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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-K



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

For the fiscal year ended December 31, 2006

OR



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

For the transition period from  to
.

Commission file number
0-50680



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BARRIER
THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 22-3828030                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

600 College Road East, Suite 3200

Princeton, New Jersey 08540

(Address of Principal Executive Offices) (Zip
Code)

(609) 945-1200

(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the
Act:



|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of each class                      |  | Name of each exchange on which registered
|Common Stock, par value $.0001 per share |  | The NASDAQ Stock Market, LLC             



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Securities registered pursuant to Section 12(g) of the Act:

None.

(Title of Class)

Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ̈Yes    x  No

Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ̈Yes    x  No

Indicate by check mark whether the
registrant (1) has filed all reports 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.    Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): ̈Large accelerated filer    x  Accelerated filer ̈Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ̈Yes     x  No

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $153.2 million. Such aggregate market value was computed by reference to the
closing price of the Common Stock as reported on the NASDAQ National Market on June 30, 2006. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and executive officers.

The number of shares of the registrants Common Stock outstanding as of March 6, 2007 was 29,247,596.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement for its 2007 annual meeting of stockholders of the registrant to be held on June 6, 2007 are incorporated by reference into Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|                                                           |  |                                                                                                              |  |     
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                                                           |  |                                                                                                              |  | Page
|Cautionary Note Regarding Forward-Looking Statements       |  | 3                                                                                                           
|                                                           |  |                                                                                                             
|                                                           |  | PART I                                                                                                       |  |     
|Item 1.                                                    |  | Business                                                                                                     |  | 4   
|Item 1A.                                                   |  | Risk Factors                                                                                                 |  | 26  
|Item 1B.                                                   |  | Unresolved Staff Comments                                                                                    |  | 44  
|Item 2.                                                    |  | Properties                                                                                                   |  | 44  
|Item 3.                                                    |  | Legal Proceedings                                                                                            |  | 44  
|Item 4.                                                    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 45  
|                                                           |  |                                                                                                             
|                                                           |  | PART II                                                                                                      |  |     
|Item 5.                                                    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 46  
|Item 6.                                                    |  | Selected Financial Data                                                                                      |  | 49  
|Item 7.                                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 50  
|Item 7A.                                                   |  | Quantitative and Qualitative Disclosure About Market Risk                                                    |  | 63  
|Item 8.                                                    |  | Financial Statements and Supplementary Data                                                                  |  | 64  
|Item 9.                                                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 64  
|Item 9A.                                                   |  | Controls and Procedures                                                                                      |  | 64  
|Item 9B.                                                   |  | Other Information                                                                                            |  | 66  
|                                                           |  |                                                                                                             
|                                                           |  | PART III                                                                                                     |  |     
|Item 10.                                                   |  | Directors and Executive Officers and Corporate Governance                                                    |  | 66  
|Item 11.                                                   |  | Executive Compensation                                                                                       |  | 66  
|Item 12.                                                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 66  
|Item 13.                                                   |  | Certain Relationships, Related Transactions, and Director Independence                                       |  | 66  
|Item 14.                                                   |  | Principal Accountant Fees and Services                                                                       |  | 66  
|                                                           |  |                                                                                                             
|                                                           |  | PART IV                                                                                                      |  |     
|Item 15.                                                   |  | Exhibits and Financial Statement Schedules                                                                   |  | 66  
|                                                           | 
|Signatures                                                 |  | 71                                                                                                          
|List of Subsidiaries                                       |  |                                                                                                             
|Consent of Ernst & Young LLP                               |  |                                                                                                             
|Certification of Principal Executive Officer               |  |                                                                                                             
|Certification of Principal Financial Officer               |  |                                                                                                             
|Certification of Principal Accounting Officer              |  |                                                                                                             
|Section 1350 Certification of Principal Executive Officer  |  |                                                                                                             
|Section 1350 Certification of Principal Financial Officer  |  |                                                                                                             
|Section 1350 Certification of Principal Accounting Officer |  |                                                                                                             



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current
condition, this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements contained in this report constitute our
expectations or forecasts of future events as of the date this report was filed with the SEC and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts.
Such statements may include words such as anticipate, will, estimate, expect, project, intend, should, plan, believe, hope, and
other words and terms of similar meaning. In particular, these forward-looking statements include, among others, statements about:



| |  |  | the trend of operating losses and the reasons for those losses;
| | - |  | ---------------------------------------------------------------



| |  |  | our spending on the clinical development of our product candidates;
| | - |  | -------------------------------------------------------------------



| |  |  | our plans regarding the development or regulatory path for any of our product candidates, particularly with respect to our Hyphanox, Rambazole, Azoline
and Hivenyl product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of the initiation or completion of any clinical trials, particularly with respect to our Hyphanox, Rambazole, Azoline and Hivenyl product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential safety or efficacy profiles anticipated for any of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the timing of filing for regulatory approvals with governmental agencies;
| | - |  | -------------------------------------------------------------------------



| |  |  | the commercialization of our products, particularly our Xolegel, Vusion and Solagé® products;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the future commercialization of any of our product candidates, if approved;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the market success of our products and anticipated revenues associated with those products; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | other statements regarding matters that are not historical facts or statements of current condition.
| | - |  | ----------------------------------------------------------------------------------------------------

Any or all of our forward-looking statements in this report may turn out to be wrong. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industrys actual results, level of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Therefore, you should
not place undue reliance on any such forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, in addition to those set forth in Part I, Item 1A
under the heading Risk Factors, our ability to:



| |  |  | obtain substantial additional funds;
| | - |  | ------------------------------------



| |  |  | obtain and maintain all necessary patents or licenses;
| | - |  | ------------------------------------------------------



| |  |  | market our Xolegel, Vusion and Solagé products, and product candidates if approved, and generate revenues;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | demonstrate the safety and efficacy of product candidates at each stage of development;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | meet applicable regulatory standards in the United States to commence or continue clinical trials, particularly with respect to our Hyphanox, Rambazole, Azoline and
Hivenyl product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | identify and initiate investigator sites for our clinical trials and complete enrollment in a timely manner, particularly with respect to our current Phase 3
clinical trial for our Hyphanox product candidate;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | meet applicable regulatory standards and file for or receive required regulatory approvals;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | produce our drug products in commercial quantities at reasonable costs and compete successfully against other products and companies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | meet our obligations and required milestones under our license and other agreements, including our agreements with the Johnson & Johnson family of
companies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Overview

We are a pharmaceutical company focused on the development and commercialization of pharmaceutical products in the field of dermatology. We currently
market three prescription pharmaceutical products in the United States. We also market one of our products in Canada, along with two other products for which we serve as the exclusive distributor in Canada. We promote our marketed products through a
sales force consisting of our own sales representatives and those of a contract sales organization. We have an extensive product pipeline that includes product candidates in Phases 2 and 3 of clinical development.

Our goal is to become a leader in the development and commercialization of proprietary innovative products in therapeutic dermatology. Our strategy is to
continue to actively market our current products while continuing to seek to selectively acquire other marketed dermatological products that complement our existing business. In addition, we intend to continue the development of our pipeline of
product candidates, all but one of which are based on new chemical entities, while continuing to seek to supplement and diversify these efforts by acquiring additional compounds that we believe to be potentially superior to currently marketed
products. We also intend to establish commercial partnerships to help fund the development of some of our product candidates.

Our
Marketed Products

Our marketed products are:



| |  |  | Xolegel (ketoconazole, USP) 2% Gel: a topical gel for the treatment of seborrheic dermatitis, a type of eczema characterized by inflammation and
scaling of the skin, principally of the scalp, face and trunk.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vusion (0.25% miconazole nitrate, 15% zinc oxide, and 81.35% white petrolatum) Ointment: a topical ointment indicated for the treatment of infants and
children with diaper dermatitis complicated by documented candidiasis, an inflammatory disease characterized by diaper rash infected by a yeast called Candida.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Solagé® (mequinol 2.0% and tretinoin 0.01%) Topical Solution: a topical solution indicated for the treatment of solar lentigines, commonly known as age spots. We currently market
this product in the United States and Canada.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | VANIQA® (elflornithine HCI) Cream 13.9%: a topical cream indicated for slowing the growth of unwanted facial hair in women. We are the exclusive distributor of this product in Canada under
an agreement with Shire Pharmaceutical Contracts Limited.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Denavir® (penciclovir cream) 1%: a topical antiviral prescription medication indicated for the treatment of herpes labialis, also known as cold sores, in adults. We are the exclusive
distributor of this product in Canada under an agreement with Novartis Consumer Health Canada, Inc., an affiliate of Novartis, Inc.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Product Pipeline

We have product candidates in various stages of clinical development for the
treatment of a range of dermatological conditions, including acne, psoriasis, onychomycosis and other acute fungal infections of the skin. In addition, we have access to the classes of compounds claimed in the patents licensed to us under our
license agreements with affiliates of Johnson & Johnson. The development of each of our product candidates involves significant risks. No assessment of the efficacy or safety of any product candidate can be considered definitive until all
clinical trials needed to support a submission for marketing approval are completed.



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Our three most advanced product candidates are:



| |  |  | Hyphanox: an oral tablet formulation of itraconazole, an antifungal agent that we are developing for the treatment of onychomycosis, commonly
known as nail fungus. We are currently conducting a Phase 3 pivotal clinical trial for Hyphanox to test once daily dosing of one 200 mg tablet in the treatment of toenail onychomycosis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Azoline: an oral liquid formulation of pramiconazole, a novel antifungal agent that we are developing as a treatment for skin and mucosal fungal infections.
We are currently conducting two Phase 2 clinical trials with Azoline outside the United States. The first is a Phase 2b dose finding clinical trial in tinea versicolor. The other is a Phase 2a clinical trial in onychomycosis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Oral Rambazole: an oral formulation of Rambazole, a drug from a novel class of molecules known as retinoic acid metabolism blocking agents, that we are
developing for the treatment of psoriasis. We are currently conducting a Phase 2b dose finding clinical trial in severe plaque psoriasis outside the United States.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are also developing two earlier stage product candidates:



| |  |  | Topical Rambazole: a topical formulation of Rambazole that we are developing for the treatment of acne. We are currently conducting a Phase 2a clinical trial
in mild to moderate acne outside the United States.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hivenyl: a novel antihistamine that we are developing as an oral treatment for allergic reactions of the skin, such as the types of reactions associated with
hives, which may not cause sedation typically associated with antihistamines. In January 2007, we announced positive data on a Phase 2a clinical trial that was conducted outside the United States, in the treatment of the itch associated with atopic
dermatitis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recent Developments

In March 2007, we announced that we had entered into an agreement with Novartis Consumer Health, Inc. whereby Novartis Consumer Health will promote our Vusion product to pediatricians in the United States.

In February 2007, we announced the issuance of United States Patent Number 7,179,475, entitled Anhydrous Topical Skin Preparations which
covers the specific formulation of ketoconazole in a waterless gel which comprises our Xolegel product.

Development of Barrier
Therapeutics During 2006

We received approval from the U.S. Food and Drug Administration, or FDA, for two of our drugs in 2006. In
February, 2006, we announced that the FDA had approved Vusion and in July, 2006, we announced that the FDA had approved Xolegel. Following the approval of Vusion we increased our sales force to 60 representatives. Our sales force is now actively
promoting both Vusion and Xolegel, along with our Solagé product in the United States.

In September we announced that we had
raised gross proceeds of approximately $25.3 million from the sale of 4.82 million shares of common stock at $5.25 per share to a select group of institutional investors in a registered direct public offering.

In November we announced the voluntarily dismissal by plaintiffs counsel, in its entirety and with prejudice, of a putative securities class action
lawsuit that had been filed against the Company and certain of our officers and some of the underwriters for our 2004 initial public offering and 2005 secondary offering.

Our History

We were founded in September 2001 by Geert Cauwenbergh, Ph.D., our Chief Executive
Officer, who identified a portfolio of dermatological product candidates and intellectual property within the Johnson & Johnson family of companies that he believed could form the basis for an independent pharmaceutical company



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focused on dermatology. In May 2002, we acquired these assets through licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer
Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson company, in exchange for an equity interest in us. In this document, we sometimes refer to Janssen Pharmaceutica Products, L.P. and its affiliates as Janssen.
We were incorporated in Delaware in September 2001 and commenced active operations in May 2002. Our principal offices are located at 600 College Road East, Suite 3200, Princeton, New Jersey 08540.

Dermatology Overview

Dermatology is the field of
medicine concerned with the study and treatment of disorders and diseases of the skin. Skin is a vital organ of the human body. Skin functions as a barrier, protecting organs and tissues in the body from injury and invasion by foreign organisms that
may cause infections or other damage. It helps regulate body temperature and sense external stimuli. The condition of ones skin also has a significant impact on an individuals overall health and appearance.

Dermatological diseases and disorders may result from a number of factors, including aging, sun damage, immunological diseases, genetic background,
viral, fungal or bacterial infections, allergic reactions and emotional or seasonal factors. These diseases and disorders can have a significant impact on an individuals physical and mental health and his or her social acceptance.

Despite the significant sales of prescription products for treatment of diseases of the skin, we believe that many limitations remain in the treatment
of these diseases. Existing treatments are often inadequate for reasons of efficacy, toxicity or patient noncompliance. Many of the drugs currently used to treat dermatological diseases originally were developed to treat diseases of other parts of
the body. For example, many of the oral antifungal drugs used today to treat dermatological infections first were developed as treatments for fungal infections of other parts of the anatomy. We believe that our focus on understanding the molecular
basis for diseases of the skin may yield more convenient and effective drugs with fewer undesirable side effects.

Business Strategy

Our goal is to develop a portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders and
become a leader in the development and commercialization of prescription pharmaceutical products to treat these diseases and disorders. To achieve our goal, we intend to:

Commercialize our products directly through our own sales organization in the United States and Canada and through collaborations with third parties outside the United States and Canada. We are building our own
sales force to market our products directly to dermatologists and other target physicians in the United States and Canada. To pursue global market penetration of our products we intend to rely on collaborations with third parties outside the United
States and Canada.

Aggressively pursue the development of our product candidates. We are committing substantial resources towards
completing the development of our product candidates.

Maintain a portfolio of product candidates at various stages of clinical
development.We are developing a product portfolio that includes product candidates at various stages of preclinical and clinical development. We believe that the diversity in our product development pipeline increases the probability of our
long-term commercial success.

Expand our product portfolio through a combination of internal development efforts and, if appropriate,
selective acquisitions of compounds, marketed products and businesses. We intend to continue expanding our product development pipeline by screening compounds to which we have access under our principal license agreements. We plan to supplement
these efforts by licensing or otherwise acquiring additional compounds that



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we believe to be potentially superior to currently marketed products and by seeking to selectively acquire marketed dermatological products or businesses
that complement our development and commercialization strategy.

Marketed Products and Development Pipeline

The following tables summarize our marketed products and product candidates in clinical development, all of which we plan to develop as prescription
drugs. The names listed below for our product candidates in our development pipeline are our current designations for these programs and may not be the final approved trade name. With respect to our product candidates in our development pipeline,
our assessment of the stage of development is based on our ongoing or most recently completed clinical trial for each product candidate. For each of our product candidates other than Hyphanox, we will need to conduct additional non-clinical and
clinical studies before proceeding to the next stage of development.

Marketed Products



|         |  |                                                |  |                          |  |                                                     |  |                     
|-------- |  | ---------------------------------------------- |  | ------------------------ |  | --------------------------------------------------- |  | --------------------
|Product  |  | Active Ingredients                             |  | Method of Administration |  | Indications                                         |  | Countries           
|         |  |                                                |  |                         
|Xolegel |  | ketoconazole                                   |  | Topical                  |  | seborrheic dermatitis                               |  | United States       
|         |  |                                                |  |                         
|Vusion  |  | miconazole nitrate zinc oxide white petrolatum |  | Topical                  |  | diaper dermatitis complicated by
candidiasis        |  | United States       
|         |  |                                                |  |                         
|Solagé®  |  | mequinol tretinoin                             |  | Topical                  |  | solar lentigines                                    |  | United States Canada
|         |  |                                                |  |                         
|VANIQA®  |  | eflornithine HCL                               |  | Topical                  |  | slowing the growth of unwanted facial hair in women |  | Canada              
|         |  |                                                |  |                         
|Denavir® |  | penciclovir                                    |  | Topical                  |  | herpes labialis (cold sores)                        |  | Canada              

Development Pipeline



|           |  |                                         |  |                          |  |                                             |  |                     
|---------- |  | --------------------------------------- |  | ------------------------ |  | ------------------------------------------- |  | --------------------
|Product    |  | Active Ingredients or Class of Molecule |  | Method of Administration |  | Indications                                 |  | Stage of Development
|           |  |                                         |  |                         
|Hyphanox  |  | itraconazole                            |  | Oral                     |  | onychomycosis                               |  | Phase 3             
|           |  |                                         |  |                         
|Azoline    |  | pramiconazole                           |  | Oral                     |  | tinea versicolor onychomycosis              |  | Phase 2b Phase 2a   
|           |  |                                         |  |                         
|Rambazole |  | RAMBA class                             |  | Oral                     |  | psoriasis (moderate to severe) nodular acne |  | Phase 2b Phase 2a   
|           |  |                                         |  |                         
|Rambazole |  | RAMBA class                             |  | Topical                  |  | acne (mild to moderate)                     |  | Phase 2a            
|           |  |                                         |  |                         
|Hivenyl   |  | vapitadine hydrochloride                |  | Oral                     |  | skin allergies                              |  | Phase 2a            

Our Marketed Products

Xolegel. Xolegel is a patented topical formulation of 2% ketoconazole, an antifungal agent, in a waterless gel. Xolegel is indicated as a once
daily topical treatment for seborrheic dermatitis in immunocompetent adults



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and children twelve years of age and older. Seborrheic dermatitis is a common skin inflammation that is characterized by a red, scaly, itchy rash primarily
occurring on the face, scalp, hairline, eyebrows and trunk. The condition often recurs, thereby requiring retreatment over time. Ketoconazole has potent pharmacological effects against the fungus known as P. ovale, which, when overcolonizing
the skin, is considered to be one of the main causes of seborrheic dermatitis. Ketoconazole quickly suppresses this type of fungus and also exhibits anti-inflammatory effects that help to reduce redness in affected areas. We have designed Xolegel to
deliver the benefits of ketoconazole with the advantages of our waterless gel. In addition, in a cumulative irritation patch study that we conducted in volunteers we observed that Xolegel was approximately five times less irritating than a
traditional ketoconazole cream.

