                 |  |               | 22,215,381   |   |                   |   | 31,710,753   |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $             | 37,951,242   |   |                   | $ | 53,295,849   |  
|                                                                                                                                                                           |  |               |              |   |                   |   |              |  



See accompanying Notes to Financial
Statements.



1



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##### 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,
2005 |           
|                                                                    |  |                            
|                                                                    |  |                            
|                                                                    |  |                            
|                                                                    |  |                            
|                                                                    |  | 2005                        |            |                           | 2004 |                                                                  | 2005       |  |   | 2004       |  
|Revenue                                                             |  | $                           | 1,958,885  |                           |      | $                                                                | 16,889,500 |  | $ | 4,011,375  |   |  | $ | 18,779,000 |  | $ | 30,816,282   |  
|Operating expenses:                                                 |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|General and administrative                                          |  |                             | 2,328,632  |                           |      |                                                                  | 2,007,557  |  |   | 4,725,218  |   |  |   | 4,005,606  |  |   | 45,612,917   |  
|Research and development                                            |  |                             | 4,003,467  |                           |      |                                                                  | 3,671,996  |  |   | 9,331,252  |   |  |   | 6,043,964  |  |   | 116,571,229  |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Total operating expenses                                            |  |                             | 6,332,099  |                           |      |                                                                  | 5,679,553  |  |   | 14,056,470 |   |  |   | 10,049,570 |  |   | 162,184,146  |  
|Other income:                                                       |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Interest and other income                                           |  |                             | 285,531    |                           |      |                                                                  | 134,823    |  |   | 557,204    |   |  |   | 260,973    |  |   | 8,334,696    |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Net income (loss)                                                   |  |                             | (4,087,683 | )                         |      |                                                                  | 11,344,770 |  |   | (9,487,891 | ) |  |   | 8,990,403  |  |   | (123,033,168 | )
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Non-cash preferred stock charge                                     |  |                             |           |                           |      |                                                                  |           |  |   |           |   |  |   |           |  |   | 27,617,105   |  
|Preferred stock dividends                                           |  |                             |           |                           |      |                                                                  |           |  |   |           |   |  |   |           |  |   | 934,478      |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Net income (loss) attributable to common stockholders               |  | $                           | (4,087,683 | )                         |      | $                                                                | 11,344,770 |  | $ | (9,487,891 | ) |  | $ | 8,990,403  |  | $ | (151,584,751 | )
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Basic net income (loss) per common share                            |  | $                           | (0.14      | )                         |      | $                                                                | 0.39       |  | $ | (0.33      | ) |  | $ | 0.31       |  |   |              |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Shares used in computing basic net income (loss) per common share   |  |                             | 28,915,511 |                           |      |                                                                  | 28,786,486 |  |   | 28,914,116 |   |  |   | 28,671,070 |  |   |              |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Diluted net income (loss) per common share                          |  |                             |           |                           |      | $                                                                | 0.38       |  |   |           |   |  | $ | 0.30       |  |   |              |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  
|Shares used in computing diluted net income (loss) per common share |  |                             |           |                           |      |                                                                  | 29,704,675 |  |   |           |   |  |   | 29,776,949 |  |   |              |  
|                                                                    |  |                             |            |                           |      |                                                                  |            |  |   |            |   |  |   |            |  |   |              |  



See accompanying Notes to Financial
Statements.



2



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##### Table of Contents

POZEN Inc.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|-------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ------------------------------------------------------------- | - | ---------- | - |  | - | ------------ | -
|                                                                                       |  | Six Months Ended June 30, |             |   | Period fromInception(September 26,1996) ThroughMarch 31,
2005 |  
|                                                                                       | 
|                                                                                       | 
|                                                                                       | 
|                                                                                       |  | 2005                      |             |   | 2004                                                          |   |           
|Operating activities:                                                                  |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Net (loss) income                                                                      |  | $                         | (9,487,891  | ) |                                                               | $ | 8,990,403  |   |  | $ | (123,033,168 | )
|Adjustments to reconcile net (loss) income to net cash (used in) operating activities: |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Depreciation                                                                           |  |                           | 90,348      |   |                                                               |   | 52,152     |   |  |   | 778,806      |  
|Write-down of impaired asset                                                           |  |                           | 69,272      |   |                                                               |   |           |   |  |   | 102,839      |  
|Gain on sale of investments                                                            |  |                           | 49,717      |   |                                                               |   |           |   |  |   | 49,717       |  
|Bond amortization                                                                      |  |                           | (219,615    | ) |                                                               |   |            |   |  |   | (219,615     | )
|Noncash compensation expense                                                           |  |                           | 340,549     |   |                                                               |   | 94,698     |   |  |   | 11,616,218   |  
|Noncash financing charge                                                               |  |                           |            |   |                                                               |   |           |   |  |   | 450,000      |  
|Changes in operating assets and liabilities:                                           |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Prepaid expenses, and other current assets                                             |  |                           | 618,568     |   |                                                               |   | 284,101    |   |  |   | (445,464     | )
|Accounts payable and accrued expenses                                                  |  |                           | (2,135,632  | ) |                                                               |   | 220,735    |   |  |   | 2,604,006    |  
|Deferred revenue                                                                       |  |                           | (4,007,070  | ) |                                                               |   | (3,779,000 | ) |  |   | 12,438,000   |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Net cash provided by (used in) operating activities                                    |  |                           | (14,681,754 | ) |                                                               |   | 5,863,089  |   |  |   | (95,658,661  | )
|Investment activities:                                                                 |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Purchase of equipment                                                                  |  |                           | (35,639     | ) |                                                               |   | (6,947     | ) |  |   | (1,225,352   | )
|Purchase of investments                                                                |  |                           | (25,655,235 | ) |                                                               |   |           |   |  |   | (25,655,235  | )
|Sale of investments                                                                    |  |                           | 6,350,283   |   |                                                               |   |           |   |  |   | 6,350,283    |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Net cash used in investing activities                                                  |  |                           | (19,340,591 | ) |                                                               |   | (6,947     | ) |  |   | (20,530,304  | )
|Financing activities:                                                                  |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Proceeds from issuance of preferred stock                                              |  |                           |            |   |                                                               |   |           |   |  |   | 48,651,850   |  
|Proceeds from issuance of common stock                                                 |  |                           | 4           |   |                                                               |   | 1,173,347  |   |  |   | 81,436,888   |  
|Proceeds from notes payable                                                            |  |                           |            |   |                                                               |   |           |   |  |   | 3,000,000    |  
|Proceeds from stockholders receivables                                                |  |                           |            |   |                                                               |   |           |   |  |   | 1,004,310    |  
|Payment of dividends                                                                   |  |                           |            |   |                                                               |   |           |   |  |   | (162,295     | )
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Net cash provided by financing activities                                              |  |                           | 4           |   |                                                               |   | 1,173,347  |   |  |   | 133,930,753  |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                           | (34,022,341 | ) |                                                               |   | 7,029,489  |   |  |   | 17,741,788   |  
|Cash and cash equivalents at beginning of period                                       |  |                           | 51,764,129  |   |                                                               |   | 60,480,690 |   |  |   |             |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Cash and cash equivalents at end of period                                             |  | $                         | 17,741,788  |   |                                                               | $ | 67,510,179 |   |  | $ | 17,741,788   |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Supplemental schedule of cash flow information:                                        |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Cash paid for interest                                                                 |  | $                         |            |   |                                                               | $ |           |   |  | $ | 191,328      |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Supplemental schedule of noncash investing and financing activities:                   |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Conversion of notes payable to preferred stock                                         |  | $                         |            |   |                                                               | $ |           |   |  | $ | 3,000,000    |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Preferred stock dividend                                                               |  | $                         |            |   |                                                               | $ |           |   |  | $ | 772,183      |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Forfeiture of common stock options and warrants                                        |  | $                         |            |   |                                                               | $ |           |   |  | $ | 314,379      |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  
|Conversion of preferred stock warrants to common stock                                 |  | $                         |            |   |                                                               | $ |           |   |  | $ | 1,080,001    |  
|                                                                                       |  |                           |             |   |                                                               |   |            |   |  |   |              |  



See accompanying Notes to Financial
Statements.



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##### Table of Contents

POZEN Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



1. Development Stage Company



We are a pharmaceutical company focused primarily on products for the treatment of migraine,
acute and chronic pain and other pain-related indications. Our product development emphasis is on diseases with unmet medical needs where we can improve efficacy, safety and/or patient convenience. Since our inception in 1996, we have focused our
efforts primarily on the development or regulatory approval of pharmaceutical products for the treatment of migraine. Our portfolio currently contains three product candidates in the migraine area, MT 400, MT 100 and MT 300, along with product
candidates in other acute and chronic pain and pain-related therapeutic areas, PN 100, PN 200 and lornoxicam. We have not obtained regulatory approval to market any of our product candidates. Statement of Financial Accounting Standards Board No.
(SFAS) 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 believe that 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.



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 9, 2005. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.



Revenue RecognitionThe Companys
licensing agreements have terms that include upfront payments upon contract signing, additional payments if and when certain milestones in the products development or commercialization are reached, and royalty payments based on future product
sales. These agreements are accounted for in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition, as amended by SAB 104, Revenue Recognition (SAB 101), and Emerging Issues Task Force 00-21
(EITF 00-21), Revenue Arrangements with Multiple Deliverables. The non-refundable portion of upfront payments received under the Companys existing agreements are 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.



Milestone payments are recognized as revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the
milestone was not reasonably assured at the inception of the agreement and (ii) the fees are non-refundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.



Royalty revenue will be recognized when earned with respect to the manufacture, sale or use
of the Companys products or technology. For those arrangements where royalties are reasonably estimable, the Company will recognize revenue based on estimates of royalties earned during the applicable period and reflect in future revenue any
differences between the estimated and actual royalties. For those arrangements where royalties are not reasonably estimable, the Company will recognize revenue upon receipt of a statement from the licensee that a royalty is payable.



Additionally, the Companys licensing agreements may include payment for services
provided by the Company on an hourly rate and direct expenses. The Company records such revenue in accordance with the agreements which would generally be based upon time spent and materials used on the project.



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 current, are considered to be available-for-sale and are carried at fair value with unrealized gains and losses recognized in other
comprehensive income (loss). Realized gains and losses are determined using the specific identification method and transactions are recorded on a settlement date basis. Generally, investments with maturities beyond twelve months are classified as
long-term. Marketable and non-marketable equity investments are evaluated periodically for impairment. If it is determined that a decline of any investment is other than temporary, the investment would be written down to fair value and the
write-down would be permanent.



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##### Table of Contents

Accumulated Other Comprehensive Income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 $7,485 of unrealized losses on its investments that are classified as accumulated other comprehensive loss at June 30, 2005.



Comprehensive income consists of the following components for three and six
months ended June 30, 2005 and 2004:



|                                                |  |                             |            |                           |      |   |            |  |   |            |   |  |   |          
|----------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | ---- | - | ---------- |  | - | ---------- | - |  | - | ---------
|                                                |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                |  | 2005                        |            |                           | 2004 |   | 2005       |  |   | 2004      
|Net income (loss)                               |  | $                           | (4,087,683 | )                         |      | $ | 11,344,770 |  | $ | (9,487,891 | ) |  | $ | 8,990,403
|Unrealized gain (loss) on marketable securities |  |                             | 4,498      |                           |      |   |           |  |   | (7,485     | ) |  |   |         
|                                                |  |                             |            |                           |      |   |            |  |   |            |   |  |   |          
|Total comprehensive loss                        |  | $                           | (4,083,185 | )                         |      | $ | 11,344,770 |  | $ | (9,495,376 | ) |  | $ | 8,990,403
|                                                |  |                             |            |                           |      |   |            |  |   |            |   |  |   |          



Stock-based
CompensationThe Company accounts for non-cash stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock Issued to Employees and Statement of
Financial Accounting Standards (SFAS) No. 123 Share Based Payments. Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock Issued to Employees, states that no compensation expense is recognized for
stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the estimated fair value of the Companys common stock on the grant date. In the event that stock options are granted with an
exercise price below the estimated fair market value of the Companys common stock at the grant date, the difference between the fair market value of the Companys common stock and the exercise price of the stock option is recorded as
deferred compensation and amortized as compensation expense over the vesting period of the options.