We estimate that seborrheic dermatitis affects approximately 3% to 5% of the United States population.
Based on U.S. census bureau data, we estimate this to be approximately 8.5 million to 14.3 million people in the United States. Prior to the approval of Xolegel, prescription therapies for seborrheic dermatitis consisted primarily of
shampoos, and topical antifungal creams, including ketoconazole creams, and topical steroids, that typically require two or more applications per day over periods of up to four weeks to be effective. With its unique gel formulation Xolegel provides
patients with a dosing regimen of a once daily application for only 14 days.

We received FDA marketing approval for Xolegel in July of
2006 and began shipping product to U.S. wholesalers in the middle of the fourth quarter 2006. In connection with the FDAs approval of Xolegel, we agreed to conduct a post approval non-clinical study to assess the dermal carcinogenic potential
of Xolegel. We expect to be able to commence and complete this study in a timely manner, consistent with the FDAs requirements. In March 2007, we received marketing approval for Xolegel from Health Canada. We plan to begin selling this product
in Canada in the second half of 2007.

We have an exclusive, royalty-free license in the field of dermatology to a United States patent
claiming the specific formulation of ketoconazole in a waterless gel. This patent is scheduled to expire in December 2018. The active ingredient of Xolegel, ketoconazole, is off patent.

Vusion. Vusion is a topical ointment containing 0.25% miconazole nitrate, an antifungal agent, 15% zinc oxide and 81.35% white petrolatum. Vusion
is indicated for use in the treatment of diaper dermatitis complicated by documented candidiasis in infants and children four weeks and older. This inflammatory condition occurs when diaper dermatitis, also known as diaper rash, is complicated with
a fungal infection caused by a yeast called Candida. The existence of Candida, which thrive in the warm, moist conditions typically found in an infants diaper, is determined by microscopic evaluation for presence of pseudohyphae
or budding yeast. Vusion is the only prescription product approved for the treatment of this condition in the United States. Miconazole nitrate is an antifungal agent that treats the Candida infection. The ointment base in Vusion is comprised
of zinc oxide and white petrolatum, which are the main components in most common diaper rash products.

Based on data from the Centers for
Disease Control and Prevention, we estimate that there are eight million infants under the age of two in the United States. Based on published reports, we estimate that diaper dermatitis is observed in approximately one million pediatric outpatient
visits each year, and that of all diaper dermatitis cases treated by physicians, more than 40% are complicated by the fungus Candida.

We received FDA marketing approval for Vusion in February 2006 and began shipping product to U.S. wholesalers early in the second quarter of 2006. Net product revenues for Vusion in 2006 were $3.8 million. Vusion, which we market under the
name Zimycan® in Europe, has received
marketing approval from several European countries. However, we do not anticipate sales of this product outside of the United States to have a material impact on our revenues.

In connection with the FDAs approval of Vusion, we agreed to conduct two Phase 4 clinical studies: a percutaneous absorption study to determine the
amount, if any, of miconazole nitrate which is absorbed into the bloodstream through the skin and its potential effect on liver function; and a microbial resistance study to



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evaluate the extent, if any, to which the Candida yeast may develop resistance to repeated treatment courses with Vusion. We expect to be able to
complete both studies in a timely manner, consistent with the FDAs requirements.

We have an exclusive, royalty-free license in the
field of dermatology to an issued United States patent covering the formulation of the combination of miconazole nitrate and zinc oxide contained in Vusion and methods of treating diaper dermatitis. This United States patent expires on
March 27, 2007. We have applied for up to 5 years of patent term extension under the United States Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act due to the patent term lost during development of
this product. This application is currently being reviewed by the United States Patent and Trademark Office, USPTO, in consultation with the FDA. We have also filed an application with the USPTO for an interim 1 year extension which is also
currently being reviewed. Also, under the Hatch-Waxman Act, Vusion is entitled to three years of marketing exclusivity which will expire in February of 2009. Each of the active ingredients in Vusion, miconazole nitrate, zinc oxide and white
petrolatum, are off patent.

Solagé. Solagé is a patented topical solution containing 2.0% mequinol and 0.01%
tretinoin. In the United States, the product is indicated for use in the treatment of solar lentigines or age spots. In Canada, the indication is broader and includes use for related hyperpigmented lesions. According to published
reports, solar lentigines or age spots are very common in light skinned individuals and appear in as many as 90% of those over the age of 60 and 20% of those under the age of 35. We estimate that more than 20 million people in the
United States have this condition. Currently, Solagé is the only combination product approved in the United States for the treatment of solar lentigines, commonly known as age spots. Solagé is also currently the only
non-hydroquinone based, FDA-approved bleaching agent on the market. We believe this may become a competitive advantage since the FDA has recently expressed safety concerns regarding the carcinogenicity and toxicity of hydroquinone-based products.

Until recently most of the therapeutic research for treating solar lentigines has focused on Caucasian patient populations due to the
epidemiological data on the disease. A recent Phase 4 study has demonstrated favorable results on the efficacy, safety and tolerability of Solagé for the treatment of solar lentigines in darker skin types. Based on the results of this Phase 4
clinical study, we filed a supplement with the FDA to add darker skin types to our current labeling for Solagé. We expect a response from FDA to this supplement in the second quarter of 2007.

We acquired the United States and Canadian rights to Solagé in February 2005 from Moreland Enterprises Limited. Under the terms of the
acquisition, we made an initial cash payment of $3 million and are making additional payments, primarily as royalties on our net sales. The aggregate amount of these additional payments is capped at $2 million. In July 2005, we re-launched the
product and began promoting it to dermatologists in the United States and Canada. Net product revenues for Solagé were $1.6 million and $0.8 million in 2006 and 2005, respectively.

As part of the Solagé acquisition, we were assigned all United States and Canadian marketing authorizations, patents and trademarks for the
product and we purchased all of the then existing inventory. The patent rights include United States and Canadian patents covering the products pharmaceutical formulation and methods of use. The earliest of the United States patents expires in
2013 while a United States patent encompassing a version of Solagé with extended shelf life expires in 2020. The Canadian patent expires in 2010 while any patents to issue from a Canadian patent application encompassing a version of
Solagé with extended shelf life would expire in 2021. Each of the active ingredients in Solagé, mequinol and tretinoin, is off patent.

Our Distributor Arrangements in Canada

VANIQA. In June 2005, we obtained the right to
distribute VANIQA (elflornithine HCL) Cream 13.9% in Canada from Shire Pharmaceutical Contracts Limited. VANIQA is currently the only prescription product approved by Health Canada for slowing the growth of unwanted facial hair in women. Under the
terms of our



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agreement with Shire, we are the exclusive distributor for VANIQA in Canada and are responsible for all sales, marketing, regulatory and distribution
activities. Shire Pharmaceuticals is responsible for supplying us with drug product. The distribution agreement has a five year term and is scheduled to expire in June, 2010. We may elect to extend this for an additional two years beyond the initial
term. Although approved, this product had never been launched in Canada. We launched and began marketing VANIQA in Canada with four sales representatives in November 2005.

Denavir. In March 2006, we obtained the right to distribute Denavir (penciclovir cream) 1% in Canada from Novartis Consumer Health, Inc., an
affiliate of Novartis, Inc. Denavir is a topical antiviral prescription medication indicated for the treatment of herpes labialis, also known as cold sores, in adults. Under the terms of our agreement with Novartis, we are the exclusive distributor
for Denavir in Canada and are responsible for all sales, marketing and distribution activities. Novartis Consumer Health is responsible for supplying us with drug product. The distribution agreement has a five year term and is scheduled to expire in
March 2011. The term of the agreement is automatically extended for additional one year periods unless either of us provides the other with notice of its desire to terminate. Although approved, this product had never been launched in Canada. We
launched and began marketing Denavir in Canada with our four sales representatives in August 2006.

Our Development Pipeline

Our product candidates must go through extensive clinical evaluation and clearance by the FDA before we can sell them commercially. Our product
development pipeline includes product candidates that are in various stages of clinical development. All of these product candidates are based on intellectual property licensed to us under our principal license agreements. We are developing these
product candidates as treatments for a wide range of dermatological diseases and disorders, including acne, psoriasis, onychomycosis and acute fungal infections such as tinea versicolor.

We plan to advance the clinical development of these product candidates based on our assessment of their market potential, the results of pilot studies
and clinical trials, the requirements of regulatory agencies and our available resources. Our development strategy anticipates that we will conduct simultaneous studies on several product candidates at any given time. However, from time to time, we
re-evaluate our product development efforts. On the basis of these evaluations, we have in the past, and may in the future, abandon, suspend or delay development efforts for particular products.

Moreover, due to the breadth of our pipeline of development projects we must manage this portfolio in accordance with our financial resources. This means
that we must, at times, perform development activities for a product candidate sequentially rather than concurrently. This may affect the amount of time it takes to go from one clinical phase to another and potentially delay the time to market. For
example, completion of a Phase 2 dose ranging study does not necessarily mean that the next study will be a Phase 3 pivotal trial. There may be additional non-clinical, clinical, chemistry and manufacturing activities required prior to moving into
that next phase or seeking regulatory approval.

The preliminary observations of efficacy and safety from any of our preclinical or
clinical trials for our product candidates are not necessarily indicative of the results that may be demonstrated in future clinical trials. Data obtained from studies performed on animals is not necessarily indicative of the results that may be
demonstrated in future clinical trials in humans. We will need to conduct significant additional preclinical studies or clinical trials prior to seeking marketing approval for the product candidates in our development pipeline. No assessment of the
safety or efficacy of any product candidate can be considered definitive until all clinical trials needed to support a submission for marketing approval are complete.

Oral Antifungals: Hyphanox.

Hyphanox is an oral formulation of itraconazole, an antifungal agent
that we are developing for the treatment of onychomycosis, commonly known as nail fungus. Itraconazole is effective in treating this type of



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fungal infection. Janssen currently markets different formulations of itraconazole under Sporanox and other brand names in various countries. Sporanox is
approved in the United States for the treatment of various disorders, including onychomycosis. A generic form of itraconazole has also been approved in the United States. A 100 mg capsule is the maximum strength in which oral Sporanox is currently
available. We are developing Hyphanox as a 200 mg tablet. We believe this 200 mg formulation may provide a more convenient form of dosing and potentially less inter-patient variability in absorption.

Product Background.In an effort to produce a more convenient dosing form of Sporanox, Janssen conducted a program to reformulate itraconazole
into 200 mg tablets using a proprietary formulation of itraconazole requiring a manufacturing process known as melt extrusion. Melt extrusion is a manufacturing process that has made it possible to formulate itraconazole into tablets.

In the first quarter of 2004, we commenced a Phase 3 pivotal clinical trial in the United States for the use of a single day, single dose treatment of
two 200 mg tablets of Hyphanox in the treatment of vaginal candidiasis, commonly known as a yeast infection. In June, 2005, we announced that Hyphanox failed to reach the primary regulatory endpoint of therapeutic cure in that trial. In September
2005, we announced that Janssen had notified us that it would not exercise its pre-negotiated option for this product candidate and, as a result, we retain worldwide rights for all indications for this product candidate. Although we have no current
plans to continue to internally develop Hyphanox for the vaginal candidiasis indication, we are seeking a commercial partner to continue such development.

Clinical Development. We are currently conducting a Phase 3 clinical trial to test once daily dosing of one 200 mg tablet for three months in the treatment of toenail onychomycosis. We expect to enroll
approximately 1,300 patients in the trial. We established the trial design after discussions with the FDA following the special protocol assessment process. Assuming we are able to initiate clinical trial sites and enroll patients at the rate we
anticipate, we expect to be able to report top line data in the second half of 2008.

Proprietary Rights.We have an exclusive
license in the field of dermatology to a United States patent claiming the Hyphanox formulation and methods of using this formulation for treatment of fungal infections. The United States patent claiming the formulation and methods of treatment
expires in 2017. We also have an exclusive license to corresponding patents and patent applications in Europe, Japan and other foreign countries. The issued patent and any additional patents issuing from the patent applications in Europe, Japan and
other foreign countries will expire in 2016 through 2017. The active ingredient of Hyphanox, itraconazole, is off patent.

Oral Antifungals: Azoline.

Azoline is an oral liquid formulation of pramiconazole, a novel antifungal agent that we are developing as a short course treatment for
acute skin and mucosal fungal infections and as a potentially more convenient dosing for chronic fungal infections such as onychomycosis.

Product Background. Preclinical testing has shown Azoline to be more potent than itraconazole against dermatological fungal infections and less interactive than itraconazole with the metabolism of other drugs. Based on the results
from a one week Phase 1 clinical trial that we conducted for Azoline which indicated that, at the doses tested, Azoline has a half-life in the body which is approximately three times longer than that of itraconazole, we believe that Azoline may be
an effective short course oral treatment for fungal infections. We are developing Azoline as a second generation antifungal product to our Hyphanox product candidate.

In 2005, we announced positive results from Phase 2a clinical trials involving 67 patients with various fungal infections of the skin. These patients were treated with 200 mg of Azoline once daily for one, three or
five days. The product candidate was studied in tinea pedis, commonly known as athletes foot, tinea corporis, commonly known as ring worm, tinea cruris, commonly known as jock itch, tinea versicolor and seborrheic



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dermatitis. In these studies, Azoline was well tolerated and there were no serious treatment-related adverse effects reported. Based upon the encouraging
response rates obtained in these studies, we advanced Azoline into Phase 2b clinical testing.

Clinical Development. We are
currently conducting two Phase 2 clinical trials for Azoline outside of the United States. The first of these is a Phase 2b dose finding clinical trial in tinea versicolor, in which we have completed enrollment with 147 patients. We expect to be
able to report top line data from this study in the second quarter of 2007. The other is a Phase 2a clinical trial in toenail onychomycosis with once a week dosing, in which we expect to enroll 20 patients.

Following our receipt of data from the Phase 2b clinical study, we plan to initiate the right of first negotiation with respect to Azoline as described
under the caption Johnson & Johnson License Agreements as a first step in our effort to identify and secure a business development partner for the continued development and commercialization of this product candidate.
Assuming we receive positive data from this Phase 2b clinical study, additional clinical studies, including studies to assess drug-drug interaction and cardiovascular safety will need to be performed prior to moving this product candidate into a
Phase 3 trial.

Proprietary Rights. We have an exclusive license in the field of dermatology to a United States patent claiming the
chemical compound pramiconazole, pharmaceutical formulations containing pramiconazole and methods of treatment with pramiconazole. The United States patent expires in 2018. We also have an exclusive license to corresponding patents and patent
applications in Europe, Japan and other foreign countries. The issued patent and any additional patents issuing from the patent applications in Europe, Japan and other foreign countries will expire in 2017 through 2018.

RAMBAs: Oral Rambazole.

Oral Rambazole is an oral
formulation of a molecule from a novel class of molecules known as retinoic acid metabolism blocking agents, or RAMBAs. We are developing oral Rambazole for the treatment of psoriasis. We believe that Rambazole may address some of the limitations of
existing therapies, such as toxicity, or the degree to which existing therapies are harmful at certain levels of treatment, and immune suppression, or the tendency of some existing therapies to compromise a patients immune system.

RAMBAs work by blocking the intracellular metabolism of natural retinoic acid in cells. This blocking results in an increased accumulation of the
bodys own retinoic acid in the bodys cells, which we believe may provide the same therapeutic benefits as synthetic retinoid therapy but potentially with less risk of adverse side effects related to the accumulation of synthetic
retinoids in the bodys tissues. We believe that one of the potential advantages of Rambazole over some synthetic retinoids may be the reduction or absence of long-term risk for birth defects.

Product Background.Various preclinical and clinical studies were conducted on Rambazole prior to our acquisition of rights to this product
candidate. In a Phase 1 multiple dose escalation study, increased doses of Rambazole resulted in increased manifestation of skin effects typical for retinoid therapy, including dry lips and skin.

In 2005, we announced positive results from two Phase 2a clinical trials in Europe using oral Rambazole, one in moderate to severe psoriasis, and the
other in moderate to severe nodular acne. In the Phase 2a trial in psoriasis, 17 patients with moderate to severe psoriasis who were treated with 1mg of Rambazole once daily for eight consecutive weeks demonstrated a reduction in the psoriasis area
severity index, commonly known as PASI score, by an average of approximately 50%. These PASI scores were measured at week 10, two weeks after stopping the treatment. There were no serious treatment-related adverse effects reported.

In the Phase 2a trial in acne, 17 patients with moderate to severe nodular acne were treated with 1 mg of oral Rambazole once daily for 12 consecutive
weeks. The results of this study indicate that 16 of 17 patients experienced a reduction in total acne lesion count of more that 50% and 6 of 17 subjects were considered



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cleared or almost cleared. To be considered cleared or almost cleared a patient must have had more than 90% reduction in total lesion
count. In the study inflammatory and non-inflammatory lesions responded equally to the treatment. There were no serious treatment related adverse effects reported, while non-serious side effects experienced by this patient group included some
dryness of skin and lips. Based on these data, we advanced Rambazole into Phase 2b clinical testing in severe plaque psoriasis.

Clinical Development. We are currently conducting a Phase 2b dose finding clinical trial in severe plaque psoriasis outside the United States and expect to be able to report top line data from this study in the second half of 2007.
The FDA has placed oral Rambazole on clinical hold meaning that we may not initiate any clinical studies in humans in the United States until we address the FDAs request for additional safety data. We believe this is due to the FDAs
concern about the safety profile of a class of drugs known as synthetic retinoids. Although oral Rambazole is not a synthetic retinoid, it blocks the intracellular metabolism of natural retinoic acid in cells, resulting in an increased accumulation
of the bodys own retinoic acid. Assuming the results of our Phase 2b clinical trial are positive, we anticipate providing the data from that study, as well as the data from other pharmacology and toxicology studies that we are conducting, to
the FDA in an attempt to address their concerns and remove the clinical hold.

Following our receipt of data from this Phase 2b clinical
study, we plan to initiate the right of first negotiation with respect to Rambazole as described under the caption Johnson & Johnson License Agreements as a first step in our effort to identify and secure a business
development partner for the continued development and commercialization of this product candidate. Assuming we receive positive data from this Phase 2b clinical study, additional clinical studies, including studies to assess drug-drug interaction
and cardiovascular safety will need to be performed prior to moving this product candidate into a Phase 3 trial.

Proprietary
Rights. We have an exclusive license in the field of dermatology to a United States patent claiming the chemical compound Rambazole, pharmaceutical formulations containing Rambazole and methods of treatment with Rambazole. The United States
patent expires in 2017. We also have an exclusive license to corresponding patents and patent applications in Europe, Japan and other foreign countries. The issued patent and any additional patents issuing from the patent applications in Europe,
Japan and other foreign countries will expire in 2016 through 2017.

RAMBAs: Liarozole

Liarozole is our first generation product candidate based on the RAMBA class of molecules. Liarozole was previously in development for the treatment of
congenital ichthyosis. In 2005, we filed an IND with the FDA to conduct a Phase 2/3 clinical trial for Liarozole in the treatment of the lamellar form of congenital ichthyosis. The FDA placed this trial on clinical hold, meaning that we may not
initiate our planned Phase 2/3 clinical trial in the United States, or any other clinical studies in humans in the United States, until we address the FDAs concerns. In January 2006, we began enrolling patients in a Phase 2/3 clinical study
for the treatment of the lamellar form of congenital ichthyosis in Europe and other countries outside of the United States. In December 2006, we discontinued enrollment of the study after enrolling 64 of the 98 patients we had originally intended to
enroll in the study. We made this decision following our analysis of feedback we received from EMEA that it is highly likely that a long term safety study and efficacy comparator trial against the current standard of care would be required prior to
submission for regulatory approval. Following our review of the data from this Phase 2/3 trial, we will evaluate the appropriate next steps for this product candidate.

Earlier Stage Clinical Candidates

Topical Rambazole. We are developing a
topical formulation of Rambazole for dermatological indications, including common forms of acne and psoriasis. Preclinical in vitro and animal studies suggest that topical Rambazole may have the potential to be effective in the treatment of
psoriasis, acne and photo-damage. A Phase 2a clinical trial for acne compared 13 subjects treated with a topical formulation of Rambazole to 13 subjects



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treated with the vehicle alone. Subjects were treated for 12 weeks. In this trial, subjects receiving topical Rambazole showed a greater percentage reduction
of acne lesions than those receiving the vehicle. In addition, topical Rambazole was well tolerated, with no serious drug-related adverse events reported.

We are currently conducting a Phase 2a clinical trial in Europe to evaluate the effectiveness of topical Rambazole in mild to moderate acne. The study is a double-blind, vehicle-controlled study, in which patients
receive once-daily treatment of 0.35% topical Rambazole or vehicle for 12 weeks. We plan to enroll up to 80 patients in this study. Based on our review of the interim efficacy data from 50 patients in this study, it is possible that topical
Rambazoles efficacy is comparable to that of existing synthetic retinoid therapies, with potentially less irritation, but the data to date is inconclusive. We are planning to complete this current trial and we may perform additional small
scale clinical trials to obtain a better understanding of the efficacy profile of this product candidate prior to performing additional development work on this program.

Hivenyl. Hivenyl is an antihistamine that we are developing as an oral treatment for allergic reactions of the skin, such as the types of reactions associated with hives. We believe an advantage of Hivenyl over
other antihistamines may be the absence of sedation typically associated with antihistamines. Patients experience sedation when an antihistamine crosses the blood-brain barrier. In preclinical studies in animal models, Hivenyl did not cross the
blood-brain barrier. In addition, the results of two dose escalation Phase 1 clinical trials of Hivenyl suggest that Hivenyl inhibits allergic reactions, has a fast onset of action and does not cause sedation. In these trials, no cardiovascular side
effects or sedation was experienced at doses of five to 15 times those that elicited an antihistamine response.

In January 2007 we
announced data from our Phase 2a clinical trial in Europe for Hivenyl, in the treatment of the itch associated with atopic dermatitis. In this study, which was a multi-center, double-blind, placebo-controlled study, 45 adult patients with atopic
dermatitis underwent a one-week lead-in period followed by randomization to treatment with oral Hivenyl 60 mg twice daily (n=23) or placebo (n=22) for one week. All patients were also treated daily with a topical corticosteroid and an emollient
throughout the study. Nine of the 23 patients in the Hivenyl group reported either a marked improvement or an almost complete to complete relief of their itch symptoms versus none of the 22 patients in the placebo group (p<0.01). The drug was
well tolerated and no patients reported signs of sedation, which supports similar findings in prior studies with Hivenyl.

Based on this
encouraging proof of concept data, we plan to move forward with the development of this early stage clinical program.

Preclinical Development

Under our principal license agreements we have access to the classes of compounds claimed in the patents licensed to us in the
field of dermatology. We are screening these compounds to determine if they are suitable product development candidates. We also work with academic institutions and third-party laboratories to perform the screening on selected compounds. We plan to
supplement these efforts by licensing or otherwise acquiring additional compounds that we believe to be potentially superior to currently marketed products.

Sales and Marketing

We are building a sales and marketing organization with experienced, qualified employees. The
dermatological medical communities in the United States and Canada are relatively small. We believe that we can best serve this discrete target physician market with a focused, specialty sales force. We believe that by developing our own sales
force, we can control marketing efforts more effectively and obtain better access to the physicians that we target. In 2005, we launched a sales force in the United States and Canada to market our products directly to dermatologists and other target
physicians. The United States sales force is comprised of our employees as well as those of a third party contract sales organization, inVentiv Health, Inc.



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During 2006, following the approval of Vusion, we expanded the sales force in the United States to
approximately 60 sales representatives. Currently about one-third of our sales representatives are Barrier employees and two-thirds are inVentiv employees. However, over time, we plan to increase the percentage of our sales force who are Barrier
employees. We also have six regional managers, all of whom are our employees. In Canada, our sales force is currently comprised of four sales representatives. InVentiv also provides us with supplemental sales and marketing services such as sales
information services, fleet management, training and logistics and recruiting support.

As part of our marketing strategy, we utilize a
variety of marketing tools to convey information about our products and their approved uses, including product sampling, rebate coupons, vouchers, journal advertising, specialty publications, and product specific internet sites. We continually
evaluate the effectiveness of these programs and may discontinue some, or add others, as we believe appropriate to market our products.

In
March, 2007, we entered into an agreement with Novartis Consumer Health, Inc., pursuant to which Novartis Consumer Health will promote our Vusion product to pediatricians in the U.S. Beginning in May 2007, Novartis Consumer Health will initiate
promotion of Vusion to pediatricians, supplementing the efforts of our 60 person sales force. Under the agreement which runs through 2008, we will pay Novartis a flat fee for each sales call made to a pediatrician. We will remain responsible for the
marketing and product strategy, as well as for the development, manufacture, distribution and sale of the product.

We rely on the
Specialty Pharmaceutical Services unit of Cardinal Health PTS, LLC, to perform a variety of functions related to the sale and distribution of our products in the United States. These services include distribution, logistics management, inventory
storage and transportation, invoicing and collections. We rely on McKesson Logistics Solutions for similar functions related to the import, quality testing, sale and distribution of our products in Canada.

Although we intend eventually to market our products globally, our efforts to date have not yielded our desired results. We have entered into third-party
distribution arrangements for Vusion and some of our later stage product candidates with potential collaborators and distributors for the major European countries and some less significant markets. Our primary European distributor is Grupo Ferrer
Internacional, S.A. To date, none of our products have been launched under these distribution agreements. In January 2006, we began marketing Vusion (under the brand name Zimycan) on a limited basis in Belgium and, through a third party
distributor, in the Netherlands. We are currently re-evaluating our European commercial strategy as it relates to those products of ours such as Zimycan that contain generically available active ingredients.

In general, should we decide to enter into third-party distribution arrangements and marketing alliances for the marketing and sale of any of our
products in the United States, we would first need to trigger the right of first negotiation with respect to any such product as further described under the caption Johnson & Johnson License Agreements.

Johnson & Johnson License Agreements

In May
2002, we licensed our initial portfolio of product candidates and the patents and other intellectual property and know-how, test data, marketing data and other tangible property associated with those product candidates, from Janssen Pharmaceutica
Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., under two similar but separate intellectual property transfer and license agreements. In September 2004, we amended these two intellectual
property transfer and license agreements to provide for revised territories and exclusivity terms.

Under these license agreements, we
obtained exclusive licenses to a portfolio of patents and non-exclusive licenses to related know-how to make, use and sell our initial product candidates in the field of dermatology. For purposes of the agreements, the field of dermatology includes
applications for the treatment or prevention of



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diseases of human skin, hair, nails and oral and genital mucosa, but excludes treatments for skin cancer. We also have access to classes of compounds claimed
in the patents licensed to us under the agreements, which we can screen in our search for new product candidates in the field of dermatology. If we or an affiliate of Johnson & Johnson advance one of these compounds to Phase 1 clinical
development, the developing party must give notice to the other party when the developing party has initiated a Phase 1 clinical trial for the particular compound. At that point, the other party must discontinue any activity towards the development
or commercialization of that compound for any indication in any field for so long as the compound continues to be in active clinical development or commercialization by the developing party. In addition, neither Johnson & Johnson nor its
affiliates may develop Liarozole, Rambazole, Azoline, Hivenyl, Atopik and several specified preclinical candidates in any formulation for any indication in any field. In exchange for these licenses, we issued an aggregate of 8,333,333 shares of our
series A convertible preferred stock to Johnson & Johnson Consumer Companies, Inc. and Janssen Pharmaceutica Products, L.P. All of these shares were converted into 4,166,666 shares of our common stock in connection with our initial public
offering.

License Terms for Our Product Candidates

The following is a summary of the terms of the license agreements with respect to our existing product candidates and to any products that we may develop from the classes of compounds claimed in the patents licensed
to us:

Royalties.The licenses are royalty free, except that, with respect to Hyphanox only, if we decide to use a third party to
commercialize Hyphanox, we will owe a royalty based on our net sales of Hyphanox. This royalty would also apply to sales by a successor company in the event of a change of control.

Territories and Exclusivity.The licenses are exclusive throughout most of the world, except that our right to sell the following products in the
following territories is semi-exclusive with the Johnson & Johnson companies:



| |  |  | Vusion in Argentina, Australia, Belgium, Denmark, Germany, Indonesia, Luxembourg, Mexico, New Zealand, Peru and Venezuela; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ketanserin in South America.
| | - |  | ----------------------------



| |  |  | In addition, we have not been granted the right to sell Oxatomide in Japan, Italy, Mexico and much of Central America or Ketanserin in Mexico, Central America and
the Caribbean.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commercialization and Manufacturing Rights.We have the sole right to commercialize any product
candidate covered by intellectual property licensed to us under the license agreements that we elect to commercialize ourselves or with the assistance of a contract sales organization. In other circumstances, however, Johnson & Johnson,
through any of its affiliates, has a right of first negotiation for the commercialization of our product candidates based on such intellectual property. The rights of first negotiation for the commercialization of our product candidates can be
exercised on a territory-by-territory basis. The material elements of these rights are as follows:



| |  |  | If we intend to commercialize any product through a third party, other than a contract sales organization, in a particular territory, we must provide notice of this
intention in accordance with the provisions of the license agreements. Johnson & Johnson has 90 days after the provision of this notice to advise us if it desires to enter into a commercialization agreement for that product in that
territory.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If, prior to the expiration of the 90-day offer period we do not receive that notice, we may enter into a commercialization agreement with a third party for that
product without further restrictions or obligations under these rights of first negotiation.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If, prior to the expiration of the 90-day offer period we do receive that notice, we must negotiate exclusively for 90 days to execute a commercialization
agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | If we do not agree on a definitive agreement within the 90-day negotiation period, we may, at any time within a specified period of time after the end of the 90-day
negotiation period, enter into a commercialization agreement for that product with a third party so long as the terms are not, taken as a whole, materially less favorable to us than those proposed by the Johnson & Johnson affiliate with
which we were negotiating.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If within the specified negotiation period, we intend to enter into a commercialization agreement with a third party with terms materially less favorable to us than
those proposed by the Johnson & Johnson affiliate or, if after the specified negotiation period, we intend to enter into a commercialization agreement with a third party on any terms, then Johnson & Johnson, through any of its
affiliates, is entitled to an additional 45-day offer period to express an interest in commercializing that product. If, prior to the termination of the additional 45-day offer period, Johnson & Johnson notifies us of its interest in
commercializing the product, we must negotiate exclusively for 60 days to execute a commercialization agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we enter into a commercialization agreement with an affiliate of Johnson & Johnson, it will have the right to negotiate a manufacturing agreement with
us relating to that particular product in the territory covered by the commercialization agreement. The terms of the right of first negotiation for a manufacturing agreement are the same as the terms of the right of first negotiation for a
commercialization agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We triggered this right of first negotiation with respect to Xolegel, Liarozole and
Ketanserin by indicating our intention to commercialize these product candidates outside the United States through third-party arrangements. Since the 90-day offer period for these product candidates in this territory has expired, if we receive
marketing approvals, we have the exclusive right to commercialize Xolegel, Liarozole and Ketanserin outside the United States, either by ourselves or with a third party, in the territories in which we hold these licenses under the license
agreements. In addition, because we would commercialize these product candidates in the United States ourselves, the rights of first negotiation do not apply to these product candidates in the United States. If we later decide to commercialize any
of these product candidates in the United States through a third party, other than a contract sales organization, we will trigger the right of first negotiation with respect to that product candidate. In addition, we triggered this right of first
negotiation with respect to Vusion by indicating our intention to commercialize this product candidate through third-party arrangements in all territories in which we hold commercialization rights, including the United States. Since the 90-day offer
period for Vusion has expired, we have the exclusive right to commercialize Vusion, either by ourselves or with a third party, in all such territories. We expect that we would trigger the right of first negotiation with respect to Rambazole and
Azoline following our receipt of data from our currently planned Phase 2b clinical studies for those product candidates.

Term and
Termination.The license agreements expire on a country-by-country basis and product-by-product basis after the later of 10 years from the execution date or the expiration of the last patent included in the license agreement in the particular
country. Following expiration of the license agreements with respect to a product, we receive a fully paid, royalty-free license applicable to that product in the particular country. These licenses may be terminated on a product-by-product basis,
if, by dates specified in the license agreements, we are not conducting active clinical trials of the particular product or if we do not obtain regulatory approval for that product. Either of the license agreements may be terminated if we breach
that agreement and do not cure the breach within 90 days or in the event of our bankruptcy or liquidation.

Abbott Development and Supply Agreement

In May 2002, we entered into a development and supply agreement with Abbott GmbH & Co. KG under which Abbott agreed to assist
us in developing an itraconazole product using Abbotts proprietary melt extrusion manufacturing process. Pursuant to the agreement, we are required to pay agreed upon development costs and fees to Abbott. In addition, the agreement provides
that as soon as reasonably possible after we submit an NDA for Hyphanox, we will enter into a supply agreement with Abbott under which Abbott will be our sole supplier



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and manufacturer of Hyphanox. Under the terms of the supply agreement, Abbott will be required to manufacture the itraconazole melt extrudate used in the
manufacture of Hyphanox exclusively for us or our designee.

Grupo Ferrer Distribution and License Agreement

In November 2004, we entered into a distribution and license agreement with Grupo Ferrer Internacional, S.A. The agreement provides for Grupo Ferrer to be
our exclusive marketer and distributor of our Vusion, Xolegel, Liarozole and Ketanserin product candidates in several countries throughout Europe, Latin America and Africa. In addition to marketing and distributing the products, Grupo Ferrer will
assist us in obtaining regulatory approvals for the products in the territories. Under the agreement, we will receive our primary revenues from the sale of finished products to Grupo Ferrer. The agreement also provided for an initial fee of
500,000, which we received in January 2005.

The distribution and license agreement expires on a country-by-country basis and
product-by-product basis after the later of 10 years from the date of the first commercial sale with respect to a product or the expiration of the last patent covering the product in the particular country. Following the expiration of the agreement
with respect to a product in a particular country, Grupo Ferrers right to distribute and manufacture the product will become non-exclusive and royalty-free. If, following expiration, Grupo Ferrer desires to continue to utilize any of our
trademarks; it could do so for a nominal royalty. To date none of our products have been launched by Grupo Ferrer under this Agreement.