On January 3, 2005, pursuant to an incentive program approved by the Compensation Committee of the Board of Directors of the Company, stock options (the Trexima grant) 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 option will vest in full upon the later to occur of (i) January 3, 2007 or (ii) the receipt by the Company of an action
letter from the U.S. Food and Drug Administration (FDA) indicating approval of the New Drug Application (NDA) for the product candidate Trexima, which is being developed pursuant to the Companys collaboration agreement with GlaxoSmithKline; provided, however that 25% of
each such option will be forfeited if receipt of the FDA approval letter for the Trexima NDA does not occur prior to June 30, 2007, and 100% of each such option will be forfeited if receipt of the FDA approval letter for the Trexima NDA does not
occur on or before December 31, 2007. The options, which were granted under the Companys Equity Compensation Plan, as amended and restated, have a ten-year term and an exercise price of $7.06, the Nasdaq reported market closing price of the
common stock on January 3, 2005, the date of grant.



As a result, the Company
is required to apply variable stock-based compensation accounting for the Trexima grant until the underlying options are vested or forfeited. The Company is only subject to compensation expense for such options when the Companys stock price is
greater than the exercise price of the options. Regarding the Trexima grant, for the three months ended March 31, 2005, the Company recorded no variable stock-based compensation expense in its statements of operations because its common stock price
on March 31, 2005 was below the options exercise price of $7.06. For the three and six month periods ended June 30, 2005, the Company recorded $140,000 in variable stock-based compensation expense because its common stock price on June 30,
2005 exceeded the options exercise price of $7.06.



Because the
determination of variable stock-based compensation expense associated with the Trexima grant is significantly dependent upon the market price of the common stock at the end of the applicable reporting period, it is not possible to determine its
future impact, either favorable or unfavorable, on the Companys financial statements for prospective reporting periods.



In connection with the grant of stock awards to employees, consisting of the January 2005 Trexima grant stock options to employees and a restricted stock unit award made
in May 2004 to our Chief Executive Officer, the Company recorded $100,000 and $200,000 in stock based compensation expense in the three and six month periods ended June 30, 2005 and $140,000 in amortized deferred compensation for the three and six
month periods ended June 30, 2005. Vesting periods of the options are generally three or four years except as noted above regarding the Trexima grant, and the restricted stock unit award vests in equal amounts on January 1, 2005, January 1, 2006 and
January 1, 2007.



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##### Table of Contents

The following table illustrates the effect on net income (loss) and net income (loss) per share as if the Company had
applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                                |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                                                                |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004        |  
|Net income (loss) attributable to common stockholders as reported                                                                               |  | $                           | (4,087,683 | ) |                           | $ | 11,344,770 |      |  | $ | (9,487,891  | ) |  | $ | 8,990,403  |  
|Add: Stock-based employee compensation expense reflected in reported net income (loss), net of related tax effects                              |  | $                           | 240,451    |   |                           | $ | 94,698     |      |  | $ | 340,549     |   |  | $ | 94,698     |  
|Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax
effects |  |                             | (1,434,949 | ) |                           |   | (1,190,056 | )    |  |   | (3,043,864  | ) |  |   | (1,865,703 | )
|                                                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Pro forma net income (loss) attributable to common stockholders                                                                                 |  | $                           | (5,282,181 | ) |                           | $ | 10,249,412 |      |  | $ | (12,191,206 | ) |  | $ | 7,114,602  |  
|                                                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |             |   |  |   |            |  
|Earnings per share                                                                                                                              |  | $                           |            |   |                           | $ |            |      |  |   |             |   |  |   |            |  
|Basic net income (loss) per common share as reported                                                                                            |  | $                           | (0.14      | ) |                           | $ | 0.39       |      |  | $ | (0.33       | ) |  | $ | 0.31       |  
|Basic net income (loss) per common share pro forma                                                                                              |  | $                           | (0.18      | ) |                           | $ | 0.36       |      |  | $ | (0.42       | ) |  | $ | 0.25       |  
|Diluted net income (loss) per common share as reported                                                                                          |  | $                           | (0.14      | ) |                           | $ | 0.38       |      |  | $ | (0.33       | ) |  | $ | 0.30       |  
|Diluted net income (loss) per common share pro forma                                                                                            |  | $                           | (0.18      | ) |                           | $ | 0.35       |      |  | $ | (0.42       | ) |  | $ | 0.24       |  



Net Loss Per ShareBasic
and diluted net (loss) income per common share amounts are presented in conformity with SFAS 128, Earnings per Share, for all periods presented. In accordance with SFAS 128, basic and diluted net (loss) income per common share amounts
have been computed using the weighted-average number of shares of common stock outstanding for the three and six month periods ended June 30, 2004 and 2005. During the three and six months ended June 30, 2004 and 2005, 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 month periods ended June 30, 2005 because the effect would be
anti-dilutive. The following table illustrates the calculation of dilutive shares outstanding:



|                                                                              |  |                             |  |                           |  |            |  |           
|----------------------------------------------------------------------------- |  | --------------------------- |  | ------------------------- |  | ---------- |  | ----------
|                                                                              |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                                                              |  | 2005                        |  | 2004                      |  | 2005       |  | 2004      
|Weighted-average shares used in computing basic net income (loss) per share   |  | 28,915,511                  |  | 28,786,486                |  | 28,914,416 |  | 28,671,070
|                                                                              |  |                             |  |                          
|Effect of dilutive securities                                                 |  |                            |  | 918,189                   |  |           |  | 1,105,879 
|                                                                              |  |                             |  |                           |  |            |  |           
|Weighted-average shares used in computing diluted net income (loss) per share |  | 28,915,511                  |  | 29,704,675                |  | 28,914,416 |  | 29,776,949
|                                                                              |  |                             |  |                           |  |            |  |           



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 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. Each Right, when exercisable, will entitle the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.001 par value per share, at a purchase
price of $80.00, subject to adjustment. Generally, the Rights only become exercisable if a person or group acquires beneficial ownership of 15 percent or more of POZENs common stock or announces a tender offer for 15 percent or more of
POZENs common stock. The Rights Plan is similar to plans adopted by many other publicly-traded companies.



New Accounting Pronouncements  On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004)
(Statement 123(R)), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation(FASB123). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in FASB 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of FASB 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under FASB 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be
permitted in periods in which financial statements have not yet been issued. The Company is reviewing Statement 123(R) and the additional guidance regarding assumptions and option-pricing models and currently anticipates adoption of Statement 123(R)
on January 1, 2006 using the modified prospective method.



As permitted by FASB
123, we currently account for share-based payments to employees using APB 25s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair
value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of the adoption of Statement 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of FASB 123 as described in the disclosure of pro forma net (loss) income
and earnings (loss) per share in Note 2 above. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things,
when employees exercise stock options), the decrease in operating cash flows which would have been recognized for such excess tax deductions was $0.9 million and $0.7 million in 2004 and 2003, respectively.



Contingencies  Five purported class action lawsuits were filed during 2004 by
holders of the Companys securities against the Company and certain of its current and former officers, in the U. S. District Court for the Middle District of North Carolina, alleging violations of securities laws. These actions were filed as a
single consolidated class action complaint on December 20, 2004. The consolidated complaint alleges, among other claims, violations of federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and Rule 10b-5 and Section 20(a) of the Exchange Act against the Company and a current officer, arising out of allegedly false and misleading statements made by the Company concerning its product candidates, MT 100 and MT
300, during the class period. On January 27, 2005, the Company filed a motion to dismiss the consolidated class action complaint. All briefing on the motion to dismiss has been completed and we are awaiting the Courts ruling on the motion.



On September 13, 2004, two derivative actions were also filed against certain
of the Companys current and former directors and officers in the Superior Court for the County of Orange in the State of North Carolina, alleging violations of state law, including breaches of fiduciary duties and insider sales, relating to
the same allegedly misleading statements concerning the Companys product candidates, MT 100 and MT 300, that are referenced in the various purported class action lawsuits. The two cases have been consolidated and assigned to the North Carolina
Business Court.



The plaintiffs in the derivative actions have filed a
consolidated amended complaint asserting the same claims as were asserted in the original complaints. On May 31, 2005, the Company filed a motion to dismiss the consolidated amended complaint. All briefing has been completed and oral argument is
scheduled for August 9, 2005.



The Company and the other defendants believe
that the allegations in these actions are without merit and intend to defend these cases vigorously.



While the Company cannot predict the outcome or reasonably estimate the range of potential loss, if any, from this litigation, it is the current judgment of management that it is unlikely that this litigation will
have a material adverse effect on the Companys results of operations, financial condition or cash flows.



Additionally, under commercialization collaborations related to MT 100 and MT 300, the Company has received upfront payments, a portion of which the Company would be required to return if certain conditions are met.
Under the MT 100 collaboration, if marketing approvals in certain European countries are not granted, the Company could be required to pay a withdrawal fee in amounts that range from $0.1 million to $0.4 million. Under the MT 300 collaboration, if
certain conditions are met, the Company could be required to pay a withdrawal fee of $1.0 million. As a result of the related contingencies, $1.4 million in the aggregate has not been recognized as revenue and will not be recognized as revenue until
the conditions in the agreements have been satisfied.



On July 21, 2005, POZEN
received a letter from Valeant Pharmaceuticals North America (Valeant NA), a subsidiary of Valeant Pharmaceuticals International (formerly Xcel Pharmaceuticals, Inc.) seeking payment of a $1.0 million withdrawal fee required under
certain conditions in the MT 300 collaboration agreement with Valeant NA. 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



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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.



While the Company cannot predict the
probability of any future withdrawal fee obligations, it is the current judgment of management that no reserve is currently required.



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



This discussion of our financial condition and the results of operations should be read together with the financial statements, including the notes contained elsewhere in
this Form 10-Q, and the financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2004, as filed on March 9, 2005.



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 under Factors That May Affect Our
Results. We do not intend to update any of these factors or to publicly announce the results of any revisions to these forward-looking statements, other than as is required under the federal securities laws.



Overview



We are a pharmaceutical company focused primarily on products for the treatment of migraine, acute and chronic pain and other pain-related
indications. Our product development emphasis is on diseases with unmet medical needs where we can improve efficacy, safety and/or patient convenience. Since our inception, we have focused our efforts primarily on the development or regulatory
approval of pharmaceutical products for the treatment of migraine. We are also exploring the development of product candidates in other acute and chronic pain and pain-related therapeutic areas. We have not obtained regulatory approval to market any
of our product candidates.



Our business activities have included:



| |  |  | product candidate research and development;
| | - |  | -------------------------------------------



| |  |  | designing and funding clinical trials for our product candidates;
| | - |  | -----------------------------------------------------------------



| |  |  | regulatory and clinical affairs;
| | - |  | --------------------------------



| |  |  | intellectual property prosecution and expansion; and
| | - |  | ----------------------------------------------------



| |  |  | business development, including product acquisition and/or licensing and collaboration activities.
| | - |  | --------------------------------------------------------------------------------------------------



Our portfolio currently contains three product candidates in the migraine area, MT 400, MT 100 and MT 300. We are also exploring the
development of product candidates in other acute and chronic pain and pain-related therapeutic areas, including product candidates containing lornoxicam and our PN suite of product candidates. We have not obtained regulatory approval for any of our
product candidates.



Under our MT 400 technology, which refers to our
proprietary combinations of a triptan (5-HT1B/1Dagonist) and a non-steroidal anti-inflammatory drug
(NSAID), we seek to develop product candidates that provide acute migraine therapy by combining the activity of two drugs that act by different mechanisms to reduce the pain and associated symptoms of migraine. In June 2003, we signed an
agreement with GlaxoSmithKline (GSK) for the development and commercialization of proprietary combinations of one or more of GSKs triptans and a long-acting NSAID for the U.S. market. The combinations covered by the agreement are
among the combinations of our MT 400 technology. Trexima is the proposed brand name for the combination of GSKs sumatriptan and naproxen sodium in a single tablet being developed pursuant to our agreement with GSK. We commenced a Phase 3
clinical program for Trexima in the second half of 2004. We met with the FDA in April 2005 to discuss the results of our two Phase 3 pivotal trials, along with other information required for the submission of the Trexima NDA. Based upon discussions
at this pre-NDA meeting, we believe that no additional pre-clinical or clinical trials are necessary for submission. The Trexima NDA submission is planned for the third quarter of 2005. Under our collaboration agreement with GSK, upon the FDAs
acceptance for filing of the Trexima NDA, GSK will become obligated to pay us a milestone payment in the amount of $20 million.



For MT 100 and MT 300, our current focus is primarily on the regulatory process. MT 100 is a combination of metoclopramide hydrochloride and naproxen sodium. MT 300 is a
proprietary formulation of injectable dihydroergotamine mesylate (DHE) in a pre-filled syringe. In May 2004, we received a not-approvable letter from the FDA with respect to our NDA for MT 100. We are continuing communications with the
FDA to seek to persuade the FDA that the NDA for MT 100 should be approved and an advisory



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committee meeting has been scheduled for August 2005 to address MT 100 issues. We are also seeking regulatory approval of MT 100 in the United Kingdom
(UK) and, if successful, other European countries. In October 2003, we received a not-approvable letter from the FDA related to our NDA for MT 300, which was submitted in December 2002. Based upon our understandings from our most recent
communications with the FDA and our understanding of the current FDA standards for approving migraine drugs, we believe it is not possible to reverse the not approvable status of the NDA for MT 300.



We currently have two exploratory programs in pain-related therapeutic areas. We have begun
exploratory development work and clinical studies to investigate the development of novel product candidates containing lornoxicam, alone or in combination with other active ingredients, as potential treatments for pain or other indications. This
exploratory work has been conducted under an exclusive option agreement with Nycomed Danmark ApS (Nycomed). On July 27, 2005, we exercised our option and acquired a license to certain rights related to lornoxicam. As a part of our
agreement with Nycomed, we have also granted certain exclusive rights to Nycomed to supply us, or our commercialization partners, if any, with lornoxicam active drug substance for use in the manufacture of any of our lornoxicam product candidates.
In our other exploratory program, we are seeking to identify potential product candidates that combine a proton pump inhibitor (PPI) with an NSAID. We have begun exploratory formulation development and clinical studies for combinations
of a PPI and an NSAID in a single tablet intended to provide effective control of pain and inflammation with fewer gastrointestinal complications compared to an NSAID taken alone. We have designated this program as our PN suite of product
candidates, and our current PN product candidates as PN 100 and PN 200.



We
have financed our operations and internal growth primarily through private placements of preferred stock, our initial public offering and, beginning in 2003, payments received under our collaborations. Beginning in the third quarter of 2003, we
began recognizing revenue from initial payments received under our collaboration agreements. We have entered into three collaboration agreements for the commercialization of our product candidates  with Nycomed for the commercialization of MT
100 in four Nordic countries, GSK for the development and commercialization of proprietary combinations of one or more of GSKs triptans and a long-acting NSAID in the U.S., and Valeant Pharmaceuticals North America (Valeant NA), a
subsidiary of Valeant Pharmaceuticals International (formerly Xcel Pharmaceuticals Inc.) for the further development and commercialization of MT 300 in the U.S. We plan to seek additional partnering opportunities to commercialize our product
candidates.



We have incurred significant losses since our inception and have
not generated any revenue from product sales. As of June 30, 2005, our accumulated deficit was approximately $124.0 million. Our historical operating losses have resulted principally from our research and development activities, including Phase 3
clinical trial activities for our product candidates MT 100 and MT 300, Phase 2 clinical trial activities for our MT 400 technology, 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 72% of our total operating
expenses. In the six-month period ended June 30, 2005, our research and development expenses represented approximately 66% of our total operating expenses.



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



| |  |  | the progress of Trexima and our other product candidates in the clinical and regulatory process;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our progress in reversing the FDAs not-approvable decision with respect to MT 100;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the establishment of new collaborations and progress and/or maintenance of our existing collaborations for the development and commercialization of any of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the acquisition and/or in-licensing, and development, of other therapeutic product candidates; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | our costs related to the lawsuits that have been filed against us and our current or former directors and officers relating to the approvability of MT 100 and MT 300. The status of
these proceedings is discussed in this Form 10-Q under PART II. Item 1. Legal Proceedings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our ability to generate revenue is dependent upon our ability, alone or with others, to achieve the milestones set forth in our collaboration agreements and successfully
develop our migraine and other product candidates, obtain regulatory approvals and successfully manufacture and commercialize our future products.



Status of Our Product Candidates



There follows a brief discussion of the status of each of Trexima, MT 100, MT 300, and our other product candidates, as well as the costs relating to our development
activities. Our research and development expenses that are not direct development costs consist of personnel and other research and development departmental costs and are not allocated by product candidate. We do not maintain records that allocate
our employees time by the projects on which they work and, therefore, are unable to identify costs related to the time that employees spend on research and development by product candidate. Total compensation and benefit costs for our
personnel involved in our research and development activities during the six month period ended June 30, 2005 were $2.2 million. Other research and development department costs for the six month period ended June 30, 2005 were $0.3 million.



9



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##### Table of Contents

MT 400/Trexima. As part of our Phase 3 program for Trexima, we have conducted two Phase 3 pivotal
trials designed to determine the effectiveness and safety of Trexima for the acute treatment of migraine as well as to satisfy the requirements of the FDAs combination drug rule. In addition, we are conducting a long-term, open label safety
study. Along with these program trials, GSK is funding and currently conducting two Phase 3b/4 studies.



In February 2005, we completed the first Phase 3 pivotal trial, in which Trexima demonstrated superiority over the individual components measured by sustained pain-free response (p<.001) and, with the exception of
the incidence of nausea-free at two hours, all other regulatory endpoints were met (p<.001). Trexima did reach statistical significance for the nausea endpoint compared to placebo after two hours and maintained superiority through twenty-four
hours. All of the active treatments (Trexima, sumatriptan and naproxen) had a similar incidence of nausea at two hours compared to placebo. In April 2005, we completed the second Phase 3 pivotal trial, in which Trexima demonstrated superiority over
the individual components measured by sustained pain-free response (p<0.001 vs. naproxen; p=0.009 vs. sumatriptan) and met all other regulatory endpoints versus placebo.



We met with the FDA in April 2005 to discuss the results of both Phase 3 trials and other information required for the submission of the
Trexima NDA. Based upon discussions at this pre-NDA meeting, we believe that no additional pre-clinical or clinical trials are necessary for submission; however, we cannot guarantee that additional data will not be necessary following this
submission. The Trexima NDA submission is planned for the third quarter of 2005. Under our collaboration agreement with GSK, upon the FDAs acceptance for filing of the Trexima NDA, GSK will become obligated to pay us a milestone payment in the
amount of $20 million.



We cannot reasonably estimate or know the amount or
timing of costs necessary to complete the development of Trexima or when, if and to what extent we will receive cash inflows from Trexima. The additional costs that we may incur include expenses relating to clinical trials and other research and
development activities associated with the packaging and labeling of our product and the cost and timing of regulatory approvals.



We have incurred direct development costs associated with the development of Trexima during the six months ended June 30, 2005 and from inception to date of $4.0 million
and $23.0 million, respectively. Our direct development costs do not include the cost of research and development personnel or any allocation of our overhead expenses.



MT 100.In July 2003, we submitted an NDA to the FDA for MT 100. In May 2004, we received a not-approvable letter from the FDA
with respect to our NDA. Since the issuance of the not-approvable letter, we have had continuing communications with the staff of the FDA to seek to persuade the FDA that MT 100 should be approved based upon the data that we submitted in the NDA for
MT 100. We reported in June 2005 that the FDA had set August 4, 2005 as the date for the meeting of the FDAs Peripheral and Central Nervous System Drugs Advisory Committee (advisory committee). Based on recent correspondence from
the FDA, we believe that the advisory committee will principally discuss the potential risk of the occurrence of an involuntary neurological movement disorder known as tardive dyskinesia associated with the use of metoclopramide, one of the
components of POZENs MT 100. The overall risk versus benefit of MT 100 in all migraine patients and in a specific subpopulation of migraine patients may also be discussed. The role of the advisory committee is to provide independent expert
advice to the FDA and contribute to the quality of the regulatory decision-making process. The FDA is not bound by the advisory committees recommendations. We have no assurances that the committees recommendation will be favorable to us.



It is possible that we may be required to conduct another clinical study
and/or conduct investigations to provide additional evidence to support the approval of MT 100. We cannot estimate the cost or duration of any such study or investigation or decide whether to conduct such a study or investigation until the results
of the meeting with the FDAs advisory committee are known and the design of any such study or studies has been determined with the FDA. Our Phase 3 clinical trials for MT 100 took between three months and eighteen months and involved a direct
cost per patient of between $2,200 and $3,200. The duration and cost of any new study that we may conduct may be different from our prior clinical trials. No assurance can be given that our efforts to obtain approval of MT 100 will ultimately be
successful.



In October 2002, we submitted a Market Authorization Application
(MAA) for MT 100 to the Medicines and Healthcare Products Regulatory Agency (MHRA) in the UK. In September 2003, we received a letter of comments relating to our MAA from the MHRA Advisory Committee to which we subsequently
responded. In January 2005, we were notified that the MHRA Advisory Committee was prepared to advise the MHRA that a marketing authorization could be granted for MT 100 in the UK, provided that we supply certain additional information and meet
certain conditions, as outlined by the MHRA Advisory Committee. In February 2005, we provided information to the MHRA Advisory Committee which we believe addresses all the conditions set forth by the MHRA Advisory Committee. Following approval of
the MAA in the UK, POZEN will pursue registration of MT 100 in other European territories, including Scandinavia, through the European Mutual Recognition Procedure.



We are not currently conducting any clinical trials for MT 100. However, we are continuing to incur pharmaceutical development costs for
product stability testing and costs relating to our continuing efforts to obtain approval of MT 100 from the FDA and in the UK. Additionally, we may incur costs for the commercialization of this product if our applications are approved by the FDA
and in the UK. Until the not-approvable letter is definitively resolved with the FDA and we receive final approval of the MAA from the MHRA,



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we cannot reasonably estimate the amount and timing of additional costs that we may need to incur to satisfy comments or conditions on our applications for
approval or when, if and to what extent we will receive cash inflows from MT 100. The additional costs that we may incur include expenses related to clinical trials, formulation, manufacturing and labeling of our product and regulatory consulting
expenses required to address the FDAs and MHRAs responses to our applications.



We have incurred direct development costs associated with the development of MT 100, during the six months ended June 30, 2005 and from inception to date, of $0.5 million and $39.3 million, respectively. Our direct
development costs do not include the cost of research and development personnel or any allocation of our overhead expenses.



MT 300.In December 2002, we submitted to the FDA an NDA for approval of MT 300. In October 2003, we received a not-approvable letter from the FDA
with respect to our NDA for MT 300. Subsequently, we submitted additional responses to the not-approvable letter and requested a Type A meeting with the FDAs Division of Neuropharmacological Drug Products to present our position in response to
the issues identified by the FDA. The Type A meeting was held in December 2004 and a subsequent teleconference with the FDA occurred in January 2005 during which the FDA restated its concerns that approval of MT 300 was problematic due to the higher
incidence of nausea at two hours following dosing in patients treated with MT 300 compared with placebo. Based upon our understandings from our most recent communications with the FDA, in which the FDA reaffirmed its previously stated concerns, and
our understanding of the FDAs current standards of 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 with Valeant NA regarding termination of our
commercialization agreement. On July 21, 2005, POZEN received a letter from Valeant NA seeking payment of a $1 million withdrawal fee required under certain conditions in the agreement with Valeant NA. We do not believe that 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. 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.



We are not currently
conducting any clinical trials for MT 300. However, we are continuing to incur pharmaceutical development costs for product stability testing and may incur costs relating to the termination of efforts to seek approval and commercialization of MT
300. Given our current assessment that it is unlikely that we can reverse the not approvable status of the NDA for MT 300, we believe it is unlikely that we will receive any future cash inflows from MT 300.



We have incurred direct development costs associated with the development of MT 300, during
the six months ended June 30, 2005 and from inception to date of $56,000 and $14.5 million, respectively. Our direct development costs do not include the cost of research and development personnel or any allocation of our overhead expenses.