Patent and
Intellectual Property Protection; Orphan Drug; Hatch-Waxman Act; Pediatric Treatment Exclusivity

We are pursuing a number of methods to
establish and maintain market exclusivity for our product candidates, including seeking patent protection for our product candidates, the use of statutory market exclusivity provisions and otherwise protecting our intellectual property.

Patents and Intellectual Property Protection

Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from
infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are
important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Our patent portfolio includes patents and patent applications with claims directed to the active ingredients, pharmaceutical formulations, methods of use
and methods of manufacturing of a number of our product candidates. We include a discussion of our proprietary rights related to each of our marketed products and our later stage product candidates and the applicable limitations to our rights in the
discussion of those products elsewhere in this Business section and in the Risk Factors section.

United States
patents issuing from patent applications filed on or after June 8, 1995 have a term of twenty years from the earliest claimed priority date. For United States patents in force on or after December 8, 1994 that issued from applications
filed before June 8, 1995, the term is the greater of twenty years from the earliest claimed priority date or seventeen years from the date of issue.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our
success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of



18



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our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that may issue
in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products.
In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar
technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any
related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our
employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by
competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

The Hatch-Waxman Act

Under the United States
Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five year
marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active ingredient. Hatch-Waxman prohibits an abbreviated new
drug application, an ANDA, or an NDA where the applicant does not own or have a legal right of reference to all the data required for approval, to be submitted by another company for another version of such drug during the five year exclusive
period. Protection under Hatch-Waxman will not prevent the filing or approval of another full NDA, however, the applicant would be required to conduct its own adequate and well-controlled clinical trials to demonstrate safety and effectiveness.

The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new NDAs with new clinical trials for
previously approved drugs and supplemental NDAs, for example, for new indications, dosages, or strengths of an existing drug, if new clinical investigations are essential to the approval. This three year exclusivity covers only the new changes
associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient. Our Vusion product has been granted three years of exclusivity under this Act.

The Hatch-Waxman Act also permits a patent extension term of up to five years as compensation for patent term lost during product development and the FDA
regulatory review process. However, patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission
date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and it must be applied for prior to expiration of the patent. The
United States Patent and Trademark Office, USPTO, in consultation with the FDA, reviews and approves the application for patent term extension. We have applied for patent term extension for the formulation patent for our Vusion product. The
application is currently under review at the USPTO.

Pediatric Treatment Exclusivity

The Best Pharmaceuticals for Children Act provides an additional six months of marketing exclusivity for new or marketed drugs for specific pediatric
studies conducted at the written request of the FDA. The Pediatric



19



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Research Equity Act of 2003, or PREA, authorizes the FDA to require pediatric studies for drugs to ensure the drugs safety and efficacy in children.
PREA requires that new NDAs or supplements to NDAs contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation
for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant
deferrals for submission of data, or full or partial waivers from PREA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication with orphan designation.

Manufacturing

Our products and product
candidates include both oral and topical formulations and are produced through a variety of manufacturing processes of varying degrees of difficulty. For example, Vusion, Solagé and Xolegel are produced through a fairly common manufacturing
process, while Hyphanox is manufactured as a tablet using a proprietary melt extrusion process that is currently only available through our development agreement with a contract manufacturer. We have relied and will continue to rely on third-party
contract manufacturers to produce sufficient quantities of our products for commercial supply and product candidates for use in our preclinical studies and clinical trials.

The following table summarizes our manufacturing relationships for our marketed products.



|        |  |                              |  |                                                     |  |                              |  |                            
|------- |  | ---------------------------- |  | --------------------------------------------------- |  | ---------------------------- |  | ---------------------------
|Product |  | Country WhereProduct is Sold |  | Manufacturer/Supplier                               |  | Country WhereProduct is Made |  | Contract Expiration        
|        |  |                              |  |                                                    
|Xolegel |  | United States                |  | DPT Laboratories, Ltd.                              |  | United States                |  | Oct. 31, 2011              
|        |  |                              |  |                                                    
|Vusion  |  | United States Europe         |  | DSM Pharmaceuticals, Inc. Janssen
Pharmaceutica, NV |  | United States Belgium        |  | Dec. 31, 2009 June 30,
2008
|        |  |                              |  |                                                    
|Solagé  |  | United States and Canada     |  | Contract Pharmaceuticals Limited Niagra             |  | United States                |  | Dec. 6, 2007               
|        |  |                              |  |                                                    
|VANIQA  |  | Canada                       |  | Shire Pharmaceutical Limited                        |  | United States                |  | June 20, 2010              
|        |  |                              |  |                                                    
|Denavir |  | Canada                       |  | Novartis Consumer Health                            |  | United States                |  | March 14, 2011             

The active pharmaceutical ingredients of our marketed products and our Hyphanox product candidate
are generic and are currently available from a number of suppliers. However, we predominately rely on a single source of supply for those active ingredients. If any of the manufacturers of our products, product candidates or active ingredients, were
to become unable or unwilling to continue to provide us with these products or ingredients, we may need to obtain an alternate supplier. The active pharmaceutical ingredients of Rambazole, Azoline and Hivenyl are proprietary. We have relied and will
continue to rely on third-party contract manufacturers to produce sufficient quantities these active ingredients for our product candidates for use in our preclinical studies and clinical trials.

Our contract manufacturers are subject to an extensive governmental regulation process. Regulatory authorities in our markets require that drugs be
manufactured, packaged and labeled in conformity with current Good Manufacturing Processes, or cGMPs. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures.

Government Regulation

Government authorities
in the United States, at the federal, state, and local level, and foreign countries extensively regulate, among other things, the following areas relating to our marketed products and product candidates:



| |  |  | the development, and testing;
| | - |  | -----------------------------



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| |  |  | manufacture and distribution;
| | - |  | -----------------------------



| |  |  | labeling, promotion, advertising, sampling, and marketing; and
| | - |  | --------------------------------------------------------------



| |  |  | import and export.
| | - |  | ------------------

All of our
product candidates will require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other approval procedures of the FDA and
similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, safety, labeling, storage and record-keeping related to such products and their marketing.
The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.

United States Government Regulation

In the
United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act and implementing regulations. If we fail to comply with the applicable requirements at any time during the product development process, approval process, or after
approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDAs refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product
seizures, total or partial suspension of our operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on us.

The steps required before a drug may be marketed in the United States include:



| |  |  | preclinical laboratory tests, animal studies and formulation studies under the FDAs good laboratory practices regulations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | execution of adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each indication for which approval is sought;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of an NDA;
| | - |  | --------------------------------



| |  |  | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good
manufacturing practice, or cGMP; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA review and approval of the NDA.
| | - |  | -----------------------------------

Preclinical studies generally are conducted in laboratory animals to evaluate the potential safety and activity of a product. Violation of the FDAs good laboratory practices regulations can, in some cases, lead to invalidation of the
studies, requiring these studies to be replicated. In the United States, drug developers submit the results of preclinical trials, together with manufacturing information and analytical and stability data, to the FDA as part of the IND, which must
become effective before clinical trials can begin in the United States. An IND becomes effective 30 days after receipt by the FDA unless before that time the FDA raises concerns or questions about issues such as the proposed clinical trials outlined
in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. If these concerns or questions are unresolved, the FDA may not allow the clinical trials to commence.

Pilot studies generally are conducted in a limited patient population to determine whether the product candidate warrants further clinical
trials based on preliminary indications of efficacy. These pilot studies may be performed in the United States after an IND has become effective or outside of the United States prior to the filing of an IND in the United States in accordance with
government regulations and institutional procedures in the country in which the trials are conducted.



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Clinical trials involve the administration of the investigational product candidate to human subjects
under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in assessing the safety and the effectiveness of the drug. Each
protocol must be submitted to the FDA as part of the IND prior to beginning the trial.

Typically, clinical evaluation involves a
time-consuming and costly three-phase sequential process, but the phases may overlap. Each trial must be reviewed, approved and conducted under the auspices of an independent institutional review board, and each trial must include the patients
informed consent.

Phase I:Refers typically to closely monitored clinical trials and includes the initial introduction of an
investigational new drug into human patients or healthy volunteer subjects. Phase 1 clinical trials are designed to determine the safety, metabolism and pharmacologic actions of a drug in humans, the potential side effects associated with increasing
doses of the product candidate and, if possible, to gain early evidence of the product candidates effectiveness. Phase 1 trials also include the study of structure-activity relationships, drug metabolism and mechanism of action in humans, as
well as studies in which investigational drugs are used as research tools to explore biological phenomena or disease processes. During Phase 1 clinical trials, sufficient information about a drugs pharmacokinetics and pharmacological effects
should be obtained to permit the design of well-controlled, scientifically valid Phase 2 studies. The total number of subjects and patients included in Phase 1 clinical trials varies, but are generally in the range of 20 to 80 people.

Phase 2:Refers to controlled clinical trials conducted to evaluate appropriate dosage and the effectiveness of a drug for a particular indication
or indications in patients with a disease or condition under study and to determine the common short-term side effects and risks associated with the drug. These clinical trials are typically well controlled, closely monitored and conducted in a
relatively small number of patients, usually involving no more than several hundred subjects. Although the FDA regulations do not do so, it is common practice in the pharmaceutical industry to sometimes distinguish Phase 2 clinical trials as Phase
2a and Phase 2b. In general, we believe that the common understanding in the industry of Phase 2a and Phase 2b is as follows:



| |  |  | Phase 2a refers to a clinical trial in a targeted patient population to evaluate preliminary efficacy and/or further safety of a drug candidate. One or more of the
following properties may be evaluated: dose response, duration of effect and kinetic/dynamic relationship
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase 2b refers to a controlled dose ranging clinical trial to evaluate further the efficacy and safety of a candidate drug in a targeted patient population and to
attempt to define an appropriate dosing regimen.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Phase 3: Refers to expanded controlled and uncontrolled clinical
trials. These clinical trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained. Phase 3 clinicals are intended to gather additional information about the effectiveness and safety that is needed to
evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase 3 trials usually include from several hundred to several thousand subjects.

Phase 1, 2 and 3 testing may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of each of
the three phases of clinical trials that are conducted in the United States and may, at its discretion, reevaluate, alter, suspend or terminate the testing based upon the data accumulated to that point and the FDAs assessment of the
risk/benefit ratio to the patient. A clinical program is designed after assessing the causes of the disease, the mechanism of action of the active pharmaceutical ingredient of the product candidate and all clinical and preclinical data of previous
trials performed. Typically, the trial design protocols and efficacy endpoints are established in consultation with the FDA. Upon request through a special protocol assessment, the FDA can also provide specific guidance on the acceptability of
protocol design for clinical trials. The FDA, an institutional review board, or we may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable
health risk. The FDA can also request additional clinical trials be conducted as a condition to product approval. During all clinical trials, physicians monitor the patients to determine effectiveness and to observe and report any reactions or other
safety risks that may result from use of the drug.



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Assuming successful completion of the required clinical trials, drug developers submit the results of
preclinical studies and clinical trials, together with other detailed information including information on the manufacture and composition of the product, to the FDA, in the form of an NDA, requesting approval to market the product for one or more
indications. In most cases, the NDA must be accompanied by a substantial user fee. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use.

Before approving an application, the FDA will inspect the facility or facilities at which the product is manufactured. The FDA will not approve the
application unless cGMP compliance is satisfactory. The FDA will issue an approval letter if it determines that the application, manufacturing process and manufacturing facilities are acceptable. If the FDA determines that the application,
manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval and refuse to approve the application by issuing a not approvable letter.

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not
grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. Furthermore, the FDA may
prevent a drug developer from marketing a product under a label for its desired indications or place other conditions on distribution as a condition of any approvals, which may impair commercialization of the product. After approval, some types of
changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Similar regulatory procedures must also be complied with in countries outside the
United States.

If the FDA approves the new drug application, the drug becomes available for physicians to prescribe in the United States.
After approval, the drug developer must comply with a number of post-approval requirements, including delivering periodic reports to the FDA, submitting descriptions of any adverse reactions reported, and complying with drug sampling and
distribution requirements. The holder of an approved NDA is required to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling. Also, quality control and manufacturing
procedures must continue to conform to cGMPs after approval. Drug manufacturers and their subcontractors are required to register their facilities and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMPs which
imposes certain procedural and documentation requirements relating to quality assurance and quality control. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMPs and other aspects of regulatory compliance. The FDA may require post market testing and surveillance to monitor the products safety or efficacy, including additional studies, known as Phase 4 trials, to evaluate long-term
effects.

In addition to studies requested by the FDA after approval, a drug developer may conduct other trials and studies to explore use
of the approved compound for treatment of new indications, which require FDA approval. The purpose of these trials and studies is to broaden the application and use of the drug and its acceptance in the medical community.

We use, and will continue to use, third-party manufacturers to produce our products in clinical and commercial quantities. Future FDA inspections may
identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product or the
failure to comply with requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further
marketing. Newly discovered or developed safety or effectiveness data may require changes to a products approved labeling,



23



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including the addition of new warnings and contraindications. Also, new government requirements may be established that could delay or prevent regulatory
approval of our products under development.

Marketed products are subject to continued regulatory oversight by the Office of Medical
Policy Division of Drug Marketing, Advertising and Communications, and the failure to comply with applicable regulations could result in marketing restrictions, financial penalties and other sanctions.

Foreign Regulation

Whether or not we obtain
FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country.
Although governed by the applicable country, clinical trials conducted outside of the United States typically are administered with the three-phase sequential process that is discussed above under United States Governmental
Regulation.

Under European Union regulatory systems, we may submit marketing authorization applications either under a centralized
or decentralized procedure. The centralized procedure which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member
states. This authorization is a marketing authorization approval, or MAA. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit
an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure,
or MRP.

In addition, regulatory approval of prices is required in most countries other than the United States. We face the risk that
the resulting prices would be insufficient to generate an acceptable return to us or our collaborators.

Competition

The pharmaceutical industry and the dermatology segment in particular, are highly competitive and include a number of established, large and mid-sized
pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on our target markets and areas of expertise. Our products compete, and if approved, our product candidates will compete, with a large number of
products that include over-the-counter treatments, prescription drugs specifically indicated for a dermatological condition and prescription drugs that are prescribed off-label. In addition, new developments, including the development of other drug
technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.

Each of our marketed products competes, and if approved each of our product candidates will compete, for a share of the existing market with numerous
products that have become standard treatments recommended or prescribed by physicians. For example, we believe the primary competition for our marketed products are:



| |  |  | For Xolegel, in the treatment of seborrheic dermatitis, Nizoral from Janssen, Desowen from Galderma S.A., Loprox from Medicis Pharmaceutical Corporation and the
generic equivalents of each.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For Vusion in the treatment of diaper dermatitis complicated by candidiasis, from ointments and creams containing nystatin, Mycolog II from Bristol-Myers Squibb
Company, clotrimazole containing creams from Bayer AG and from generic manufacturers and topical miconazole creams. None of these products are indicated for the treatment of diaper dermatitis complicated by documented candidiasis.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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| |  |  | For Solagé in the treatment of solar lentigenes from Triluma from Galderma S.A., Avage from Allergan, Inc., EpiQuin Micro from SkinMedica, Inc. and other
prescription 4% hydroquinone formulations as well as over-the-counter 2% hydroquinone products, Retin-A from Neutrogena and other tretinoin containing topical formulations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe the primary competition for our later stage product candidates in development are:



| |  |  | For Hyphanox, in the treatment of onychomycosis, Sporanox from Janssen and generic manufacturers, Lamisil from Novartis AG and generic manufacturers, and Penlac
from Dermik Laboratories.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La Roche and Stiefel Laboratories, biologic agents such as Amevive from Astellas Pharma
US, Inc., Raptiva from Genentech, Inc., and methotrexate from generic manufacturers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For Azoline, in the treatment of acute fungal infections, topical antifungals including Loprox from Medicis, Lotrimin AF from Schering-Plough and generic
manufacturers, Lotrimin Ultra from Schering Plough, Lamisil AT from Novartis, and ketoconazole, miconazole and nystatin from generic manufacturers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect to compete on, among other things, the efficacy of our products, the reduction in adverse side effects experienced and more desirable treatment regimens, combined with the effectiveness of our experienced
management team. Competing successfully will depend on our continued ability to attract and retain skilled and experienced personnel, to identify, secure the rights to and develop pharmaceutical products and compounds and to exploit these products
and compounds commercially before others are able to develop competitive products. In addition, our ability to compete may be affected because insurers and other third-party payors in some cases seek to encourage the use of generic products making
branded products less attractive, from a cost perspective, to buyers.

Although we believe that, if approved, our product candidates will
have favorable features for the treatment of their intended indications, existing treatments or treatments currently under clinical development that also receive regulatory approval may possess advantages in competing for market share.

Third-Party Reimbursement and Pricing Controls

In
the United States and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services. It will be time-consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered
cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis. The passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes new
requirements for the distribution and pricing of prescription drugs which may affect the marketing of our products.

In many foreign
markets, including the countries in the European Union, pricing of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state
proposals to implement similar governmental pricing control. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial
condition and profitability.

Employees

As of December 31, 2006, we had 93 full time employees. Of our full time employees, 41 were engaged in sales and marketing, 28 were engaged in research and development and 24 were engaged in general and administrative activities. None
of our employees is represented by a collective bargaining arrangement, and we believe our relationship with our employees is good.