PN (PPI / NSAID) Program.Our PN exploratory development program
is intended to identify potential product candidates that combine a proton pump inhibitor (PPI) with an NSAID in a single tablet intended to provide effective control of pain and inflammation with fewer gastrointestinal complications compared to an
NSAID taken alone. We have designated these potential product candidates as our PN suite of potential products. In March 2005, we received a Notice of Allowance on a patent application covering combinations of acid inhibitors and NSAIDs, including
naproxen and aspirin. Our PN suite of product candidates are among the compositions to be covered by this patent.



In late 2004, we requested a pre-IND meeting with the FDA to discuss our exploratory proprietary tablet formulations containing a traditional non-selective NSAID and a
PPI. Our studies in human volunteers have suggested that such fixed combinations could provide a degree of protection against the development of gastric and/or duodenal ulcers in patients who require the daily use of an NSAID drug for arthritis or
other chronic inflammatory conditions.



We met with the FDA in January 2005 and
discussed our proposals for studies to obtain approval of our PN 100 product, the most advanced product in our PN program. Based on discussions at this meeting, we believe we should be able to initiate Phase 3 studies of this product candidate in
early 2006. We have requested a meeting with the FDA to discuss our plans for studies to pursue approval of our second PN product, PN 200, a combination tablet containing a different PPI with a traditional non-selective NSAID, as well as to discuss
implications of the FDAs guidance concerning labeling of NSAID-containing products (June 2005) which resulted from the FDA advisory committee meeting in February 2005 that discussed the safety of NSAIDs, and, in particular, the cardiovascular
risks of the COX-2 selective NSAIDs.



We will continue to review with the FDA
its expectations and recommendations regarding the efficacy and safety requirements necessary to support NDAs for our PN product candidates.



We have incurred direct development costs associated with the development of our PN program, for the six month period ended June 30, 2005 and from inception to date, of
$1.6 million and $5.8 million, respectively. Our direct development costs do not include the cost of research and development personnel or any allocation or our overhead expenses.



Lornoxicam Program.We are exploring the development of novel product candidates containing lornoxicam, an NSAID that is
currently marketed outside the United States (including Europe and Japan), alone or in combination with other active ingredients, as potential treatments for pain or other indications. We have been conducting our exploratory work under an exclusive
option agreement with Nycomed. In July 2005, we exercised this option and licensed certain rights related to lornoxicam.



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In December 2003, we submitted an IND to the FDA for lornoxicam oral tablets and, in January 2004, received FDA approval
to conduct the first human study with this formulation in the United States. This single-site trial evaluated the efficacy and safety of single doses of lornoxicam (at three different dose strengths), ibuprofen and placebo in 125 patients undergoing
dental surgery for impacted third molars. The data from this study confirmed the acute safety profile for lornoxicam in these patients and provided preliminary evidence of efficacy in this pain model.



In September 2004, we met with the FDA to review the results of this study, to discuss
information provided in the IND and to discuss non-clinical issues and potential additional clinical studies. We provided additional analyses and information requested by the FDA following that meeting. As a result of an FDA advisory committee
meeting held in February 2005 addressing the potential cardiovascular risk of COX-2 selective NSAIDs and related drugs, the FDA has indicated that studies evaluating cardiovascular risk will be required for new NSAID products prior to approval, such
as lornoxicam oral tablets.



In May 2005, we submitted an IND to the FDA for an
injectable lornoxicam formulation and, in June 2005, received FDA approval to conduct the first human study with this formulation under our IND. It is anticipated that the injectable formulation will be studied in the management of moderate to
severe acute pain, and as such, we believe it is a possible that long term cardiovascular safety studies may not be required for NDA approval.



We will continue to discuss with the FDA the clinical and non-clinical study requirements, including safety study requirements, anticipated for approval of lornoxicam
product candidates.



We cannot reasonably estimate or know the amount or timing
of the costs necessary to continue exploratory development and/or complete the development of any lornoxicam product candidates we may seek to develop or when, if and to what extent we will receive cash inflows from any lornoxicam products. The
additional costs that may be incurred include expenses relating to clinical trials and other research and development activities and activities necessary to obtain regulatory approvals.



We have incurred direct development costs associated with the development of our lornoxicam program, for the six month period ended June 30,
2005 and from inception to date, of $0.7 million and $3.2 million, respectively. Our direct development costs do not include the cost of research and development personnel or any allocation or our overhead expenses.



Collaborative Arrangements



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



GlaxoSmithKline



In June 2003, we signed an agreement with GSK for the development and commercialization of proprietary combinations of a triptan (5-HT1B/1Dagonist) 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 United States to commercialize all combinations which combine GSKs triptans, including Imitrex® (sumatriptan succinate) or Amerge® (naratriptan hydrochloride), with a long-acting NSAID. We are responsible for development of the first combination product, while GSK is to provide
formulation development and manufacturing. 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. Additionally, GSK is obligated to make payments to us in an amount up to $40.0 million upon the
achievement of specified development and regulatory milestones relating to an NDA and commercialization progress for the first product. In addition, GSK will pay us sales performance milestones of up to $80.0 million if certain sales thresholds are
achieved. Up to an additional $10.0 million per product is payable upon achievement of milestones relating to other products. GSK will also pay us royalties on all net sales of marketed products until at least the expiration of the last to expire
issued applicable patent (August 14, 2017 based upon the scheduled expiration of currently issued patents). GSK may reduce, but not eliminate, the royalty payable to us if generic competitors attain a pre-determined share of the market for the
product, or if GSK owes a royalty to one or more third parties for rights it licenses from such third parties to commercialize the product. The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by
either party for a material breach or by GSK at any time upon ninety (90) days written notice to us for any reason or no reason. Among the contract breaches that would entitle POZEN to terminate the agreement is GSKs determination not to
further develop the combination product under certain circumstances. GSK has the right, but not the obligation, to bring, at its own expense, an action for infringement of certain patents by third parties. If GSK does not bring any such action
within a certain time frame, we have the right, at our own expense, to bring the appropriate action. With regard to certain other patent infringements, we have the sole right to bring an action against the infringing third party. Each party
generally has the duty to indemnify the other for damages arising from breaches of each partys representations, warranties and obligations under the agreement, as well as for gross negligence or intentional misconduct. We also have a duty to
indemnify GSK for damages arising from our development and manufacture of MT 400 prior to the effective date of the agreement, and each party must indemnify the other for damages arising from the development and manufacture of any combination
product after the effective date.



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Nycomed Danmark ApS



MT 100



In June 2003, we signed a license agreement with Nycomed for the commercialization of MT 100 in four Nordic countries. Under the terms of the agreement, Nycomed will have exclusive rights in Denmark, Sweden, Norway
and Finland to commercialize MT 100 upon its approval in these countries. Upon execution of the agreement, Nycomed paid us an upfront fee of $0.5 million. We are eligible to receive milestone payments in an aggregate amount of up to $1.0 million
upon the occurrence and based on the timing of and reasons for delays in obtaining certain regulatory approvals, including the approval of the MAA in the UK and in the countries where Nycomed has exclusive rights. If a substantial reason for a delay
in obtaining any such approval is due to specified issues identified in the agreement, these milestones may be reduced, deferred and/or eliminated in whole or in part. In June 2005, we received notice from Nycomed that they believe that regulatory
approval in the UK has been delayed due in substantial part to one of these specified issues. We disagree with Nycomeds assessment and are in discussions with Nycomed to attempt to resolve this matter. In addition to milestone payments,
Nycomed is obligated to pay us a specified royalty on all net sales of MT 100, based upon the higher of an agreed percentage of sales on a country-by-country basis, subject to reduction in the event of generic competition, or an agreed dollar amount
per unit sold subject to reduction under certain conditions, until the later of the expiration of the last to expire issued applicable patent in the particular country or 15 years from first commercial sale. The scheduled expiration date of the
patent that is currently applicable in Sweden, Finland and Denmark is November 12, 2016. There is no applicable patent in Norway. The license agreement will expire on a country-by-country basis upon the later of (a) the date of expiration of all
royalty obligations in a particular country, which is scheduled for November 12, 2016 in Sweden, Finland and Denmark, and (b) 15 years after the date of first commercial sale of MT 100 in such country under the agreement. Nycomed has the
right to terminate the agreement if we default under the agreement or the MAA is not approved in the UK by October 14, 2005. The agreement terminates if we withdraw the MAA in the UK and also terminates with respect to a particular country (other
than the UK) if we withdraw the required regulatory application in that country. If we withdraw a regulatory application in any of the countries identified in the agreement, we will be required to pay a withdrawal fee in amounts that range from $0.1
million to $0.4 million. Assuming the issues raised in the September 2003 MAA comment letter discussed elsewhere in this Form 10-Q are satisfactorily resolved and we receive unconditional approval of the MAA from the MHRA, we intend to seek approval
of MT 100 in Denmark, Sweden, Norway and Finland through the European Union Mutual Recognition Procedure.



Under the agreement, generally, each party must indemnify the other for damages arising from each partys breach of its representations, warranties and obligations under the agreement. Additionally, Nycomed must
indemnify us for any claim brought by a third party arising from Nycomeds development, manufacture or sale of any products, and we must indemnify Nycomed for any claim brought by a third party arising from our development, transportation or
manufacture of any products. Furthermore, both parties have a duty to maintain commercially reasonable insurance coverage commensurate with its obligations under the agreement.



At the same time as we entered into the license agreement with Nycomed, we entered into a supply agreement with Nycomed under which Nycomed
is obligated to purchase from us, and we are obligated to sell to Nycomed, the MT 100 that Nycomed sells in the countries specified in the agreement, and Nycomed is required to reimburse us for certain costs related to the manufacturing of MT 100.
The agreement will expire upon an anniversary date of the first commercial sale of MT 100 following final approval by the FDA of the NDA for MT 100. Either party may terminate the agreement in the event of a material breach or default by the other
party of the material terms and conditions of the agreement. Among the material breaches that would entitle Nycomed to terminate the agreement would be our failure to deliver products to Nycomed at a time when Nycomed has established an alternative
source of the product.



Lornoxicam



In May 2003, we entered into a development, option and license agreement with Nycomed
pursuant to which we obtained an exclusive license to certain development rights during the option period and an exclusive option to license certain rights to develop, manufacture and commercialize products containing lornoxicam. In July 2005, we
exercised the option and were granted an exclusive license, with the right to sublicense, develop, manufacture and commercialize single-entity products and combination products containing lornoxicam in the U.S. (& its territories) and Canada
(the Exclusive Territory). We were granted a non-exclusive license to develop and commercialize combination products containing lornoxicam in Belgium, Germany, Greece, France, Ireland, Luxembourg, The Netherlands, Austria, Finland,
Denmark, United Kingdom, Sweden, Armenia, Azerbaijan, Belarus, Estonia, Georgia, Iceland, Kazakhstan, Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Moldova, Norway, Russia, Switzerland, Tajikistan, Turkmenistan, Ukraine and Uzbekistan (the
Limited Territory). We were granted a non-exclusive license to manufacture single-entity and combination products containing lornoxicam outside of the Exclusive Territory, excluding certain countries. We granted Nycomed a right of first
refusal with respect to the development, manufacturing and commercialization, in Iceland, Denmark, Norway, Finland, Sweden, Lithuania, Latvia, Estonia, Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan,
Turkmenistan, Uzbekistan and Ukraine, of certain combination lornoxicam products that we may develop under the agreement.



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Pursuant to the agreement, we paid Nycomed a total of $500,000 for upfront and milestone payments during the option
period, and we will pay Nycomed a non-refundable $500,000 payment in August 2005 to exercise our option under the agreement. We will be obligated to pay additional milestone payments in an aggregate amount of up to $500,000 upon the occurrence of
certain regulatory approvals. In addition, we will be obligated to pay Nycomed specified single digit royalties on all net sales of any licensed single-entity or combination lornoxicam products, with the amount of such royalties subject to reduction
upon the occurrences of certain specified events. The obligation to pay such royalties expires on a product-by-product and country-by-country basis ten (10) years from the first commercial sale of a product in a given country. We are also obligated
to pay Nycomed a specified single digit percentage of any upfront and milestone payments we may receive from our sublicensees up to a preset maximum amount per sub-licensee.



As a part of the agreement, Nycomed will supply us with all of our required clinical supply of active drug substance, and may also supply
some clinical trial materials under certain conditions. Under the agreement, subject to Nycomeds ability to meet a specified percentage of POZENs and each of its sublicensees requirements, POZEN and each of its sublicensees (each,
a buyer) must purchase all of their required commercial supply of active drug substance from Nycomed for a minimum of 5 years. For each buyer, this exclusive 5-year purchase commitment for each of the Exclusive Territory and the Limited Territory
begins with the buyers first commercial sale of its first licensed lornoxicam product in a particular specified country within the Exclusive Territory and the Limited Territory, respectively, as applicable.



Each party generally has the duty to indemnify the other for damages arising from each
partys breach of its representations, warranties and obligations under the agreement, as well as for gross negligence or willful misconduct. In addition, we must indemnify Nycomed for any claim brought by a third party arising from our
development, testing, manufacture or sale of any licensed product. Further, each party has a duty to maintain commercially reasonable insurance coverage commensurate with its obligations under the agreement. Nycomed has the right, but not the
obligation, to bring, at its own expense, an action for infringement of certain patents by third parties. If Nycomed does not bring any such action within a certain time frame, we have the right, but not the obligation, at our own expense, to bring
the appropriate action. The agreement terminates upon the date of expiration of all royalty obligations unless terminated earlier by either party for material breach or upon the bankruptcy, insolvency or dissolution of either party, or by us if we
determine in good faith that it is not commercially or scientifically feasible to continue development and commercialization efforts with respect to products using the licensed technology. Nycomed also may terminate the agreement if we or any
sublicensee initiates a lawsuit challenging the validity of any licensed patent.



Valeant Pharmaceuticals North American (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 this occurs 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. On



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July 21, 2005, POZEN received a letter from Valeant NA seeking payment of the $1 million withdrawal fee. We do not believe that 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. We intend to vigorously defend our position under the agreement. At this time, it is not possible to determine if any withdrawal fee will be required to be paid to
Valeant NA upon the ultimate resolution of this dispute.



Based upon the delays
related to commercialization of MT 300 due to our receipt of the not-approvable letter for MT 300 and our efforts to address with the FDA the issues raised in that letter, we and Valeant NA had previously agreed to extend the time for certain
activities under our agreement with Valeant NA that are dependent on the FDAs actions with respect to MT 300. In the event of termination of the agreement, these obligations will not be relevant.



We can give no assurance that Valeant NA or Valeant International will agree to termination
terms acceptable to us, and we can give no assurance that we will not be required to pay Valeant NA the withdrawal fee of $1.0 million.



Results of Operations



Three months ended June 30, 2005 compared to the three months ended June 30, 2004



Net income (loss) per share: Net loss attributable to common stockholders for the quarter ended June 30, 2005 was $(4.1) million or $(0.14) per share, as compared
to net income of $11.3 million, or $0.38 per share, for the quarter ended June 30, 2004.



Revenue: We recognized $2.0 million of revenue for the quarter ended June 30, 2005 as compared to $16.9 million for the quarter ended June 30, 2004. Revenue for the period resulted from amortization of upfront
payments and other payments we received pursuant to development and commercialization agreements relating to MT 100, MT 300 and Trexima. Revenue for the quarter ended June 30, 2004 included a milestone payment of $15.0 million from GSK for
commencement of Phase 3 clinical trial activities for Trexima. 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. Approximately $12.4 million remains in deferred revenue at June 30, 2005. Substantive milestone payments are recognized as revenue upon completion of the contractual events.



Research and development: Research and development expenses increased by $0.3 million
to $4.0 million for the second quarter of 2005, as compared to the same period of 2004. The increase was due primarily to an increase in direct development costs for the PN exploratory development program and increases in personnel costs. Direct
development costs for the PN exploratory development program increased by $0.6 million to $1.2 million, primarily due to product development activities during the second quarter of 2005, as compared to the same period of 2004. Research and
development personnel costs increased $0.4 million to $1.2 million as compared to the same period of 2004 primarily due to an in increase in personnel. We have included in our research and development expenses the personnel costs associated with our
research and development activities and costs associated with pharmaceutical development, clinical trials, toxicology activities, and regulatory matters.



General and administrative: General and administrative expenses increased by $0.3 million to $2.3 million for the second quarter of 2005, as compared to the same
period of 2004. The increase was due primarily to an increase in the costs associated with our public company activities. Costs associated with our public company activities increased by $0.2 million to $0.9 million primarily due to increases in
directors and officers insurance. 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 for the quarter ended June 30, 2005 and the quarter
ended June 30, 2004 were $0.2 and $0.1 million, respectively. Investment income from bond amortization for the period ended June 30, 2005 totaled $0.1 million as compared to no investment income from bond amortization during the same period of 2004.



Six months ended June 30, 2005 compared to the six months ended
June 30, 2004



Net income (loss) per share: Net loss
attributable to common stockholders for the six months ended June 30, 2005 was $(9.5) million or $(0.33) per share, as compared to net income of $9.0 million, or $0.30 per share, for the six months ended June 30, 2004.



Revenue: We recognized $4.0 million of revenue for the six months ended June 30, 2005
as compared to $18.8 million for the six month period ended June 30, 2004. Revenue for the period resulted from amortization of upfront payments and other payments we received pursuant to development and commercialization agreements relating to MT
100, MT 300 and Trexima. Revenue for the six month period ended June 30, 2004 included a milestone payment of $15.0 million from GSK for commencement of Phase 3 clinical trial activities for Trexima. 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



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of regulatory approvals, as specified in the agreements relating to the product candidates. Approximately $12.4 million remains in deferred revenue at June
30, 2005. Substantive milestone payments are recognized as revenue upon completion of the contractual events.



Research and development: Research and development expenses increased by $3.3 million to $9.3 million for the six months ended June 30, 2005, as compared to the same period of 2004. The increase was due
primarily to an increase in direct development costs for Trexima and the PN exploratory development program and increases in personnel costs. Direct development costs for Trexima increased by $2.2 million to $4.0 million, primarily due to Phase 3
clinical trial activities during the period. Direct development costs for the PN exploratory development program increased by $0.7 million to $1.6 million primarily due to product development activities during the six months ended June 30, 2005, as
compared to the same period of 2004. Research and development personnel costs increased $0.7 million to $2.2 million as compared to the same period of 2004, primarily due to an in increase in personnel. We have included in our research and
development expenses the personnel costs associated with our research and development activities and costs associated with pharmaceutical development, clinical trials, toxicology activities, and regulatory matters.



General and administrative: General and administrative expenses increased by $0.7
million to $4.7 million for the six months ended June 30, 2005, as compared to the same period of 2004. The increase was due primarily to an increase in the costs associated with our public company activities. Costs associated with our public
company activities increased by $0.5 million to $1.8 million, primarily due to legal fees associated with the class action and shareholder derivative litigation pending against us and increases in directors and officers insurance.
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 for the six month periods ended June 30, 2005 and June 30, 2004 was $0.3 million and $0.3 million,
respectively. Investment income from bond amortization for the period ended June 30, 2005 totaled $0.2 million as compared to no investment income from bond amortization during the same period of 2004.



Income Taxes



As of December 31, 2004, we had net operating loss carry-forwards of approximately $80.1 million for federal and state income tax purposes,
which are available to offset future federal and state taxable income, if any, which expire between 2013 and 2024. We also have research and development tax credit carry-forwards of approximately $7.2 million for federal income tax reporting
purposes that expire between 2012 and 2024. We currently estimate a cumulative net operating loss carry-forward of approximately $6.1 million for the twelve months ending December 31, 2005 and estimate an effective tax rate of 0% for the three and
six month periods ended June 30, 2005. Our effective tax rate was 0% for the three and six month periods ended June 30, 2004. The estimated effective rate was based upon estimates of income for the fiscal year and our ability to use remaining net
operating loss carry-forwards and other tax credits. However, the actual effective rate may vary depending upon actual licensing fees and milestone payments received, specifically the pre-tax book income for the year, and other factors. Income taxes
have been accounted for using the liability method in accordance with SFAS 109, Accounting for Income Taxes. Since our inception, we have incurred substantial losses and may incur substantial and recurring losses in future periods. The
Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carry-forwards (following certain ownership changes, as defined by the Act) that could
significantly limit our ability to utilize these carry-forwards. We have experienced various ownership changes, as defined by the Act, as a result of, among other reasons, past financings. Accordingly, our ability to utilize the aforementioned
carry-forwards may be limited. Additionally, because U.S. tax laws limit the time during which these carry-forwards may be applied against future taxes, we may not be able to take full advantage of these carry-forwards for federal income tax
purposes.



Liquidity and Capital Resources



Since our inception, we have financed our operations and internal growth primarily through
private placements of preferred stock and our initial public offering, resulting in cash inflows of $133.9 million, and since 2003, from upfront and milestone payments from our collaborators, resulting in cash inflows of $43.3 million. Our cash and
cash equivalents are invested primarily in short-term, highly rated investments, including U.S. Government securities, commercial paper and certificates of deposit guaranteed by banks.



During the first quarter of 2005, we moved $20 million into a managed investment account designed to increase the return on our cash. This
account is managed within our Board approved investment policy, which restricts investments to less than 12 months, limits concentration to 5% or less and requires credit ratings of A1/P1, among other requirements. Because certain holdings in the
managed account have maturities longer than 3 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.



No operating cash was received during the six-month period ended June 30, 2005. We expect milestone payments from GSK over the next several years in an aggregate amount
of up to $40.0 million upon the satisfaction of specified regulatory and commercialization events for Trexima. These milestone payments include a $20 million payment payable upon the FDAs acceptance for filing of the Trexima NDA. The Trexima
NDA submission is currently planned for the third quarter of 2005 and we expect FDA acceptance of the NDA for filing in the fourth quarter of 2005.



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Based upon the direct method of presenting cash flow, cash paid for operating activities totaled $15.1 million for the
six-month period ended June 30, 2005. The indirect method for presenting cash flow is used in the Statement of Cash Flows. Cash paid for operating activities in the fiscal years ended December 31, 2004, 2003, and 2002 was $26.4, $17.8 million and
$23.7 million, respectively. Net cash paid for investing activities during the period totaled $19.3 million, reflecting investing activities associated with the purchase of short-term securities. Cash required for our operating activities during
2005 is projected to be slightly higher than our 2004 requirements due to the expected cash required to complete Phase 3 clinical trial activities for Trexima and to continue development of our exploratory programs.



As of June 30, 2005, we had $17.7 million in cash and cash equivalents and $19.5 million in
short-term investments. If our operating expenses for the remainder of 2005 and 2006 are at the level of our currently expected operating expenses in 2005, and if we do not receive any additional milestone payments under any of our collaboration
agreements during 2005 and 2006, including in particular the $20 million milestone payment payable by GSK upon the FDAs acceptance for filing of the Trexima NDA, we will not have sufficient cash reserves to maintain our level of business
activities throughout 2006. Further, our expenses might increase in 2005 and 2006 if any regulatory agency requires us to conduct additional clinical trials, studies or investigations in connection with their consideration, or reconsideration of our
regulatory filings for our product candidates. We are not currently obligated to make any milestone payments to third parties and do not currently have any other required material payment obligations during that period. However, our efforts to
reverse the FDAs not-approvable letter on MT 100 and other regulatory delays or unforeseen developments in the development of our existing and future product candidates may increase our cash requirements beyond our currently assumed needs. In
addition, we may be required to pay Valeant NA a withdrawal fee of $1.0 million if we do not prevail in our current dispute with them as to whether the withdrawal fee in payable. If any of the foregoing occurs, we may seek to raise additional funds.
Sources of such funds may not be available on terms favorable to us. We regularly assess available funding options and will consider available funding opportunities as they arise. We may issue shares of common stock in the future, including to fund
additional unplanned development activities. In February 2004, we filed with the Securities and Exchange Commission 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. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants.



Our forecast of the period of time through which we expect that our financial resources will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of a number of factors. Our future capital requirements will depend on many factors, including:



| |  |  | the number and progress of our clinical trials and other trials and studies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our success in obtaining 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 class action and shareholder derivative lawsuits that have been filed against us or our current or former directors and officers relating to MT 100
and MT 300.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Factors That May Affect Our Results



Our business is subject to certain risks and uncertainties, each of which
could materially adversely affect our business, financial condition, cash flows and results of operations.



Risks Related to Our Business



We depend heavily on the success of our product candidates, which may never be approved for commercial use. If we are unable to develop, gain approval of or commercialize those product candidates, we may never
receive revenues from the sale of our product candidates.