25



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Trademarks

Solagé® is a registered trademark
of Barrier Therapeutics, Inc. Zimycan® is a
registered European Community Trademark of Barrier Therapeutics, Inc. We are seeking United States trademark registrations for our trademarks Barrier Therapeutics, Vusion, Xolegel, Hyphanox, Rambazole and Hivenyl.
Liarozole, Azoline and Atopik are temporary designations. We are developing commercial names for our Liarozole, and Azoline product candidates. Shire International Licensing, B.V., owns the Canadian registration of the VANIQA® trademark. Novartis International Pharmaceutical Ltd.
owns the Canadian registration of the Denavir®
trademark. All other trademarks or service marks appearing in this Report are the property of their respective companies.

Available Information

We maintain a website at www.barriertherapeutics.com. General information about us, including our Corporate Governance
Guidelines and the charters for the committees of our Board of Directors, can be found on this website. Our Board of Directors has adopted a Code of Conduct, which applies to all employees, officers and directors. This Code of Conduct can also be
found on our website. We make available free of charge through the Investor Relations section of our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our website address in this Annual Report on Form 10-K only as an inactive textural reference and do not
intend it to be an active link to our website. The material on our website is not part of our Annual Report on Form 10-K. You may also obtain a free copy of these reports and amendments, as well as our Corporate Governance Guidelines, committee
charters and Code of Conduct, by contacting our General Counsel at Barrier Therapeutics, Inc., 600 College Road East, Suite 3200, Princeton, NJ 08540.



|ITEM 1A.  RISK | FACTORS
|-------------- | -------

Risks Related to Our Financial Results and Need for
Additional Financing

We have incurred losses since inception and anticipate that we will continue to incur losses for the
foreseeable future.

Since our inception in September 2001, we have incurred significant operating losses and, as of
December 31, 2006, we had an accumulated deficit of $204.2 million. We currently market Xolegel, Vusion and Solagé in the United States and Solagé, VANIQA and Denavir in Canada. Our product pipeline includes several product
candidates in various stages of clinical development. Prior to our acquisition of Solagé in February 2005, we had generated no revenues from the sale of our products. We expect to continue to incur significant operating expenses and
anticipate that our expenses may increase in the foreseeable future as we:



| |  |  | conduct additional clinical trials;
| | - |  | -----------------------------------



| |  |  | conduct research and development on existing and new product candidates;
| | - |  | ------------------------------------------------------------------------



| |  |  | seek regulatory approvals for our product candidates;
| | - |  | -----------------------------------------------------



| |  |  | increase our sales and marketing activities to commercialize our products;
| | - |  | --------------------------------------------------------------------------



| |  |  | hire additional clinical, scientific, sales and marketing, management and compliance personnel;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | add operational, financial and management information systems; and
| | - |  | ------------------------------------------------------------------



| |  |  | identify and in-license or acquire additional compounds, technologies, marketed products or businesses.
| | - |  | -------------------------------------------------------------------------------------------------------

We need to generate significant revenue to achieve profitability. We may never generate sufficient sales revenue to achieve and then maintain
profitability. We expect to incur operating losses for the foreseeable future.



26



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We will need substantial additional funding and may be unable to raise capital when needed, which
would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

As of December 31,
2006, we had cash, cash equivalents and marketable securities of $58.9 million. We believe that our existing cash resources and our interest on these funds will be sufficient to meet our projected operating requirements for at least the next 12
months. We currently have no additional commitments or arrangements for any additional financing to fund the commercialization of our marketed products and the research, development and commercial launch of our product candidates. We will require
additional funding in order to continue our commercialization efforts and our research and development programs, including preclinical studies and clinical trials of our product candidates, pursue regulatory approvals for our product candidates,
pursue the commercial launch of our products, expand our sales and marketing capabilities and for general corporate purposes. Our future capital requirements will depend on many factors, including:



| |  |  | the success of our commercialization of our marketed products;
| | - |  | --------------------------------------------------------------



| |  |  | the costs of commercialization activities, including manufacturing, product marketing, sales and distribution, compliance, and related working capital needs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the advancement and success of the development of our product candidates, including clinical trial results;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | our ability to advance early stage compounds into clinical development;
| | - |  | -----------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------------



| |  |  | the costs of manufacturing activities for our clinical trials;
| | - |  | --------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property-related costs, including any possible
litigation costs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to establish and maintain collaborative and other strategic arrangements; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | potential acquisition or in-licensing of other technologies, products or businesses.
| | - |  | ------------------------------------------------------------------------------------

Adequate financing may not be available on terms acceptable to us, if at all. We may continue to seek additional capital through public or private equity
offerings, debt financings or collaborative arrangements and licensing agreements.

If we raise additional funds by issuing equity
securities, our stockholders would experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital
expenditures or declaring dividends. Any debt financing that we raise or additional equity we may sell may contain terms that are not favorable to us or our common stockholders. If we raise additional funds through collaboration and licensing
arrangements with third parties, it will be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. Lack of funding could adversely affect our ability to pursue
our business. For example, if adequate funds are not available, we may be required to curtail significantly or eliminate one or more of our product development programs.

Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.

Variations in our quarterly operating results are difficult to predict and may fluctuate significantly from period to period. We are a relatively new
company and our sales prospects are uncertain as we have only recently commenced our commercialization efforts. In the U.S. we currently only have three FDA-approved products: Solagé, Vusion and Xolegel. We cannot predict with certainty the
timing of level of sales on these products in the future. If our quarterly sales or operating results fall below expectations of investors or securities analysts, the price of our common stock could decline substantially.



27



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Risks Related to Development of Product Candidates



We will not be able to commercialize our product candidates if our preclinical
studies do not produce successful results or if our clinical trials do not demonstrate safety and efficacy in humans.

We must
conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our product candidates in order to obtain regulatory approval for the sale of our product candidates. Preclinical studies and clinical
trials are expensive, can take many years and have uncertain outcomes.

Our success will depend on the success of our currently ongoing
clinical trials and subsequent clinical trials that have not yet begun. It takes several years to complete the clinical trials of a product, and a failure of one or more of our clinical trials can occur at any stage of testing. We believe that the
development of each of our product candidates involves significant risks at each stage of testing. If clinical trial difficulties and failures arise, our product candidates may never be approved for sale or become commercially viable. We do not
believe that any of our product candidates have alternative uses if our current development activities are unsuccessful.

There are a
number of difficulties and risks associated with clinical trials. These difficulties and risks may result in the failure to receive regulatory approval to sell our product candidates or the inability to commercialize any of our product candidates.
For instance, we may discover that a product candidate does not exhibit the expected therapeutic results in humans, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit
commercial use if approved. For example, in June 2005, we announced that our Hyphanox product candidate failed to reach the primary endpoint in its Phase 3, non-inferiority trial for the treatment of vaginal candidiasis. Consequently, the results of
this trial were not sufficient to support a filing for regulatory approval for Hyphanox in that indication. The risk of clinical trial failure is even greater where the product candidate contains a new chemical entity, such as Azoline, Rambazole and
Hivenyl, and where the product candidate uses a novel or not fully known mechanism of action, such as Rambazole. Likewise, the risk of discovering harmful side effects is greater where the product candidate contains a new chemical entity.

In addition, the possibility exists that:



| |  |  | the results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates
for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subjects may drop out of our clinical trials;
| | - |  | ---------------------------------------------



| |  |  | our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct
additional preclinical studies or clinical trials; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of our clinical trials may be greater than we currently anticipate.
| | - |  | ----------------------------------------------------------------------------

For example, the FDA has placed our Liarozole and oral Rambazole product candidates on clinical hold. Moreover, due to the expected costs and time
required to address the FDAs request for significant additional safety data and other requirements for Liarozole, we have placed the further development of this product candidate on hold. We may never complete the development of Liarozole.

If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates,
we would not be able to grow revenues in future periods, which would result in significant harm to our financial position and adversely impact our stock price.



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If our clinical trials for our product candidates are delayed, we would be unable to commercialize
our product candidates on a timely basis, which would materially harm our business.

Planned clinical trials may not begin on time,
may take longer to complete than anticipated, or may need to be restructured after they have begun. Clinical trials can be delayed for a variety of reasons, including delays related to:



| |  |  | obtaining an effective investigational new drug application, or IND, or regulatory approval to commence a clinical trial;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | identifying and engaging a sufficient number of clinical trial sites;
| | - |  | ---------------------------------------------------------------------



| |  |  | negotiating acceptable clinical trial agreement terms with prospective trial sites;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | obtaining institutional review board approval to conduct a clinical trial at a prospective site;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | recruiting qualified subjects to participate in clinical trials in a timely manner;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | competition in recruiting clinical investigators;
| | - |  | -------------------------------------------------



| |  |  | shortage or lack of availability of supplies of drugs for clinical trials;
| | - |  | --------------------------------------------------------------------------



| |  |  | the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the placement of a clinical hold on a study;
| | - |  | --------------------------------------------



| |  |  | the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely
fashion; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the
trial.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The risk of delay is greater for large scale clinical trials such as our Phase 3 trial for Hyphanox in toenail
onychomycosis. This is because studies which have a greater number of patients and investigator sites are more likely to experience one or more of the occurrences identified above. If we are not able to identify and engage a sufficient number of
investigator sites or enroll a sufficient number of patients in our Hyphanox Phase 3 study in a timely manner, the completion of that trial would be delayed.

All of our product candidates have significant milestones to reach, including the successful completion of clinical trials, before commercialization. If we continue to have significant delays in or termination of
clinical trials, our financial results and the commercial prospects for our product candidates or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to
generate revenue could be impaired.

Risks Related to Regulatory Approval of Our Product Candidates

We may not receive regulatory approvals for our product candidates or approvals may be delayed, either of which could materially harm our business.

Government authorities in the United States and foreign countries extensively regulate the development, testing, manufacture,
distribution, marketing and sale of our product candidates and our ongoing research and development activities. Our failure to receive regulatory approval, or failure to receive regulatory approval within the anticipated timeframe, for our product
candidates could significantly adversely affect future revenues.

The process of obtaining regulatory approvals is expensive, often takes
many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. According to the FDA, a Phase 1 clinical trial typically takes several months to complete, a Phase
2 clinical trial typically takes several months to two years to complete and a Phase 3 clinical trial typically takes one to four years to complete. Moreover, Phase 3 clinical trials may not directly follow successful completion of Phase 2



29



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clinical trials, as additional non-clinical and clinical trials may be required prior to initiating a Phase 3 trial. For instance, under recently revised
guidelines of the International Conference on Harmonization, or ICH, the FDA requires a cardiovascular safety study at the expected dose and an elevated dose prior to initiating Phase 3 clinical trials. In addition, additional trials may be needed
following successful completion of a Phase 3 clinical trial prior to seeking marketing approval. For instance, depending upon the outcome of our ongoing Phase 3 trial for Hyphanox, and any directions or feedback we may receive from regulatory
agencies, we may need to perform additional non-clinical or clinical studies prior to seeking marketing approval for Hyphanox.

Industry
sources report that the preparation and submission of new drug applications, or NDAs, which are required for regulatory approval, generally take six months to one year to complete after completion of a pivotal clinical trial. Industry sources also
report that approximately 10 to 15% of all NDAs accepted for filing by the FDA are rejected and that FDA approval, if granted, usually takes approximately one year after submission, although it may take longer if additional information is required
by the FDA. Accordingly, we cannot assure you that the FDA will approve any NDA that we may file. In addition, the Pharmaceutical Research and Manufacturers of America reports that only one out of five product candidates that enter clinical trials
will ultimately be approved by the FDA for commercial sale.

In particular, human therapeutic products are subject to rigorous preclinical
studies, clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling,
storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection
of facilities and supporting information to the FDA for each therapeutic indication to establish the product candidates safety and efficacy. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit
or prevent regulatory approval of a product candidate. For example in May 2005, the FDA issued a not approvable letter for Vusion. Although the FDA ultimately approved our Vusion product in February 2006, the FDAs initial interpretation of our
data and resulting not approvable letter resulted in delay of approximately nine months.

Changes in the FDA approval process during the
development period or changes in regulatory review for each submitted product application may also cause delays in the approval or result in rejection of an application. In addition, recent withdrawals of approved products by major pharmaceutical
companies have resulted in a renewed focus on safety at the FDA, which may result in delays in the approval process.

The FDA has
substantial discretion in the approval process and may reject our data or disagree with our interpretations of regulations or our clinical trial data or ask for additional information at any time during their review, which could result in one or
more of the following:



| |  |  | delays in our ability to submit an NDA;
| | - |  | ---------------------------------------



| |  |  | the refusal by the FDA to file any NDA we may submit;
| | - |  | -----------------------------------------------------



| |  |  | requests for additional studies or data;
| | - |  | ----------------------------------------



| |  |  | delays of an approval; or
| | - |  | -------------------------



| |  |  | the rejection of an application.
| | - |  | --------------------------------

Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn, including for failure to comply with regulatory requirements, an increase in, or appearance of new, adverse events, or if clinical or
manufacturing problems follow initial marketing. If our product candidates are marketed abroad, they will also be subject to extensive regulation by foreign governments.

In addition, any proposed brand name that we intend to use for our product candidates will require approval from the FDA. The FDA typically conducts a rigorous review of proposed product names, including an



30



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evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies
medical claims.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates would severely harm our
business. The process of obtaining these approvals and the subsequent compliance with appropriate domestic and foreign statutes and regulations require spending substantial time and financial resources. If we fail to obtain or maintain, or encounter
delays in obtaining or maintaining, regulatory approvals, it could adversely affect the marketing of any product candidate we develop, our ability to receive product or royalty revenues, and our liquidity and capital resources.

Some of our product candidates are based on new chemical entities that have not been extensively tested in humans, which may affect our ability or
the time we require to obtain necessary regulatory approvals.

Some of our product candidates are based on new chemical entities
that have not been extensively tested in humans. The regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result, we may experience a longer and more expensive
regulatory process in connection with obtaining regulatory approvals of these types of product candidates.

This risk is particularly
applicable to our oral and topical Rambazole product candidates, which are based on a novel class of molecules known as retinoic acid metabolism blocking agents. Since 2004, the FDA has become increasingly concerned about the safety profile of a
class of drugs known as synthetic retinoids. Although oral Rambazole is not a synthetic retinoid, it blocks the intracellular metabolism of natural retinoic acid in cells, resulting in an increased accumulation of the bodys own retinoic acid.
Since this accumulation is designed to provide the same therapeutic benefits of synthetic retinoid therapy, the FDA and foreign regulatory authorities may impose a more difficult, time consuming and expensive regulatory path in order to commence and
complete the clinical testing of these product candidates as compared to others in our pipeline at the same stage of development. The FDA has placed our Liarozole and oral Rambazole product candidates on clinical hold. Due to the expected costs and
time required to address the FDAs request for significant additional safety data and other requirements for Liarozole, we have placed the further development of this product candidate on hold. Since, the active ingredient of our topical
Rambazole product candidate is the same as oral Rambazole, we may experience a longer and more expensive regulatory process for this product candidate, as well.

If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to market our products abroad, and the growth of our revenues, if any, would be limited.

We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other foreign
jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain
approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all.
Approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. Approval by the FDA does not ensure approval by regulatory authorities in other countries or
jurisdictions. For example, although our Xolegel product has received marketing approval from the FDA, we may not be able to obtain regulatory approval for Xolegel in Europe since the European regulatory authorities require data that could only be
obtained by conducting an additional clinical trial, which we currently do not plan to do. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain
these approvals could materially adversely affect our business, financial condition and results of operations.



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Risks Related to Commercialization

If our products and product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success of our products and our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will
depend upon the acceptance of these products by physicians, patients and healthcare payors. Safety, efficacy, convenience and cost-effectiveness, particularly as compared to competitive products, are the primary factors that affect market
acceptance. Even if a product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is launched. In the United States, we have three FDA approved products: Xolegel,
Vusion and Solagé. Our efforts to educate the medical community and third-party healthcare payors on the benefits of Xolegel, Vusion and Solagé, or any of our future products may require significant resources and may never be
successful.

If our products fail to achieve and maintain market acceptance, including coverage by private and public health care insurers,
or if new products or technologies are introduced by others that are more favorably received than our products, or if we are otherwise unable to market and sell our products successfully, our business, financial condition, results of operations and
future growth will suffer.

If third-party payors do not reimburse patients for our products those products might not be used or
purchased, and our revenues and profits will be adversely affected and may not grow.

Our revenues and profits depend,
in part, upon the availability of coverage and reimbursement from third-party healthcare and state and federal government payors. Third-party payors include state and federal programs such as Medicare and Medicaid, managed care organizations,
private insurance plans and health maintenance organizations. Reimbursement by a third-party payer may depend upon a number of factors, including determination if the product is:



| |  |  | competitively priced;
| | - |  | ---------------------



| |  |  | safe, effective and medically necessary;
| | - |  | ----------------------------------------



| |  |  | appropriate for the specific patient;
| | - |  | -------------------------------------



| |  |  | cost-effective; and
| | - |  | -------------------



| |  |  | approved for the intended use.
| | - |  | ------------------------------

Since reimbursement approval for a product is required from third-party and government payors, seeking this approval, particularly when seeking approval for a preferred form of reimbursement over other competitive products, is a
time-consuming and costly process.

Managed care organizations and other third-party payors negotiate the pricing of medical services and
products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products.
Due to their lower costs, generics are often favored on formularies and the active ingredients in each of our marketed products are generically available, although not in the same formulations as our products. Consumers and third-party payors may
not view our marketed products as cost-effective, and consumers may not be able to get reimbursement or reimbursement may be so low that we cannot market our products on a competitive basis. If a product is excluded from a formulary, its usage may
be sharply reduced in the managed care organization patient population. If our products, particularly our Vusion and Xolegel products, are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if
those policies increasingly favor generic products, our market share and gross margins could be negatively affected, as could our overall business and financial condition.