We anticipate
that for the foreseeable future our ability to achieve profitability will be dependent on the successful development, approval and commercialization of our current product candidates. In addition to the inability to obtain regulatory approval, many
other factors could negatively affect the success of our efforts to develop and commercialize our product candidates, including those discussed in the risk factors that follow as well as negative, inconclusive or otherwise unfavorable results from
any studies or clinical trials, such as those that we obtained with respect to MT 500, which led to our decision to discontinue development of that product candidate in 2002.



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We have incurred losses since inception and we may continue to incur losses for the foreseeable future. We do not have
a current source of product revenue.



We have incurred losses in each year
since our inception. As of June 30, 2005, we had an accumulated deficit of approximately $124.0 million. Our ability to receive product revenue from the sale of products is dependent on a number of factors, principally the development, regulatory
approval and successful commercialization of our product candidates. We expect that the amount of our operating losses will fluctuate significantly from quarter to quarter principally as a result of increases and decreases in our development efforts
and the timing of payments that we may receive from others. We expect to continue to incur significant operating losses and do not know when, if and to what extent we will generate product revenue.



Our only current potential sources of revenue are the payments that we may receive pursuant
to our collaboration agreements with Nycomed for MT 100 and GSK for Trexima. We may never receive milestone payments under our agreement with Nycomed. In addition, we will have to pay Nycomed a withdrawal fee in amounts that range from $0.1 million
to $0.4 million if we withdraw a required regulatory application for MT 100 in a country specified in the agreement with Nycomed. 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. These amounts are currently reflected in our financial statements as deferred revenue and will never be recognized as revenue if repaid.



Changes in regulatory approval policy or regulations 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 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 (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 gastro-intestinal events associated with the use of NSAIDs. Moreover, subsequent to the FDA advisory committee meeting in February 2005, the FDA has indicated that studies evaluating cardiovascular risk will be required for approval
of new NSAID products. We do not know to what extent the FDAs actions may adversely affect the approvability of our product candidates which include NSAIDs.



If we, or our 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 and may also be required to pay termination payments under certain of our collaboration agreements. Further, if we are delayed in obtaining any required approvals, our collaborators may be entitled
to terminate their agreements with us or reduce or eliminate their payments to us under these agreements.



Our product candidates under development are subject to extensive domestic and foreign regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping,
labeling, storage, approval, advertisement, promotion, sale and distribution of pharmaceutical products in the United States. In order to market our products abroad, we must comply with extensive regulation by foreign governments. If we are unable
to obtain and maintain FDA and foreign government approvals for our product candidates, we, alone or through our collaborators, will not be permitted to sell them. Failure to obtain regulatory approval for a product candidate will prevent us from
commercializing that product candidate. None of our product candidates have been approved for sale in the United States or any foreign market and they may never be approved.



In the United States, 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 outside the United States. For example, as described in the risk factors that follow, we are currently seeking to resolve
issues raised by the FDA related to our MT 100 and MT 300 NDAs and by the MHRA related to our MAA for MT 100 in the UK.



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Further, our 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
certain circumstances, we may elect not to do studies required by the FDA as a condition for approval of the NDA for MT 300 as allowed in the agreement. If Valeant NA elects not to assume control of efforts to seek approval of the NDA, we would be
required to pay to Valeant NA a withdrawal fee of $1.0 million. We have begun discussions regarding termination of our commercialization agreement with Valeant NA and can give no assurance that Valeant NA or Valeant International will agree to
termination terms acceptable to us. On July 21, 2005, we received a letter from Valeant NA seeking payment of the $1 million withdrawal fee required under certain conditions under the agreement. We do not believe that 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. 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. Similarly, under our agreement with Nycomed for the commercialization of MT 100, we will be required to pay a withdrawal fee, in amounts that range from $0.1 million to $0.4 million, if we withdraw a
regulatory application in any of the countries identified in the agreement. Further, the agreement terminates if we withdraw the MAA in the UK, or terminates with respect to a particular country identified in the agreement if we withdraw the
regulatory application in that country. Nycomed also has the right to terminate the agreement if our MAA for MT 100 is not approved in the UK by October 14, 2005. In addition, we would forfeit the ability to receive milestone payments, as well as
royalties, if the agreements are terminated. Further, certain milestone payments may be reduced, deferred or eliminated if regulatory approval is delayed for reasons specified in the agreement with Nycomed.



If we or our contract manufacturers do not maintain required regulatory approvals, we may not
be able to commercialize our products. Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drugs use, or upon the conduct of further studies, and is subject to continuous review. The FDA may
also require us to conduct additional post-approval studies. These post-approval studies may include carcinogenicity studies in animals or further human clinical trials. The later discovery of previously unknown problems with the product,
manufacturer or manufacturing facility may result in criminal prosecution, civil penalties, recall or seizure of products, or total or partial suspension of production, as well as other regulatory action against our product candidates or us. If
approvals are withdrawn for a product, or if a product is seized or recalled, we would be unable to sell that product and therefore would not receive any revenues from that product.



We and our contract manufacturers are required to comply with the applicable FDA current Good Manufacturing Practices (cGMP)
regulations, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation.



Further, manufacturing facilities must be approved by the FDA before they can be used to manufacture our product candidates, and are subject
to additional FDA inspection. We, or our third-party manufacturers, may not be able to comply with cGMP regulations or other FDA regulatory requirements, which could result in a delay or an inability to manufacture the products.



Labeling and promotional activities are subject to scrutiny by the FDA and state regulatory
agencies and, in some circumstances, the Federal Trade Commission. FDA enforcement policy prohibits the marketing of unapproved products as well as the marketing of approved products for unapproved, or off-label, uses. These regulations and the
FDAs interpretation of them may impair our ability to effectively market products for which we gain approval. Failure to comply with these requirements can result in federal and state regulatory enforcement action. Further, we may not obtain
the labeling claims we believe are necessary or desirable for the promotion of our product candidates.



If we are unable to convince the FDA to reverse its conclusion in its not-approvable letter for MT 100, we will not receive any revenue from sales of MT 100 in the United States.



On May 28, 2004, we received a not-approvable letter from the FDA with respect to our NDA
for MT 100. In the letter, the FDA noted that, although we had demonstrated unambiguous statistically significant superiority compared to an appropriate control on a valid measure of pain as well as on the three associated symptoms of nausea,
photophobia and phonophobia in one study, MT 100 did not clearly meet these criteria in a second study. The FDA letter cited the apparent lack of superiority of MT 100 over naproxen for sustained pain relief, which was the primary endpoint for the
two component studies. The FDA also stated in its letter that, based on animal studies, there may be a potential risk of carcinogenicity, presumably due to metoclopramide, one of the components of MT 100. Finally, the FDA raised an approvability
issue concerning the risk of tardive dyskinesia presented by the use of metoclopramide.



Since the issuance of the FDAs not-approvable letter, we have had continuing communications with the FDA to seek to persuade the FDA that MT 100 should be approved based upon the data that we submitted in the NDA for MT 100.
The FDA has set August 4, 2005 as the date for the meeting of the FDAs Peripheral and Central Nervous System Drugs Advisory Committee (advisory committee). Based on recent correspondence with the FDA, we believe that the advisory
committee will principally discuss the potential risk of the occurrence of an involuntary neurological movement disorder known as tardive dyskinesia associated with the use of metoclopamide, one of the components of MT 100. The overall risk versus



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benefit of MT 100 in all migraine patients and in a specific subpopulation of migraine patients may also be discussed. We cannot predict the outcome of the
meeting with the FDAs advisory committee or whether the FDA will follow the advisory committees recommendations. The FDA is not bound by the deliberations or recommendations of its advisory committees.



Further, it is possible that we may be required to conduct another clinical study to provide
additional evidence that MT 100 meets the requirements of the combination rule and the efficacy standards applicable to MT 100. The FDA may also require that we conduct investigations to evaluate any potential risk of tardive dyskinesia with the use
of MT 100. We cannot estimate the cost or duration of any such studies or investigations or decide whether to conduct such studies or undertake such investigations until the results of the meeting with the FDAs advisory committee are known and
the design of any such studies and the parameters of such investigations have been determined with the FDA. Our Phase 3 clinical trials of MT 100 took between three months and eighteen months and involved a direct cost per patient of between $2,200
and $3,200. However, the duration and cost of any new study that we may conduct may be different from our prior clinical trials. No assurance can be given that our efforts to obtain FDA approval of MT 100 will ultimately be successful.



Without approval of our NDA for MT 100 by the FDA, we would not be able to market MT 100
in the United States. Even if the FDA were to approve the NDA for MT 100, the delay in obtaining such approval may adversely affect our ability to find a partner to market and sell MT 100 in the United States. Further, as an additional condition of
any approval, the FDA could request or require additional studies or analyses of existing data which would require us to incur additional costs and expenses, which could be significant and would further delay the commercialization of MT 100.



Our failure to address satisfactorily the comments we received on our MAA
for MT 100 in the UK would adversely impact our ability to market MT 100 in the UK or to use the mutual recognition procedure in the European Union. Even if we obtain required approvals, the need to appropriately price and obtain reimbursement for
MT 100 may adversely affect sales or cause delays.



In September 2003, we
received a letter of comments relating to the MAA we submitted for MT 100 from an MHRA Advisory. The most significant comment in the MHRA Advisory Committees letter of comments was that we provide additional data to support the benefits of the
combination of metoclopramide hydrochloride and naproxen sodium in MT 100. We provided additional data and supplemental information to the MHRA Advisory Committee in 2004 to address the MHRA Advisory Committees questions and, in January 2005,
the MHRA Advisory Committee advised us in a letter that it was prepared to advise the MHRA that a marketing authorization could be granted for MT 100 in the UK, provided we supply certain additional information and meet certain conditions, as
outlined by the MHRA Advisory Committee. The MHRA is not bound by the MHRA Advisory Committees comments, and, although we believe we have addressed the requests of the MHRA Advisory Committee as set forth in its letter to us, we can
give no assurance that the MHRA Advisory Committee will accept the supplemental information we supplied or that the MHRA will follow the MHRA Advisory Committees recommendations. Without approval of our MAA in the UK by the MHRA, we would not
be able to market MT 100 in the UK. Further, we would not be able to use the mutual recognition process to obtain approval of MT 100 in other European Union countries unless we first obtain approval in another country in the European Union, which
would result in increased expenses and time delays. Moreover, if the MAA is not approved in the UK by October 14, 2005, Nycomed, our licensee, has the right to terminate our MT 100 commercialization agreement.



Even if we are able to obtain approvals in the European Union to market MT 100, potential
licensees, including Nycomed and any other party with whom we may enter into an agreement to commercialize MT 100, will not be able to sell MT 100 successfully in some of those European Union countries unless they price MT 100 competitively and
obtain necessary regulatory approvals for reimbursement to the patient. In some countries, licensees would need to enter into discussions regarding pricing and reimbursement of MT 100 with the appropriate governmental authorities pursuant to each of
such countrys individual requirements. Those discussions could further delay successful commercialization of MT 100 because of the time-consuming review processes in some of those countries.



If we are unable to convince the FDA to reverse its conclusion in its not-approvable
letter for MT 300, we will not receive any revenue from sales of MT 300 in the United States.



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



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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. In addition, the identification of new compounds or product candidates for development has led us, and may continue to require us, to enter into license or other collaborative agreements with others, including pharmaceutical
companies and research institutions. Collaborative agreements for the acquisition of new compounds or product candidates may require us to pay license fees, make milestone payments and/or pay royalties. Furthermore, these agreements may result in
our revenues being lower than if we developed our product candidates ourselves and in our loss of control over the development of our product candidates.