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Any regulatory approval we may receive for our product candidates may be subject to limitations on
its indicated uses which could adversely affect our ability to market the product as anticipated.

Even if regulatory approval of
one or more of our product candidates is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and
surveillance to monitor the safety or efficacy of the product. If this happens it could adversely affect our ability to market that product and potentially adversely affect our revenues for that product.

If we fail to comply with the laws governing the marketing and sale of our products regulatory agencies may take action against us, which could
significantly harm our business.

As a pharmaceutical company, we are subject to a large body of legal and regulatory requirements.
In particular, there are many federal, state and local laws that we need to comply with now that we are engaged in the marketing, promoting, distribution and sale of pharmaceutical products. The FDA extensively regulates, among other things,
promotions and advertising of prescription drugs. In addition, the marketing and sale of prescription drugs that are covered under Medicaid and Medicare, must comply with the Federal fraud and abuse laws, which are enforced by the Office of the
Inspector General of the Division, or OIG, of the Department of Health and Human Services. These laws make it illegal for anyone to give or receive anything of value in exchange for a referral for a product or service that is paid for, in whole or
in part, by any federal health program. The federal government can pursue fines and penalties under the Federal False Claims Act which makes it illegal to file, or induce or assist another person in filing, a fraudulent claim for payment to any
governmental agency.

Since, as part of our commercialization efforts, we provide physicians with samples we must comply with the
Prescription Drug Marketing Act, or PDMA, which governs the distribution of prescription drug samples to healthcare practitioners. Among other things, the PDMA prohibits the sale, purchase or trade of prescription drug samples. It also sets out
record keeping and other requirements for distributing samples to licensed healthcare providers.

In addition, we must comply with the body
of laws comprised of the Medicaid Rebate Program, the Veterans Health Care Act of 1992 and the Deficit Reduction Act of 2005. This body of law governs product pricing for government reimbursement and sets forth detailed formulas for how we
must calculate the pricing of our products so as to ensure that the federally funded programs will get the best price.

Moreover, many
states have enacted laws dealing with fraud and abuse, false claims, the distribution of prescription drug samples and the calculation of best price. These laws typically mirror the federal laws but in some cases, the state laws are more stringent
than the federal laws and often differ from state to state, making compliance more difficult. We expect more states to enact similar laws, thus increasing the number and complexity of requirements with which we would need to comply.

Compliance with this body of laws is complicated, time consuming and expensive. We are a relatively small company that only recently began selling
pharmaceutical products. As such, we have very limited experience in developing and managing, and training our employees regarding, a comprehensive healthcare compliance program. We cannot assure you that we are or will be in compliance with all
potentially applicable laws and regulations. Even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated. Failure to comply with all potentially applicable laws and regulations could lead to penalties
such as the imposition of significant fines, debarment from participating in drug development and marketing and the exclusion from government-funded healthcare programs. The imposition of one or more of these penalties could adversely affect our
revenues and our ability to conduct our business as planned.

In addition, the Federal False Claims Act, which allows any person to bring
suit alleging the false or fraudulent submission of claims for payment under federal programs and other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam



33



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actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action. We could
also become subject to similar false claims litigation under state statutes. If we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations.

If we fail to comply with regulatory requirements governing the manufacture of our marketed products, regulatory agencies may take
action against us, which could significantly harm our business.

The manufacturing facilities and processes for our marketed
products are subject to continual requirements and periodic inspection by the FDA and other regulatory bodies, as well as with compliance with the current Good Manufacturing Practices, or cGMPs. The cGMP regulations include requirements relating to
quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture
of products. Other than through contract, we do not have control over compliance by our contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMPs and other FDA
requirements or similar regulatory requirements outside the United States. Failure of our contract manufacturers or our employees to comply with applicable regulations or the discovery of previously unknown problems with our products or
manufacturing processes may result in any of the following:



| |  |  | restrictions on our products or manufacturing processes;
| | - |  | --------------------------------------------------------



| |  |  | warning letters;
| | - |  | ----------------



| |  |  | withdrawal of the products from the market;
| | - |  | -------------------------------------------



| |  |  | voluntary or mandatory recall;
| | - |  | ------------------------------



| |  |  | fines;
| | - |  | ------



| |  |  | suspension or withdrawal of regulatory approvals;
| | - |  | -------------------------------------------------



| |  |  | refusal to permit the import or export of our products;
| | - |  | -------------------------------------------------------



| |  |  | refusal to approve pending applications or supplements to approved applications that we submit; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | product seizure.
| | - |  | ----------------

We rely on
third parties to perform many necessary commercial services for our products, including services related to the distribution, storage, and transportation of our products.

We rely on the Specialty Pharmaceutical Services unit of Cardinal Health PTS, LLC, to perform a variety of functions related to the sale and distribution
of our products in the United States. These services include distribution, logistics management, inventory storage and transportation, invoicing and collections. We rely on McKesson Logistics Solutions for similar functions related to the import,
quality testing, sale and distribution of our products in Canada. If these third party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties, our
ability to deliver products to meet commercial demand would be significantly impaired.

We depend on three wholesalers for the vast
majority of our product revenues in the United States, and the loss of any of these wholesalers would decrease our revenues.

The
prescription drug wholesaling industry in the United States is highly concentrated, with a vast majority of all sales made by three major full-line companies. Those companies are Cardinal Health, McKesson Corporation and AmerisourceBergen.
Approximately 87% of our product revenues in 2006 were from these three companies. Although we have entered into agreements with each of these companies concerning the terms of



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their purchase of products from us, none of them is under an obligation to continue to purchase our products. The loss of any of these wholesalers, a
material reduction in their purchases, the cancellation of product orders or unexpected returns of unsold products, or the failure to pay an outstanding invoice, from any one of these wholesalers could decrease our revenues and impede our future
growth prospects.

We may acquire additional products, product candidates, technology and businesses in the future and any
difficulties from integrating such acquisitions could damage our ability to attain profitability.

We have acquired our entire
current product pipeline by licensing intellectual property from third parties, and we may acquire additional products or product candidates or technologies that complement or augment our existing product development pipeline. However, because we
acquired substantially all of our existing product candidates in the same transaction, we have limited experience integrating products or product candidates into our existing operations. Integrating any newly acquired product or product candidate
could be expensive and time-consuming. We may not be able to integrate any acquired product or product candidate successfully. Moreover, we may need to raise additional funds through public or private debt or equity financing to make these
acquisitions, which may result in dilution for stockholders and the incurrence of indebtedness.

We plan to consider, as appropriate,
acquisitions of businesses, which may subject us to a number of risks that may affect our stock price, operating results and financial condition. If we were to acquire a business in the future, we would need to consolidate and integrate its
operations with our business. Integration efforts often take a significant amount of time, place a significant strain on our managerial, operational and financial resources, and could prove to be more difficult and expensive than we predicted. If we
fail to realize the expected benefits from acquisitions we may consummate in the future, our business, results of operations and financial condition could be adversely affected.

If our post-marketing studies for one or more of our marketed products produce undesirable results, the FDA may require us to make changes to the
applicable products label which could adversely affect our ability to market that product.

In connection with its approval of
our Xolegel and Vusion products, the FDA has required us to conduct additional post marketing studies. For Xolegel, we must perform a pre-clinical dermal carcinogenicity study in mice to determine the carcinogenic potential of repeated treatment
courses of Xolegel over a prolonged period of time. For Vusion, we must conduct two Phase 4 clinical studies: a percutaneous absorption study to determine the amount, if any, of miconazole nitrate which is absorbed into the bloodstream through the
skin and its potential effect on liver function; and a microbial resistance study to evaluate the extent, if any, to which the candida yeast may develop resistance to repeated treatment courses with Vusion. If any of these studies, or any Phase 4
clinical study that we may elect to conduct, produces undesirable results, the FDA could require us to make changes to the approved label for Xolegel or Vusion, as applicable, which would adversely affect our ability to market that product and
potentially adversely affect our revenues for that product.

Foreign governments tend to impose strict price controls, which may
adversely affect our revenues.

In some foreign countries, particularly the countries of the European Union and Canada, the pricing
of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To
obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or
limited in scope or amount or if pricing is set at unsatisfactory levels our business could be materially harmed. The risk of being unable to obtain pricing at a satisfactory level is greater for products for which the active ingredient is
generically available such as our Vusion and Xolegel products and our Hyphanox product candidate.

For example, although our Vusion product
candidate, which we market under the name Zimycan in Belgium, has received marketing approval from several countries in Europe, our distributor has not launched that



35



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product in any of those countries, due to the inability to obtain acceptable pricing. This product might not be launched in any country in which we are not
able to obtain pricing approval at a satisfactory level.

Risks Related to Our Dependence on Third Parties for Manufacturing, Research and Development
and Marketing and Distribution Activities

Because we have no manufacturing capabilities, we contract with third-party contract
manufacturers whose performance may be substandard or not in compliance with regulatory requirements, which could increase the risk that we will not have adequate supplies of our product candidates and harm our ability to commercialize our product
candidates.

We do not have any manufacturing experience or facilities. We rely on third-party contract manufacturers to produce the
products that we commercialize and use in our clinical trials. If we are unable to retain our current, or engage additional, contract manufacturers, we will not be able to conduct our clinical trials or sell any products for which we receive
regulatory approval. The risks associated with our reliance on contract manufacturers include the following:



| |  |  | Contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance and also may experience shortages in
qualified personnel. As a result, our contract manufacturers might not be able to meet our clinical development schedules or adequately manufacture our products in commercial quantities when required.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changing manufacturers may be difficult because the number of potential manufacturers for some of our product candidates may be limited and, in one case, there is
only a single source of supply. Specifically, the intermediate for our product candidate Hyphanox is manufactured using a process that is proprietary to our contract manufacturer. We do not have a license to the technology used by our contract
manufacturer to make the intermediate needed for the Hyphanox tablets. If this manufacturer cannot provide adequate supplies of the intermediate for Hyphanox, we cannot sublicense this technology to a third party to act as our supplier. As a result,
it may be difficult or impossible for us to find a qualified replacement manufacturer quickly or on terms acceptable to us, the FDA and corresponding foreign regulatory agencies, or at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Each of our marketed products could be produced by multiple manufacturers. However, if we need to change manufacturers, the FDA and corresponding foreign regulatory
agencies must approve these manufacturers in advance. This would involve testing and pre-approval inspections to ensure compliance with FDA and foreign regulations and standards.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our contract manufacturers may breach our manufacturing agreements because of factors beyond our control or may terminate or fail to renew a manufacturing agreement
based on their own business priorities at a time that is costly or inconvenient for us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may compete with other drug
developers for access to manufacturing facilities for our products and product candidates. If we are not able to obtain adequate supplies of our products we may not be able to distribute our products as planned which could adversely affect our
revenues. If we are not able to obtain adequate supplies of our product candidates, it will be more difficult for us to develop our product candidates. Dependence upon third parties for the manufacture of our product candidates may reduce our profit
margins, if any, and may limit our ability to develop and deliver products on a timely and competitive basis.

We rely on a single
source supplier for the manufacture of each of our marketed products and the active ingredients contained in those products and the loss of these suppliers could disrupt our business.

Although each of our marketed products and the active ingredients in those products can be produced by multiple manufacturers, we predominately rely on a
single source of supply for those products and active ingredients. If any of these manufacturers, or any manufacturer of any other ingredient or component contained in our marketed products or their packaging, were to become unable or unwilling to
continue to provide us with



36



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these products or ingredients, we may need to obtain an alternate supplier. The process of changing or adding a manufacturer includes qualification
activities and may require approval from the FDA and corresponding foreign regulatory agencies, and can be time consuming and expensive. If we are not able to manage this process efficiently or if an unforeseen event occurs, we could face supply
disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, damage the commercial prospects for our products and adversely affect our operating results.

If third parties on whom we rely do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or
commercialize our products and product candidates.

We depend on independent clinical investigators and contract research
organizations to conduct our clinical trials. Contract research organizations also assist us in the collection and analysis of trial data. The investigators, contract research organizations, and other contractors are not our employees, and we cannot
control, other than by contract, the amount of resources, including time, that they devote to our product candidates. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial that have been approved by regulatory agencies and for ensuring that we report product-related adverse events in accordance with applicable regulations. Furthermore, the FDA and European regulatory
authorities require us to comply with standards, commonly referred to as good clinical practice, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected.

In connection with our reliance on our independent clinical
investigators and contract research organizations, our clinical trials may be extended, delayed, suspended, terminated, or deemed unacceptable including as a result of:



| |  |  | the failure of these investigators and research organizations to comply with good clinical practice or to meet their contractual duties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our independent investigators to devote sufficient resources to the development of our product candidates or to perform their responsibilities at a
sufficiently high level;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our need to replace these third parties for any reason, including for performance reasons or if these third parties go out of business; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the existence of problems in the quality or accuracy of the data they obtain due to the failure to adhere to clinical protocols or regulatory requirements or for
other reasons.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Extensions, delays, suspensions or terminations of our clinical trials as a result of the performance of
our independent clinical investigators and contract research organizations will delay, and make more costly, regulatory approval for any product candidates that we may develop.

In addition, although we have used a number of contract research organizations to conduct our clinical trials, there are many other qualified contract
research organizations available. Any change in a contract research organization during an ongoing clinical trial could seriously delay that trial and potentially compromise the results of the trial.

We are dependent upon distribution arrangements and marketing alliances to commercialize our product candidates outside the United States and
Canada. These distribution arrangements and marketing alliances place the marketing and sale of our product candidates in these regions outside our control.

We have entered into distribution arrangements and marketing alliances relating to the commercialization of some of our product candidates. Dependence on these arrangements and alliances subjects us to a number of
risks, including:



| |  |  | we may not be able to control the amount and timing of resources that our distributors may devote to the commercialization of our product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | our distributors may experience financial difficulties;
| | - |  | -------------------------------------------------------



| |  |  | our distributors may determine not to launch our product candidates in countries where the distributor determines that commercialization of a particular product
candidate is not feasible or is economically unreasonable due to government pricing controls or other market conditions existing in a particular country;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | business combinations or significant changes in a distributors business strategy may also adversely affect a distributors willingness or ability to
complete its obligations under any arrangement; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | these arrangements are often terminated or allowed to expire, which could interrupt the marketing and sales of a product and decrease our revenue.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

We may not be successful in entering into additional distribution arrangements and marketing alliances with third
parties for our earlier stage product candidates. Our failure to enter into these arrangements on favorable terms could delay or impair our ability to commercialize our product candidates outside the United States and Canada and could increase our
costs of commercialization. In addition, we may be at a competitive disadvantage in negotiating these agreements with third parties because under our license agreements, Johnson & Johnson, through any of its affiliates, has a right of first
negotiation for the commercialization of our product candidates that are based on the licensed intellectual property. Because this first right of negotiation may only be triggered after Phase 2b clinical trials and could extend for up to 180 days,
it may hinder our ability to enter into distribution agreements and marketing alliances. It may also delay our receipt of any milestone payments or reimbursement of development costs.

Risks Related to Intellectual Property

There are limitations on our patent rights relating to
our products and product candidates that may affect our ability to exclude third parties from competing against us.

The patent
rights that we own or have licensed relating to our products and product candidates are limited in ways that may affect our ability to exclude third parties from competing against us. In particular:



| |  |  | We do not hold composition of matter patents covering the active pharmaceutical ingredients of Xolegel, Vusion, Solagé, or our Hyphanox product candidate.
Composition of matter patents on active pharmaceutical ingredients are the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. The active
ingredients for Solagé, Vusion, Xolegel and Hyphanox are off patent. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products so long as the competitors do not
infringe any method of use or formulation patents that we may hold.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The composition of matter patent covering the formulation of our Vusion product is scheduled to expire on March 27, 2007, meaning that competitors who obtain the
requisite regulatory approval can offer a product with the same formulation following the expiration of our Hatch Waxman marketing exclusivity in February 2009. Although we have submitted an application for up to five years of patent term extension,
it is possible that the USPTO could reject that application or grant an extension for a shorter period of time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our patent licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. are limited
to the field of dermatology. As a result, if we were to discover that one or more of our product candidates had potential to be effective in indications outside the field of dermatology, we would not be able to capitalize on that potential without
first obtaining a license to do so. We may not be able to obtain such a license on attractive terms or at all.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



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These limitations on our patent rights may result in competitors taking product sales away from us, which
would reduce our revenues and harm our business.

If we fail to comply with our obligations in the agreements under which we license
development or commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

All of our current product candidates in clinical development are based on intellectual property that we have licensed from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and
Ortho-McNeil Pharmaceutical, Inc. We depend, and will continue to depend, on these license agreements. The terms of these licenses are set out in two license agreements. These license agreements may be terminated on a product-by-product basis, if,
by dates specified in the license agreements, we are not conducting active clinical development of the particular product or if we do not obtain regulatory approval for that product. Either of the license agreements may also be terminated if we
breach that license agreement and do not cure the breach within 90 days or in the event of our bankruptcy or liquidation.

Disputes may
arise with respect to our licensing agreements regarding manufacturing, development and commercialization of any products relating to this intellectual property. These disputes could lead to delays in or termination of the development, manufacture
and commercialization of our product candidates or to litigation.

Various aspects of our Johnson & Johnson license
agreements may adversely affect our business.

Under our principal license agreements, neither Johnson & Johnson nor any of
its affiliates is restricted from developing or acquiring products that may address similar indications as our products or otherwise compete with our products. We have the sole right to commercialize any product candidate based on intellectual
property licensed to us under these agreements that we elect to commercialize ourselves or with the assistance of a contract sales organization. In other circumstances, however, Johnson & Johnson and any of its affiliates has a right of
first negotiation for the commercialization of our product candidates based on such intellectual property. The rights of first negotiation for the commercialization of our product candidates can be exercised on a territory-by-territory basis. This
negotiation may extend for up to 180 days, which may delay our commercialization efforts or hinder our ability to enter into distribution agreements.

The license agreements also permit each of Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., to abandon its maintenance of any patents or
the prosecution of any patent applications included in the licensed intellectual property for any reason. If any of these companies abandon these activities, we have the option to undertake their maintenance and prosecution if we decide to prevent
their abandonment. To date, we have assumed the maintenance and prosecution for all of the patents and patent applications relating to our Xolegel and Vusion product candidates. If we are required to undertake these activities for any additional
product candidates, our operating costs will increase.

In addition, our license agreements limit our use of our product candidates to the
specific field of dermatology as defined in the license agreements. As so defined, dermatology consists of applications for the treatment or prevention of diseases of human skin, hair, nails and oral and genital mucosa, but excludes treatments for
skin cancer.

This field of use restriction may limit our ability to market our products for indications outside of dermatology and,
therefore, limit the potential market size for our products.

If we are unable to obtain and maintain patent protection for our
intellectual property, our competitors could develop and market products similar or identical to ours, which may reduce demand for our product candidates.

Our success will depend in part on our ability to obtain and maintain patent protection for our proprietary technologies and product candidates and our ability to prevent third parties from infringing our proprietary
rights.



39



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The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We
may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar
products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property
or narrow the scope of our patent protection. We also may not have the resources to aggressively protect and enforce existing patent protection, and our competitors may infringe our patents or successfully avoid them through design innovation. To
prevent infringement or unauthorized use, we may need to file infringement lawsuits, which are expensive and time-consuming.

Because of
the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on patent
protection for new technologies, products and processes. Accordingly, we expect to seek patent protection for our new proprietary technologies and some of our product candidates. The risk exists, however, that new patents may be unobtainable and
that the breadth of the claims in a patent, if obtained, may not provide adequate protection for our proprietary technologies or product candidates.

Although we own or otherwise have rights to a number of patents, these patents may not effectively exclude competitors. The issuance of a patent is not conclusive as to its validity or enforceability and third parties
may challenge the validity or enforceability of our patents. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because
publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in our issued United States patents or pending patent applications, or that we
were the first to file for protection of the inventions set forth in the foreign patents or patent applications. It is possible that a competitor may successfully challenge our patents or that challenges will result in the elimination or narrowing
of patent claims and, therefore, reduce our patent protection.

We may need to initiate lawsuits to protect or enforce our patents
and other intellectual property rights, which could result in the forfeiture of these rights.

Any issued patents that cover our
proprietary technologies may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent may be challenged with respect to its validity or its enforceability. In particular, if a competitor were to file a
paragraph IV certification under the United States Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, in connection with that competitors submission to the FDA of an abbreviated new drug application,
or ANDA, for approval of a generic version of any of our products for which we believed we held a valid patent, then we would have 45 days in which to initiate a patent infringement lawsuit against such competitor. In any infringement proceeding, a
court may decide that a patent of ours is not valid or is unenforceable, may narrow our patent claims or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. If a court so
found that one of our patents was invalid or not infringed in an infringement suit under paragraph IV of the Hatch-Waxman Act, then the FDA would be permitted to approve the competitors ANDA resulting in a competitive generic product.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology may be
adversely affected.

In addition to patent protection, we rely upon trade secrets relating to unpatented know-how and technological
innovations to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees, consultants and other third parties. We also have confidentiality and invention or patent assignment
agreements with our employees and our consultants. If our employees, consultants or other third parties breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our trade secrets may otherwise become known
to or be independently developed by our competitors.



40



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If the development of our product candidates infringes the intellectual property of our competitors
or other third parties, we may be required to pay license fees or cease our development activities and pay damages, which could significantly harm our business.

Even if we have our own patents which protect our products and our product candidates they may nonetheless infringe the patents or violate the proprietary rights of third parties. In these cases, we may be required to
obtain licenses to patents or proprietary rights of others in order to continue to develop and commercialize our product candidates. We may not, however, be able to obtain any licenses required under any patents or proprietary rights of third
parties on acceptable terms, or at all. Even if we were able to obtain rights to a third partys intellectual property, these rights may be non-exclusive, thereby giving our competitors potential access to the same intellectual property.

Third parties may assert patent or other intellectual property infringement claims against us, or our collaborators, with respect to
technologies used in potential product candidates. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial
damages. Even if we were to prevail, any litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. In addition, any patent claims brought against our collaborators
could affect their ability to carry out their obligations to us.

Furthermore, as a result of a patent infringement suit brought against
us, or our collaborators, the development, manufacture or potential sale of product candidates claimed to infringe a third partys intellectual property may have to be stopped or be delayed. Ultimately, we may be unable to commercialize some of
our product candidates or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

Risk Related to Our Industry

Federal legislation will likely increase the pressure to reduce the price of
pharmaceutical products paid for by Medicare, which will adversely affect our revenues.

The Medicare Prescription Drug Improvement
and Modernization Act of 2003 reformed the way Medicare covers and reimburses for pharmaceutical products. The law expands Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales
prices for drugs. In addition, the law provides authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of the expansion of federal coverage of drug products, we expect that there will be additional
pressure to contain and reduce costs. These cost initiatives and other provisions of this law could decrease the coverage and price that we receive for our products and could seriously harm our business.

If we are not able to retain our current senior management team or attract and retain qualified scientific, technical and business personnel, our
business will suffer.

We are dependent on the members of our senior management team for our business success. In addition, an
important element of our strategy is to leverage the development, regulatory and commercialization expertise of our current management in our development activities. The loss of key employees may result in a significant loss in the knowledge and
experience that we, as an organization, possess and could cause significant delays, or outright failure, in the further commercialization of our products and development of product candidates. If we are unable to attract and retain qualified and
talented senior management personnel, our business may suffer.

In addition, competition for qualified scientific, technical, and business
personnel is intense in the pharmaceutical industry. If we are unable to hire and retain qualified personnel, our business will suffer.



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We face potential product liability exposure, and, if successful claims are brought against us, we
may incur substantial liability for a product and may have to limit its commercialization.

The use of our product candidates in
clinical trials and the sale of products may expose us to the risk of product liability claims. This risk is even greater for our product candidates that are administered orally such as Hyphanox, Azoline, Rambazole and Hivenyl or which contain a new
chemical entity such as Azoline, Rambazole and Hivenyl. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves
against these claims, we may incur substantial losses or expenses, be required to limit the commercialization of our product candidates and face adverse publicity. We have product liability insurance coverage with a $10 million annual aggregate
coverage limit, and our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be
able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side
effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash.

If our competitors develop and market products faster than we do or if the products of our competitors are considered more desirable than ours,
revenues for any of our products and product candidates that are approved for marketing will not develop or grow.

The
pharmaceutical industry, and the dermatology segment in particular, is highly competitive and includes a number of established, large and mid-sized pharmaceutical companies, as well as smaller emerging companies, whose activities are directly
focused on our target markets and areas of expertise. We face and will continue to face competition in the discovery, in-licensing, development and commercialization of our product candidates, which could severely impact our ability to generate
revenue or achieve significant market acceptance of our product candidates. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry
at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.

Compared to us, many of
our competitors and potential competitors have substantially greater:



| |  |  | capital resources;
| | - |  | ------------------



| |  |  | research and development resources, including personnel and technology;
| | - |  | -----------------------------------------------------------------------



| |  |  | regulatory experience;
| | - |  | ----------------------



| |  |  | preclinical study and clinical trial experience; and
| | - |  | ----------------------------------------------------



| |  |  | manufacturing, distribution and sales and marketing experience.
| | - |  | ---------------------------------------------------------------

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than us. Our competitors may obtain patent protection or other intellectual property rights that limit our
ability to develop or commercialize our product candidates or technologies. Our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than us in manufacturing and marketing their
products.

Each of our marketed products competes, and if approved each of our product candidates will compete, for a share of the existing
market with numerous products that have become standard treatments recommended or prescribed by physicians. For example, we believe the primary competition for our marketed products are:



| |  |  | For Xolegel, in the treatment of seborrheic dermatitis, Nizoral from Janssen, Desowen from Galderma S.A., Loprox from Medicis Pharmaceutical Corporation and the
generic equivalents of each.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | For Vusion in the treatment of diaper dermatitis complicated by candidiasis, from ointments and creams containing nystatin, Mycolog II from Bristol-Myers Squibb
Company, clotrimazole containing creams from Bayer AG and from generic manufacturers and topical miconazole creams. None of these products are indicated for the treatment of diaper dermatitis complicated by documented candidiasis.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For Solagé in the treatment of solar lentigenes from Triluma from Galderma S.A., Avage from Allergan, Inc., EpiQuin Micro from SkinMedica, Inc. and other
prescription 4% hydroquinone formulations as well as over-the-counter 2% hydroquinone products, Retin-A from Neutrogena and other tretinoin containing topical formulations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe the primary competition for our later stage product candidates in development are:



| |  |  | For Hyphanox, in the treatment of onychomycosis, Sporanox from Janssen and generic manufacturers, Lamisil from Novartis AG and generic manufacturers, and Penlac
from Dermik Laboratories.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La Roche and Stiefel Laboratories, biologic agents such as Amevive from Astellas Pharma
US, Inc., Raptiva from Genentech, Inc., and methotrexate from generic manufacturers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For Azoline, in the treatment of acute fungal infections, topical antifungals including Loprox from Medicis, Lotrimin AF from Schering-Plough and generic
manufacturers, Lotrimin Ultra from Schering Plough, Lamisil AT from Novartis, and ketoconazole, miconazole and nystatin from generic manufacturers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Risks Related to Our Common Stock

Our stock price is volatile, and the market price of our
common stock may drop below the price you pay.

Market prices for securities of biopharmaceutical and specialty pharmaceutical
companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:



| |  |  | results of our clinical trials or those of our competitors;
| | - |  | -----------------------------------------------------------



| |  |  | the regulatory status of our product candidates;
| | - |  | ------------------------------------------------



| |  |  | failure of any of our products to achieve commercial success;
| | - |  | -------------------------------------------------------------



| |  |  | developments concerning our competitors and their products;
| | - |  | -----------------------------------------------------------



| |  |  | success of competitive products and technologies;
| | - |  | -------------------------------------------------



| |  |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | developments or disputes concerning our patents or other proprietary rights;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to manufacture any products to commercial standards;
| | - |  | ----------------------------------------------------------------



| |  |  | public concern over our drugs;
| | - |  | ------------------------------



| |  |  | litigation involving our company or our general industry or both;
| | - |  | -----------------------------------------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | changes in the structure of health care payment systems, including developments in price control legislation;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | departure of key personnel;
| | - |  | ---------------------------



| |  |  | period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | changes in estimates of our financial results or recommendations by securities analysts;
| | - |  | ----------------------------------------------------------------------------------------



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| |  |  | investors general perception of us; and
| | - |  | ----------------------------------------



| |  |  | general economic, industry and market conditions.
| | - |  | -------------------------------------------------

If any of these risks occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Provisions in our certificate of incorporation and bylaws and under Delaware law may prevent or frustrate a change in control or a change in
management that stockholders believe is desirable.

Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by
our stockholders to replace or remove our management. These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | limitations on the removal of directors;
| | - |  | ----------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations;
| | - |  | ----------------------------------------------------------------------



| |  |  | the inability of stockholders to act by written consent or to call special meetings; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to
institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote is necessary to amend or repeal the above
provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled
to vote.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.



|ITEM 2. | PROPERTIES
|------- | ----------

We lease approximately 20,300 square
feet of administrative offices at our corporate headquarters, which is located in Princeton, New Jersey. We also lease approximately 10,600 square feet of administrative offices in Geel, Belgium. Our Princeton, New Jersey lease expires in 2010 if
not renewed by September 30, 2010, and our lease in Belgium is short-term and renewable. We believe that our current facilities are adequate for our present purposes.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

In October 2005, a purported
class action lawsuit was filed in the United States District Court for the District of New Jersey against us and certain of our officers on behalf of all persons who purchased or acquired



44



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securities of Barrier Therapeutics, Inc. between April 29, 2004 and June 29, 2005. The complaints alleged violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and under Sections 11, 12 and 15 of the Securities Exchange Act of 1933. In November 2006, the case was voluntarily dismissed by plaintiffs counsel, in its entirety and
with prejudice.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

We did not submit any matters to the vote of security holders during the fourth quarter of fiscal 2006.

OUR EXECUTIVE OFFICERS

The following table identifies our current executive officers:



|                        |  |     |  |                                                                
|----------------------- |  | --- |  | ---------------------------------------------------------------
|Name                    |  | Age |  | Position                                                       
|Geert Cauwenbergh, Ph.D |  | 53  |  | Chief Executive Officer and Director                           
|Alfred Altomari         |  | 48  |  | Chief Operating Officer                                        
|Albert C. Bristow       |  | 37  |  | General Counsel and Secretary                                  
|Charles T. Nomides      |  | 50  |  | Chief Research and Development Officer                         
|Anne M. VanLent         |  | 58  |  | Executive Vice President, Chief Financial Officer and Treasurer
|Dennis P. Reilly        |  | 48  |  | Vice President, Principal Accounting Officer                   

Geert Cauwenbergh, Ph.D. is our founder and Chief Executive Officer. Dr. Cauwenbergh
served as our Chairman of the Board and Chief Executive Officer from September 2001 until June 2006. Prior to joining us, Dr. Cauwenbergh was at Johnson & Johnson Consumer and Personal Care Products Companies from 2000 to 2002 where he
served in various capacities, most recently as Vice President of Technology. From 1994 to 2000, Dr. Cauwenbergh was at Johnson & Johnson Consumer Companies Worldwide where he served in various capacities, most recently as Vice
President of Research & Development. He received his Ph.D. in Medical Sciences from the Catholic University of Leuven, Faculty of Medicine, Belgium where he also completed his Masters and undergraduate work. Dr Cauwenbergh serves on the
Board of Trustees of the Biotechnology Council of New Jersey, currently as Vice Chairman of the Board. He has been the author of numerous publications in the fields of Dermatology and Infectious Diseases.

Alfred Altomari was appointed Chief Operating Officer in February 2006. From August 2003 until February 2006, Mr. Altomari served as our
Chief Commercial Officer. Prior to joining us, Mr. Altomari was at affiliates of Johnson & Johnson from 1982 to 2003 where he most recently served as General Manager of the Ortho Neutrogena prescription drug development group.
Mr. Altomari also serves as a director of Auxilium Pharmaceuticals, Inc. and Agile Therapeutics, Inc. Mr. Altomari received a bachelors degree in Science with a dual major in finance and accounting from Drexel University and received
his M.B.A. from Rider University.

Albert C. Bristow has been our General Counsel since October 2003. Mr. Bristow was an
attorney with Morgan, Lewis & Bockius LLP, Princeton, New Jersey, from January 2000 until joining us, and an attorney with Archer & Greiner, P.C., Haddonfield, New Jersey, from September 1995 until January 2000. Mr. Bristow
received a bachelors degree in the Arts from Lafayette College and a J.D. from the University of Pennsylvania.

Charles T.
Nomides was appointed Chief Research and Development Officer in February 2006. From July 2002 until February 2006, Mr. Nomides served as our Chief Operating Officer. Prior to joining us, Mr. Nomides was at Johnson & Johnson
Consumer Products Worldwide from 1997 to 2002 where he most recently served as Director of Research and Development in charge of the Ortho Neutrogena prescription drug development group. Mr. Nomides received a bachelors degree in Biology
from Clarion State University and received graduate training from Temple University and The Milton S. Hershey Medical Center.



45



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Anne M. VanLent has been our Executive Vice President, Chief Financial Officer and Treasurer since
May 2002. Prior to joining us, Ms. VanLent served as a principal of the Technology Compass Group, LLC, a healthcare/technology consulting firm, since she founded it in October 2001. From July 1997 to October 2001, she was the Executive Vice
PresidentPortfolio Management for Sarnoff Corporation, a multidisciplinary research and development firm. Ms. VanLent also currently serves as a director of Penwest Pharmaceuticals Co. and Integra Lifesciences Holdings Corp. She received
a bachelors degree in Physics from Mount Holyoke College and did graduate work in biophysics.

Dennis P. Reilly was appointed
Principal Accounting Officer in June 2006. Mr. Reilly has been Barrier Therapeutics Vice President of Finance since September 2005. Prior to joining Barrier, from May 2002 until September 2005, Mr. Reilly was Senior
Director and Controller of The Medicines Company. From September 2000 through April 2002, Mr. Reilly was the U.S. Controller of Orbiscom, Inc. Mr. Reilly also spent 17 years with Mobil Corporation in various accounting and finance
roles. Mr. Reilly received a bachelors degree in Accounting from Villanova University and a masters degree in Finance from Virginia Tech University. Mr. Reilly is also a Certified Public Accountant.