Contractors or collaborators may have the right to terminate their agreements with us or reduce their payments to us under those agreements on limited or no notice and
for reasons outside of our control. We currently have a collaboration with GSK for the development and commercialization of certain triptan combinations using our MT 400 technology in the United States and collaborations with Nycomed in the Nordic
countries and Valeant NA in the United States for the development and commercialization of MT 100 and MT 300, respectively. In all of these collaboration and license agreements, our licensees have the right to terminate the agreement upon a default
by us. In addition, GSK is entitled to terminate its agreement upon 90 days notice for any reason. Nycomed is entitled to terminate its agreement if the MAA for MT 100 is withdrawn or is not approved in the UK by October 14, 2005, and can
terminate the applicability of the agreement to a particular country (other than the UK) if we withdraw the required regulatory application in that country. Further, our milestone payments may be reduced or eliminated, or the payment of such
milestones may be deferred, in whole or in part, if specified delays in the regulatory approval of MT 100 occur, including if a substantial reason for delay in obtaining regulatory approval in any of the countries identified in the agreement is due
to specified issues identified in the agreement. In June 2005, we received notice from Nycomed that they believe that regulatory approval in the UK has been delayed due in substantial part to one of these specified issues. We disagree with
Nycomeds assessment and are in discussions with Nycomed to attempt to convince them to change their assessment; however, we can give no assurance that we will be successful in resolving this matter in a manner favorable to us. Valeant NA is
entitled to terminate its agreement with us if we choose to withdraw the NDA for MT 300 for commercial or financial reasons under the conditions specified in the agreement. Our receipt of not-approvable letters for MT 100 and MT 300 may suggest to
our collaborators that they should terminate their agreements with us. Due to our belief that the FDA will not approve the NDA for MT 300, we have begun discussions with Valeant NA regarding termination of our agreement. If these licensees exercise
their termination rights, 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 commercialize these and our other product candidates. Moreover, any future collaborations or license arrangements 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 determines, among other things, the exact formulation and
composition of the product candidates using our MT 400 technology for use in the Trexima clinical trials. If any collaborator were to breach its agreement with us or otherwise fail to conduct collaborative activities in a timely or successful
manner, the pre-clinical or clinical development or commercialization of the affected product candidate or research program would be delayed or terminated. Any delay or termination of clinical development or commercialization would delay or
eliminate our potential product revenues.



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;
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| |  |  | third parties may not fulfill their regulatory or other obligations;
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| |  |  | we may not realize the contemplated or expected benefits from collaborative or other arrangements; and
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| |  |  | disagreements may arise regarding a breach of the arrangement, the interpretation of the agreement, ownership of proprietary rights, clinical results or regulatory approvals.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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A collaborator may withdraw support or cease to perform work on our product candidates if the collaborator determines
to develop its own competing product candidate instead.



We have entered
into collaboration and license agreements, and expect to continue to enter into such agreements, with companies that have products and are developing new product candidates that compete or may compete with our product candidates. If one of our
collaborators should decide that the product or a product candidate that the collaborator is developing would be more profitable for the collaborator than our product candidate covered by the collaboration or license agreement, the collaborator may
withdraw support for our product candidate or may cease to perform under our agreement. In the event of a termination of the collaborators agreement upon such cessation of performance, we would need to negotiate an agreement with another
collaborator in order to continue the development and commercialization efforts for the product candidate. If we were unsuccessful in negotiating another agreement, we might have to cease development activities of the particular product candidate.
Our development and commercialization agreement with GSK is subject to this risk. GSK has publicly disclosed that it is exploring the development of several early-stage compounds for the treatment of migraine. If GSK decides to focus its development
and commercialization efforts on its own products rather than continuing to work with us on Trexima or any other product candidates that may be developed under the agreement, it has the ability to terminate our agreement upon 90 days written
notice. In such a case, we would need to enter into a new development and commercialization agreement and would need to start the development process all over again. If we were able to negotiate a new development and commercialization agreement to
develop our MT 400 technology, which is not certain, we would face delays and redundant expenses in that development.



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



We have no sales or distribution personnel or capabilities. If we are unable to maintain current collaborations or enter into additional collaborations with established
pharmaceutical or pharmaceutical services companies to provide those capabilities, or, alternatively, we are unable to develop internally sales and distribution capabilities, we will not be able to successfully commercialize our products. To the
extent that we enter into marketing and sales agreements with third parties, our revenues, if any, will be affected by the sales and marketing efforts of those third parties. Further, we cannot guarantee that, should we elect to develop our own
sales and distribution capabilities, we would have sufficient resources to do so, or would be able to hire the qualified sales and marketing personnel we would need.



We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity studies and clinical trials for our product candidates. Any
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
reduce, delay or eliminate our receipt of revenues for one or more of our product candidates and adversely affect our ability to achieve profitability.



Generally, we must demonstrate the efficacy and safety of our product candidates before approval to market can be obtained from the FDA or the regulatory authorities in
other countries. Our existing and future product candidates are and will be in various stages of clinical development. Depending upon the stage of the development process of a product candidate, we will need to complete preclinical, toxicology,
genotoxicity and carcinogenicity 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. 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 our clinical trials are not necessarily predictive of results we will obtain in subsequent clinical
trials. This may occur for many reasons, including, among others, the variability of patient characteristics, including patient symptoms at the time of study treatment, the larger scale testing of patients in later trials, or differences in
formulation or doses of the product candidate used in later trials. For example, if we conduct an additional study to address the FDAs concerns in its not-approvable letter on MT 100, there is no assurance that the results of such a study will
satisfy all of the FDAs conditions for approval because, among other reasons, migraine affects patients differently, including the presence, or lack or level of severity, of secondary symptoms in a particular patient and the variability of the
responsiveness of migraine attacks to given treatments, all of which may affect treatment responses. In addition, our results from the first of our two Phase 3 pivotal clinical trial of Trexima differed from the results of our second Phase 3
clinical trial and the Phase 2 proof-of-concept trial of MT 400 that we conducted prior to entering into our collaboration with GSK. Whereas in the Phase 2 trial statistical significance was reached at two hours over placebo in the relief of all
associated symptoms of migraine (nausea, photophobia and phonophobia), in the first Phase 3 study Trexima failed to achieve statistical significance at two hours compared to placebo in the relief of nausea. In the second Phase 3 pivotal clinical
trial, Trexima demonstrated superiority over the individual components measured by sustained pain-free response (p<0.001 vs. naproxen; p=0.009 vs. sumatriptan) and met all other regulatory endpoints versus placebo.



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The successful completion of clinical trials depends upon many factors, including the rate of enrollment of patients. If
we are unable to recruit sufficient clinical patients during the appropriate period, we may need to delay our clinical trials and incur significant additional costs. We also rely on the compliance of our clinical trial investigators with FDA
regulatory requirements and noncompliance can result in disqualification of a clinical trial investigator and data that is unusable. In addition, the FDA or Institutional Review Boards may require us to conduct additional trials or delay, restrict
or discontinue our clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. For example, even though we are entitled to submit an NDA for Trexima as a 505(b)(2)
application, the FDA may require us to conduct more studies or trials than we now believe are necessary or required.



Further, even though we may have completed all planned clinical trials for a product candidate and submitted an NDA for such product candidate, as we have for MT 100 and
MT 300, the FDA may require us to conduct additional clinical trials, studies or investigations to support our NDAs. For example, the FDA may require us to conduct additional studies or trials of MT 100 in connection with our efforts to convince the
FDA to reverse its not-approvable decision on this product candidate. We may also determine from time to time, including in connection with our efforts to resolve the FDAs issues raised in the not-approvable letters related to MT 100 and MT
300, that it would be necessary to seek to persuade the FDA to evaluate the results of a study or trial in a manner that differs from the way the FDA initially evaluated the results, or customarily evaluates results. In addition, we may have
unexpected results that require us to reconsider the need for certain studies or trials. For example, results from a genotoxicity study involving MT 400 may require us to conduct chronic toxicology and carcinogenicity studies.



Once submitted, an NDA requires FDA approval before we can distribute or commercialize the
product described in the application. Even if we determine that data from our clinical trials, toxicology, genotoxicity and carcinogenicity studies are positive, we cannot assure you that the FDA, after completing its analysis, will not determine
that the trials or studies should have been conducted or analyzed differently, and thus reach a different conclusion from that reached by us, or request that further trials, studies or analyses be conducted. For example, although we believe that we
provided the necessary data to support approval of the NDAs for MT 100 and MT 300, the FDA issued not-approvable letters for the MT 100 and MT 300 NDAs on May 28, 2004 and October 17, 2003, respectively, and based upon our understandings from our
most recent communication with the FDA and our understanding of the FDAs current standards for approval of migraine drugs, we do not believe it is possible to reverse the not approvable status of the NDA for MT 300. Further, although we
believed the results of our MT 100 two-year rat carcinogenicity study provided no evidence that the concomitant administration of maximum tolerated doses of metoclopramide and naproxen, the two active components in MT 100, produced any statistically
significant differences in the occurrences and types of tumors seen with metoclopramide alone, the FDA expressed concern about the potential risk of carcinogenicity, presumably due to metoclopramide, in its MT 100 not-approvable letter. The FDA may
also require further investigations to assess any potential risk of tardive dyskinesia associated with the use of MT 100.



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 United States. For example, no assurance can be given that the MHRA will follow the MHRA Advisory Committees recommendation, of which we received
notice in January 2005, that marketing authorization be granted in the UK for MT 100, subject to our providing additional information and addressing certain matters set forth in our notice from the MHRA Advisory Committee, or that we will be able to
satisfactorily answer and/or address such matters.



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 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



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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. Our primary competitors will likely include large
pharmaceutical companies (including, based upon their current migraine portfolios, GSK, Merck & Co., MedPointe Pharmaceuticals, Johnson & Johnson and Pfizer, Inc.), biotechnology companies, universities and public and private research
institutions. Based upon their migraine portfolios and the overall competitiveness of our industry, we believe that we face, and will continue to face, intense competition from other companies for securing collaborations with pharmaceutical
companies, establishing relationships with academic and research institutions, and acquiring licenses to proprietary technology.



Our competitors, either alone or with collaborative parties, may also succeed with technologies or products that are more effective than any of our current or future
technologies or products. Many of our actual or potential competitors, either alone or together with collaborative parties, have substantially greater financial resources, and almost all of our competitors have larger numbers of scientific and
administrative personnel than we do.



Many of these competitors, either alone
or together with their collaborative parties, also have significantly greater experience than we do in:



| |  |  | developing product candidates;
| | - |  | ------------------------------



| |  |  | undertaking preclinical testing and human clinical trials;
| | - |  | ----------------------------------------------------------



| |  |  | obtaining FDA and other regulatory approvals of product candidates; and
| | - |  | -----------------------------------------------------------------------



| |  |  | manufacturing and marketing products.
| | - |  | -------------------------------------



Accordingly, our actual or potential competitors may succeed in obtaining patent protection, receiving FDA or other regulatory approval or
commercializing products before we do. Any delays we encounter in obtaining regulatory approvals for our product candidates, such as we are currently experiencing as a result of the not-approvable letters we have 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 or shareholder derivative
lawsuits that have been filed against us or our current or former directors and officers, our business may be materially harmed. Further, defending against these lawsuits may be expensive and will divert the attention of our management.



Four purported class action lawsuits claiming violations of securities
laws were filed between June 4 and July 28, 2004 in the U.S. District Court for the Middle District of North Carolina by holders of our securities against us and certain of our current and former officers. These actions have been consolidated for
pre-trial purposes. A fifth case filed on August 6, 2004 has also been consolidated with those actions for pre-trial purposes. By order dated November 4, 2004, the court appointed a lead plaintiff, who filed a consolidated amended complaint (amended
complaint) on December 20, 2004. The defendants named in the amended complaint are POZEN and John R. Plachetka, our chairman and chief executive officer. The complaint alleges violations of federal securities laws, including violations of Section
10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, and violations of Section 20(a) of the Exchange Act against Dr. Plachetka. The amended complaint alleges that we made false and misleading statements concerning our product
candidates MT 100 and MT 300 during the class period. The amended complaint requests certification of a plaintiff class consisting of purchasers of our stock between October 4, 2002 and May 28, 2004. On January 27, 2005, we moved to dismiss the
amended complaint.



In September 2004, two derivative actions were filed
against certain of our current and former directors and officers in the Superior Court for the County of Orange in the State of North Carolina. These actions allege violations of state law, including breaches of fiduciary duties and insider sales,
relating to the same allegedly misleading statements concerning the same product candidates MT 100 and MT 300 that are referenced in the various purported class action lawsuits. The cases have been consolidated and assigned to the North Carolina
Business Court. The plaintiffs in the derivative actions have filed a consolidated amended complaint asserting the same claims as were asserted in the original complaints. On May 31, 2005, we filed a motion to dismiss the consolidated and amended
complaint.



As with any litigation proceeding, we cannot predict with certainty
the eventual outcome of these pending lawsuits. Furthermore, we will have to incur expenses in connection with these lawsuits, 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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If we are unable to protect our patents or proprietary rights, or if we are unable to operate our business without
infringing the patents and proprietary rights of others, we may be unable to develop our product candidates or compete effectively.



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



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



We may need to submit our issued patents for amendment or reissue if we determine that any
claims within our patents should not have been issued. While such a submission may be based on our view that only specified claims should not have been granted to us, there can be no assurance that a patent examiner will not determine that
additional claims should not have been granted to us. Such a risk exists with one of our patents covering MT 100, which we submitted for reissue after determining that certain specified claims that are not central to our protection of MT 100 should
not have been issued. A third party has filed a protest regarding the reissuance of that MT 100 patent. We do not know the weight the examiner will give to the protest or whether this may adversely affect our submission for reissuance of the
patent.



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. 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. Even if we are successful in defending any such claims of infringement or in asserting claims against third parties, such
litigation is expensive, may have a material effect on our operations, and may distract management from our business operations. Regardless of its eventual outcome, any lawsuit that we enter into may consume time and resources that would impair our
ability to develop and market our product candidates.



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



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



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



None of our future products
may be accepted by the market.



Even if our product candidates perform
successfully in clinical trials and are approved by the FDA and other regulatory authorities, our future products may not achieve market acceptance and may not generate the revenues that we anticipate. The degree of market acceptance will depend
upon a number of factors, including:



| |  |  | the receipt and timing of regulatory approvals;
| | - |  | -----------------------------------------------



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| |  |  | the availability of third-party reimbursement;
| | - |  | ----------------------------------------------



| |  |  | the indications for which the product is approved;
| | - |  | --------------------------------------------------



| |  |  | the rate of adoption by healthcare providers;
| | - |  | ---------------------------------------------



| |  |  | the rate of product acceptance by target patient populations;
| | - |  | -------------------------------------------------------------



| |  |  | the price of the product relative to alternative therapies;
| | - |  | -----------------------------------------------------------



| |  |  | the availability of alternative therapies;
| | - |  | ------------------------------------------



| |  |  | the extent and effectiveness of marketing efforts by us and third-party distributors and agents;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the existence of adverse publicity regarding our products or similar products; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the extent and severity of side effects as compared to alternative therapies.
| | - |  | -----------------------------------------------------------------------------



If we do not receive adequate third-party reimbursements for our future products, our revenues and profitability will be reduced.



Our ability to commercialize our product candidates successfully will depend, in part, on
the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of a newly approved healthcare product. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payors for use of our products, our products may fail to achieve market acceptance.



Our future revenues, profitability and access to capital will be affected by the continuing
efforts of governmental and private third-party payors to contain or reduce the costs of healthcare through various means. We expect that a number of federal, state and foreign proposals will seek to control the cost of drugs through governmental
regulation. We are unsure of the form that any healthcare reform legislation may take or what actions federal, state, foreign and private payors may take in response to any proposed reforms. Therefore, we cannot predict the effect of any implemented
reform on our business.



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



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



We may need additional funding and may not have access to
capital. If we are unable to raise capital when needed, we may need to delay, reduce or eliminate our product development or commercialization efforts.



We may need to raise additional funds to execute our business strategy. We have incurred losses from operations since inception and we may continue to incur additional
operating losses. Our actual capital requirements will depend upon numerous factors, including:



| |  |  | the progress of our research and development programs;
| | - |  | ------------------------------------------------------



| |  |  | the progress of preclinical studies, clinical and other testing or the need conduct additional trials, studies or other testing;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | the time and cost involved in obtaining any regulatory approvals;
| | - |  | -----------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------



In addition, collaborative arrangements may require us to grant product development programs or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves which may increase our capital requirements.



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For fiscal years 2002 through 2004, our average annual operating expenses (including average non-cash deferred
compensation of $2.2 million) were $24.6 million. We are currently expecting operating expenses for the 2005 fiscal year to be between $28.0 million and $30.0 million, excluding any non-cash compensation expense that would result from the award of
stock options upon the adoption of SFAS 123(R). As of June 30, 2005, we had $37.2 million in cash and cash equivalents and short-term investments. If our operating expenses in 2005 and 2006 are at the level of our currently expected operating
expenses for 2005 and if we do not receive any additional milestone payments under any of our collaboration agreements, in particular the $20 million milestone payment payable by GSK upon the FDAs acceptance for filing of the Trexima NDA, we
will not have sufficient cash reserves to maintain our level of business activities throughout 2006. Further, our expenses might increase in 2005 and 2006 beyond currently expected levels if any regulatory agency requires us to conduct additional
clinical trials, studies or investigations in connection with their consideration, or reconsideration, of our regulatory filings for our product candidates. In addition, we may be required to pay Valeant NA a withdrawal fee of $1.0 million if we do
not prevail in our current dispute with them as to whether the withdrawal fee is payable.



We may be unable to raise additional equity funds until the uncertainties of the regulatory future of MT 100 resulting from our receipt of the not-approvable letter has been resolved. 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.



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 employment agreement with us on April 1, 1999, as amended and restated on July 25, 2001, for a three-year term with automatic one-year renewal terms. We also entered into employment agreements with certain of our
other key management personnel, which provides for one or two-year terms with automatic one-year renewal terms. If we lose the services of Dr. Plachetka, or are unable to replace the services of our key personnel who may leave the Company, such as
Dr. Marshall E. Reese, Executive Vice President, Product Development, William L. Hodges, Senior Vice President Finance and Administration and Chief Financial Officer, Kristina M. Adomonis, Senior Vice President, Business Development, or Dr. W. James
Alexander, Senior Vice President, Product Development, or if we fail to recruit other key scientific personnel, we may be unable to achieve our business objectives. There is intense competition for qualified scientific personnel. Since our business
is very science-oriented, we need to continue to attract and retain such people. We may not be able to continue to attract and retain the qualified personnel necessary for developing our business. Furthermore, our future success may also depend in
part on the continued service of our other key management personnel and our ability to recruit and retain additional personnel, as required by our business.



Factors That May Affect Our Stockholders



Our stock price is volatile, which may result in significant losses to stockholders.



There has been significant volatility in the market prices of biotechnology companies securities and in the market
price of our common stock. Various factors and events may have a significant impact on the market price of our common stock including:



| |  |  | fluctuations in our operating results;
| | - |  | --------------------------------------



| |  |  | announcements of technological innovations, acquisitions or licensing of therapeutic products or product candidates by us or our competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | published reports by securities analysts;
| | - |  | -----------------------------------------



| |  |  | positive or negative progress with our clinical trials or with regulatory approvals of our product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | governmental regulation, including reimbursement policies;
| | - |  | ----------------------------------------------------------



| |  |  | developments in patent or other proprietary rights;
| | - |  | ---------------------------------------------------



| |  |  | developments in our relationships with collaborative partners;
| | - |  | --------------------------------------------------------------



| |  |  | public concern as to the safety and/or efficacy of our products or product candidates; 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. From October 16, 2000, when our common stock began trading on the NASDAQ National
Market, through July 20, 2005, the high and low closing prices of our common stock ranged from $2.25 to $21.75. Broad market fluctuations may also adversely affect the market price of our common stock.



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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 beneficially hold approximately 33.60% 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.



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



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



| |  |  | authorize the issuance of blank check preferred stock without any need for action by stockholders;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | provide for a classified board of directors with staggered three-year terms;
| | - |  | ----------------------------------------------------------------------------



| |  |  | require supermajority stockholder approval to effect various amendments to our charter and bylaws;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | eliminate the ability of stockholders to call special meetings of stockholders;
| | - |  | -------------------------------------------------------------------------------



| |  |  | prohibit stockholder action by written consent; and
| | - |  | ---------------------------------------------------



| |  |  | establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Further, in January 2005 our board of directors adopted a
stockholder rights plan, similar to plans adopted by many other publicly-traded companies. The stockholder rights plan is intended to deter an attempt to acquire POZEN in a manner or on terms not approved by our board of directors.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



The proceeds from our initial public offering and, private placements and revenue from our collaboration agreements have been invested in money market funds that invest primarily in short-term, highly-rated
investments, including U.S. Government securities, commercial paper and certificates of deposit guaranteed by banks and short-term corporate fixed income obligations and U.S. Government and Government agency obligations. Under our current policies,
we do not use interest rate derivative instruments to manage our exposure to interest rate changes. Because of the short-term maturities of our investments, we do not believe that a decrease in market rates would have a significant negative impact
on the value of our investment portfolio.



Item 4. Controls and Procedures



(a) Evaluation
of Disclosure Controls and Procedures



Our management, with the participation
of our chief executive officer and chief financial officer, evaluated the effectiveness our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us
in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosures. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



(b) Change in Internal Control over Financial Reporting



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



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Five purported class
action lawsuits were filed during 2004 by holders of our securities against us and certain of our current and former officers, in the U. S. District Court for the Middle District of North Carolina, alleging violations of securities laws. These
actions were filed as a single consolidated class action complaint on December 20, 2004. The consolidated complaint alleges, among other claims, violations of federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934,
as amended (the Exchange Act), and Rule 10b-5 and Section 20(a) of the Exchange Act against us and a current officer, arising out of allegedly false and misleading statements made by us concerning our product candidates, MT 100 and MT
300, during the class period. On January 27, 2005, we filed a motion to dismiss the consolidated class action complaint. All briefing on the motion to dismiss has been completed and we are awaiting the Courts ruling on the motion.



On September 13, 2004, two derivative actions were also filed against certain of our
current and former directors and officers in the Superior Court for the County of Orange in the State of North Carolina, alleging violations of state law, including breaches of fiduciary duties and insider sales, relating to the same allegedly
misleading statements concerning our product candidates, MT 100 and MT 300, that are referenced in the various purported class action lawsuits. The two cases have been consolidated and assigned to the North Carolina Business Court.



The plaintiffs in the derivative actions have filed a consolidated amended complaint
asserting the same claims as were asserted in the original complaints. On May 31, 2005, we filed a motion to dismiss the consolidated amended complaint. All briefing has been completed and oral argument is scheduled for August 9, 2005.



We and the other defendants believe that the allegations in these actions are without
merit and intend to defend these cases vigorously. While we cannot predict the outcome or reasonably estimate the range of potential loss, if any, from this litigation, it is the current judgment of management that it is unlikely that this
litigation will have a material adverse effect on our results of operation or financial condition.



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



At our annual meeting of stockholders held on May 17, 2005, our stockholders voted on two matters, as follows:



1. The stockholders elected three Class II directors to serve for three year terms by the following votes (there were no abstentions or broker non-votes in connection
with the election of directors):



|                    |  |            |  |          
|------------------- |  | ---------- |  | ---------
|                    |  | For:       |  | Withheld:
|Kenneth B. Lee, Jr. |  | 21,515,898 |  | 4,439,001
|Bruce A Tomason     |  | 21,693,635 |  | 4,261,264
|Arthur S. Kirsch    |  | 21,693,835 |  | 4,261,064



The other directors whose terms of
office as director continue after the meeting are as follows: John R. Plachetka, Peter J. Wise, Ted G. Wood, Paul J. Rizzo and James R. Butler.



2. The stockholders ratified the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2005 by the following votes
(there were no broker non-votes in connection with the ratification of our independent auditor):



|           |  |          |  |         
|---------- |  | -------- |  | --------
|For:       |  | Against: |  | Abstain:
|24,453,273 |  | 497,001  |  | 4,625   



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##### Table of Contents

Item 6. Exhibits



|              |  |                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                             
|31.1          |  | 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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##### Table of Contents

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)
|               |  |                       
|August 3, 2005 |  | By:                    |  | /s/ JOHN R. PLACHETKA                
|               |  |                        |  | John R. Plachetka                    
|               |  |                        |  | President and Chief Executive Officer
|               |  |                       
|August 3, 2005 |  | By:                    |  | /s/ WILLIAM L. HODGES                
|               |  |                        |  | William L. Hodges                    
|               |  |                        |  | Chief Financial Officer              
|               |  |                       
|August 3, 2005 |  | By:                    |  | /s/ JOHN E. BARNHARDT                
|               |  |                        |  | John E. Barnhardt                    
|               |  |                        |  | Principal Accounting Officer         



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                             
|31.1          |  | 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.                                          



32