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Our Common Stock is quoted on the NASDAQ National Market under the symbol BTRX. The following table sets forth the range of high and low sale
prices for the common stock as reported on the NASDAQ National Market for the periods indicated below.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | High |       | Low
|2006           |  |      |       |     |   |      
|First Quarter  |  | $    | 11.34 |     | $ | 7.40 
|Second Quarter |  | $    | 9.93  |     | $ | 5.25 
|Third Quarter  |  | $    | 7.30  |     | $ | 5.01 
|Fourth Quarter |  | $    | 7.85  |     | $ | 5.98 
|2005           |  |      |       |     |   |      
|First Quarter  |  | $    | 22.40 |     | $ | 13.45
|Second Quarter |  | $    | 19.22 |     | $ | 7.85 
|Third Quarter  |  | $    | 10.12 |     | $ | 7.50 
|Fourth Quarter |  | $    | 8.70  |     | $ | 6.66 

As of March 6, 2007, there were 66 holders of record of our Common Stock. On March 6,
2007, the last reported sale price of our common stock as reported on the NASDAQ National Market was $6.69 per share.

We have not paid any
dividends on our common stock since our inception and do not anticipate paying any dividends on our Common Stock in the foreseeable future.

Dividend
Policy

Since we became a public company, we have not paid any dividends on our Common Stock. We do not anticipate paying any dividends
on our Common Stock in the foreseeable future. We intend to retain future earnings in order to finance the growth and development of our business.

Recent Sales of Unregistered Securities

During the year ended December 31, 2006, we did not sell any securities which
were not covered by an effective registration statement under the Securities Act of 1933.



46



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Equity Compensation Plan Information

The following table sets forth certain information as of the end of our fiscal year ended December 31, 2006 with respect to our compensation plans under which equity securities are authorized.



|                                                           |  |                                                                                            |  |                                                                         |      |                                                                                                                                         |           |  
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------- | --------- | -
|Plan Category                                              |  | Number of securities tobe issued upon exerciseof outstanding options,warrants or rights(a) |  | Weighted average priceof outstanding stockoptions, warrants orrights(b) |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn(a))(c) |          
|Equity compensation plans approved by security holders     |  | 2,638,024                                                                                  |  | $                                                                       | 8.17 |                                                                                                                                         | 1,766,880 | *
|Equity compensation plans not approved by security holders |  | 0                                                                                          |  |                                                                         | N/A  |                                                                                                                                         | 0         |  
|Total                                                      |  | 2,638,024                                                                                  |  | $                                                                       | 8.17 |                                                                                                                                         | 1,766,880 |  

---

|* | Effective as of January 1, 2007, this number reflects an increase of 1,000,000 shares of common stock reserved for issuance under the Plan. The Plan contains an evergreen
provision which provides for an automatic increase or reserved shares under the Plan each year on the first trading day in January of each calendar year by an amount equal to 5% of the total number of shares of Common Stock outstanding on the last
trading day in December, not in excess of 1,000,000. This number also takes into consideration 126,330 shares of restricted common stock issued to certain employees under the Plan on December 6, 2006, which is subject to future vesting. Future
vesting is contingent upon the individuals continued employment with the Company.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47



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Comparative Stock Performance Graph

The following Performance Graph and related information shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

LOGO

ASSUMES $100 INVESTED ON APRIL 28, 2004

ASSUMES DIVIDENDS REINVESTED THROUGH FISCAL YEAR ENDING DECEMBER 31, 2006



|                            |  |         |     |         |   |         |  |          |       |         |   |         |  |         |        |          |   |         |  |         |        |         |   |          |  |   |        |  |   |        |  |   |        |  |   |       
|--------------------------- |  | ------- | --- | ------- | - | ------- |  | -------- | ----- | ------- | - | ------- |  | ------- | ------ | -------- | - | ------- |  | ------- | ------ | ------- | - | -------- |  | - | ------ |  | - | ------ |  | - | ------ |  | - | ------
|                            |  | 4/28/04 |     | 6/30/04 |   | 9/30/04 |  | 12/31/04 |       | 3/31/05 |   | 6/30/05 |  | 9/30/05 |        | 12/30/05 |   | 3/31/06 |  | 6/30/06 |        | 9/30/06 |   | 12/31/06
|Barrier Therapeutics, Inc.  |  | $       | 100 |         | $ | 93.40   |  | $        | 81.07 |         | $ | 110.67  |  | $       | 103.27 |          | $ | 52.87   |  | $       | 56.60  |         | $ | 54.67    |  | $ | 64.53  |  | $ | 43.60  |  | $ | 43.07  |  | $ | 50.27 
|Nasdaq Pharmaceutical Index |  | $       | 100 |         | $ | 94.77   |  | $        | 90.64 |         | $ | 97.77   |  | $       | 85.86  |          | $ | 89.92   |  | $       | 105.71 |         | $ | 107.66   |  | $ | 110.59 |  | $ | 98.93  |  | $ | 103.37 |  | $ | 105.39
|Nasdaq Composite Index (US) |  | $       | 100 |         | $ | 102.98  |  | $        | 95.56 |         | $ | 109.60  |  | $       | 100.68 |          | $ | 104.10  |  | $       | 109.07 |         | $ | 111.93   |  | $ | 118.73 |  | $ | 114.46 |  | $ | 118.95 |  | $ | 127.17



48



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The selected consolidated
financial data presented below for, and as of the end of, each of our last five fiscal years has been derived from and is qualified by reference to our consolidated financial statements. Our consolidated financial statements for the fiscal years
ended December 31, 2006, 2005, 2004, 2003, and 2002, have been audited by Ernst & Young LLP, independent registered public accounting firm.

This information should be read in conjunction with our consolidated financial statements and the related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of
Operations which is Item 7 of Part II of this annual report on Form 10-K.

We have not paid any cash dividends on our shares of
Common Stock during the periods presented.



|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------- | ---------- | -- | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                           |  | Year Ended December 31,                         |           
|                                                                                           |  | 2006                                            |            |    | 2005 |   |            | 2004 |  |   | 2003       |   |  | 2002 |        
|                                                                                           |  | (in thousands, except share and per share data) |           
|Consolidated Statement of Operations Data:                                                 |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   | 
|Revenues:                                                                                  |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Net product revenue                                                                        |  | $                                               | 5,853      |    |      | $ | 792        |      |  | $ |           |   |  | $    |        |   |  | $ |        |  
|Other revenue                                                                              |  |                                                 | 885        |    |      |   | 1,748      |      |  |   | 897        |   |  |      | 367     |   |  |   |        |  
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Total revenues                                                                             |  |                                                 | 6,738      |    |      |   | 2,540      |      |  |   | 897        |   |  |      | 367     |   |  |   |        |  
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Operating expenses:                                                                        |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Cost of product revenues                                                                   |  |                                                 | 1,431      |    |      |   | 544        |      |  |   |           |   |  |      |        |   |  |   |        |  
|Research and development                                                                   |  |                                                 | 25,895     | *  |      |   | 30,369     |      |  |   | 30,904     |   |  |      | 17,485  |   |  |   | 3,542   |  
|Selling, general and administrative                                                        |  |                                                 | 35,795     | *  |      |   | 20,280     |      |  |   | 11,475     |   |  |      | 3,730   |   |  |   | 1,532   |  
|In-process research and development                                                        |  |                                                 |           |    |      |   |           |      |  |   |           |   |  |      |        |   |  |   | 25,000  |  
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                                   |  |                                                 | 63,121     | *  |      |   | 51,193     |      |  |   | 42,379     |   |  |      | 21,215  |   |  |   | 30,074  |  
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Loss from operations                                                                       |  |                                                 | (56,383    | )  |      |   | (48,653    | )    |  |   | (41,482    | ) |  |      | (20,848 | ) |  |   | (30,074 | )
|Interest income                                                                            |  |                                                 | 3,015      |    |      |   | 2,929      |      |  |   | 1,408      |   |  |      | 419     |   |  |   | 275     |  
|Interest expense                                                                           |  |                                                 | (61        | )  |      |   | (53        | )    |  |   | (36        | ) |  |      | (3      | ) |  |   | (5      | )
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Net loss before income tax benefit and cumulative effect of change in accounting principle |  |                                                 | (53,429    | )* |      |   | (45,777    | )    |  |   | (40,110    | ) |  |      | (20,432 | ) |  |   | (29,804 | )
|Income tax benefit                                                                         |  |                                                 | 655        |    |      |   | 536        |      |  |   | 367        |   |  |      | 217     |   |  |   |        |  
|Cumulative effect of change in accounting principle                                        |  |                                                 | 57         |    |      |   |           |      |  |   |           |   |  |      |        |   |  |   |        |  
|Preferred stock accretion                                                                  |  |                                                 |           |    |      |   |           |      |  |   | (4,592     | ) |  |      | (8,432  | ) |  |   | (3,392  | )
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Net loss attributable to common stockholders                                               |  | $                                               | (52,717    | )* |      | $ | (45,241    | )    |  | $ | (44,335    | ) |  | $    | (28,647 | ) |  | $ | (33,196 | )
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share                                                       |  | $                                               | (2.06      | )* |      | $ | (1.91      | )    |  | $ | (3.02      | ) |  | $    | (83.95  | ) |  | $ | (240.74 | )
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  
|Weighted average shares used in computing basic and diluted net loss per share             |  |                                                 | 25,583,259 |    |      |   | 23,656,306 |      |  |   | 14,677,710 |   |  |      | 341,256 |   |  |   | 137,889 |  
|                                                                                           |  |                                                 |            |    |      |   |            |      |  |   |            |   |  |      |         |   |  |   |         |  

---

|* | Note: As discussed in Note 1, Summary of Significant Accounting Policiesto the consolidated financial statements, effective January 1, 2006, we
adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (FAS 123(R)).
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49



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|                                                 |  |                |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  | December 31,   |         
|                                                 |  | 2006           |          |   | 2005 |   |          | 2004 |  |   | 2003     |   |  | 2002 |        
|                                                 |  | (in thousands) |         
|Consolidated Balance Sheet Data:                 |  |                |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and marketable securities |  | $              | 58,884   |   |      | $ | 78,120   |      |  | $ | 89,081   |   |  | $    | 53,776  |   |  | $ | 18,144  |  
|Working capital                                  |  |                | 50,056   |   |      |   | 72,785   |      |  |   | 82,846   |   |  |      | 51,682  |   |  |   | 17,475  |  
|Total assets                                     |  |                | 67,181   |   |      |   | 84,961   |      |  |   | 92,784   |   |  |      | 56,971  |   |  |   | 19,296  |  
|Long-term notes payable                          |  |                | 280      |   |      |   | 405      |      |  |   | 443      |   |  |      | 193     |   |  |   |        |  
|Accumulated deficit                              |  |                | (204,158 | ) |      |   | (151,441 | )    |  |   | (106,200 | ) |  |      | (61,865 | ) |  |   | (33,217 | )
|Total stockholders equity (deficit)             |  |                | 53,213   |   |      |   | 76,266   |      |  |   | 83,570   |   |  |      | (61,534 | ) |  |   | (33,198 | )



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial
statements and the related notes appearing at the end of this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our
business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the Risk Factors in Item 1A of Part I of this Form 10-K for a discussion of important factors that
could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a pharmaceutical company focused on the development and commercialization of
pharmaceutical products in the field of dermatology. Our strategy is to become a leader in the development and commercialization of proprietary innovative products in therapeutic dermatology.

We currently market three pharmaceutical products in the United States, Xolegel (ketoconazole, USP) Gel 2%, Vusion (0.25% miconazole nitrate, 15% zinc
oxide, and 81.35% white petrolatum) Ointment and Solagé (mequinol 2.0% and tretinoin 0.01%) Topical Solution. We also market our Solagé product in Canada, along with two other products for which we are the exclusive distributor in
Canada: VANIQA (elflornithine HCL) Cream 13.9% and Denavir (penciclovir cream) 1%. We promote our marketed products through a sales force consisting of our own sales representatives and those of a contract sales organization. Since the approval of
Vusion in February 2006, we increased our sales and marketing efforts significantly, including an expansion of our U.S. sales force from 21 to 60 U.S. representatives. We also completed our pre-launch marketing and manufacturing activities for
Xolegel, and commenced our commercial launch in the fourth quarter of 2006.

We have other product candidates in various stages of clinical
development for the treatment of a range of dermatological conditions, including acne, psoriasis, onychomycosis and fungal infections. In addition, we have access to the classes of compounds claimed in the patents licensed to us under our license
agreements with affiliates of Johnson & Johnson. The development of each of our product candidates involves significant risks. No assessment of the efficacy or safety of any product candidate can be considered definitive until all clinical
trials needed to support a submission for marketing approval are completed.

In 2006, we recognized total product revenues of $5.9 million
mostly related to our Vusion sales in the United States and sales of Solagé in the United States and Canada. In 2005, we recognized total product revenues of $0.8 million for our sales of Solagé in the United States and Canada and
sales of VANIQA in Canada. We expect product revenues to increase in 2007, primarily due to the anticipated growth in sales for our Vusion and Xolegel products. We have financed our operations and internal growth almost entirely through proceeds
from private placements of preferred stock, our initial public offering in the second quarter of 2004 and our follow-on public offerings in the first quarter of 2005 and in the third quarter of 2006.



50



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We were incorporated in September 2001 and commenced active operations in May 2002. Since our
inception we have incurred significant losses. As of December 31, 2006, we had an accumulated deficit of $204.2 million. We plan to continue to invest in the clinical development of our product candidates and screen for new product candidates.
We also plan to seek marketing approvals for our products in various countries throughout the world, particularly in the United States and Canada. We expect to continue to spend significant amounts on the commercial development of our products,
including the sales and marketing of Xolegel, Vusion and Solagé. Accordingly, we will need to generate significantly greater revenues to achieve and then maintain profitability. Additionally, we plan to continue to evaluate possible
acquisitions of development-stage or approved products that would fit within our growth strategy.

Research and clinical development
expenses represent:



| |  |  | cost incurred for the conduct of our clinical trials,
| | - |  | -----------------------------------------------------



| |  |  | cost related to pre-clinical studies, including toxicology and pharmacokinetics,
| | - |  | --------------------------------------------------------------------------------



| |  |  | cost incurred in screening for new product candidates,
| | - |  | ------------------------------------------------------



| |  |  | manufacturing development costs related to our clinical product candidates,
| | - |  | ---------------------------------------------------------------------------



| |  |  | personnel and related costs related to our research and product development activities (including stock based compensation expense as required under FAS 123(R)),
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | outside professional fees related to clinical development and regulatory matters.
| | - |  | ---------------------------------------------------------------------------------

We outsource the conduct of our pre-clinical studies, clinical trials and all of our manufacturing development activities to third parties to maximize
efficiency and minimize our internal overhead. We expense these research and development costs as they are incurred. We expect that our research and development expenses will be somewhat higher in 2007 compared to 2006, mostly related to our ongoing
Hyphanox phase 3 study in onychomychosis and the completion of our two phase 2b studies in oral Rambazole and Azoline.

Selling, general
and administrative expenses consist primarily of salaries and other related personnel costs, marketing and promotion, general corporate activities, professional fees and facilities costs. We expect these costs to increase in 2007, as we continue to
increase our commercial efforts in support of Vusion, Xolegel, and Solagé. In addition, if we were to acquire or in-license other products, we would then incur sales and marketing costs related to such products.

We expect to continue to incur net losses over the next several years as we continue our clinical development, apply for regulatory approvals, enter into
arrangements with third parties for manufacturing and distribution services and market our products. We have a limited history of operations and anticipate that our quarterly results of operations will fluctuate for several reasons, including:



| |  |  | the timing and extent of recognition of product and other revenues;
| | - |  | -------------------------------------------------------------------



| |  |  | the timing of any contract, license fee or royalty payments that we may receive or be required to make;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the timing and outcome of our applications for regulatory approvals;
| | - |  | --------------------------------------------------------------------



| |  |  | the timing and extent of marketing and selling expenses;
| | - |  | --------------------------------------------------------



| |  |  | the timing and extent of our research and development efforts;
| | - |  | --------------------------------------------------------------



| |  |  | the timing and extent of our adding new employees and infrastructure; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the timing and extent of employee stock grants and stock option grants.
| | - |  | -----------------------------------------------------------------------

Critical Accounting Policies and Significant Judgments and Estimates

Our managements
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted



51



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accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing at the end of this annual report on Form 10-K, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

We use revenue recognition criteria in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements, Emerging Issues Task Force (EITF) Issue 00-21 Revenue Arrangements with Multiple Deliverables (EITF 00-21) and Statement of Financial Accounting Standards No 48 (FAS 48) Revenue
Recognition When Right of Return Exists. Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria, including whether the fair value of the delivered items
can be determined and whether there is evidence of fair value of the undelivered items. In addition, the consideration is allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria
are considered separately for each of the separate units of accounting.

Net Product Revenue. In the United States and
Canada, we sell our products primarily to wholesalers and distributors, who, in turn, sell to pharmacies. The following are our revenue recognition policies.

New Product LaunchAt the time of a new product launch, we utilize a pull-through sales method that recognizes revenue based on estimated prescription demand based on third party market research data and
revenue for a normal level of wholesaler inventory based on our estimated current prescription demand. Estimating the amount of returns and discounts for new products is based on specific facts and circumstances including acceptance rates from
established products with similar marketing characteristics. At the time of a new product launch, absent the ability to make reliable estimates, we defer revenue on sales to wholesalers until we can make reliable estimates of returns, discounts and
related end user demand. We attempt to monitor our inventory levels at our wholesalers and pharmacies to ensure these levels remain within normal levels. We estimate inventory at wholesalers based on historical sales to wholesalers, inventory data
provided to us by these wholesalers and from third party market research data related to prescription trends and patient demand. Making these determinations involves estimating whether trends in past buying patterns will predict future product
sales.

Product Sales AllowancesWe record product sales net of the following significant categories of product sales
allowances: prompt payment discounts, wholesaler fees, returns, coupons, discounts for Medicaid, managed care and governmental contracts. In determining allowances for product returns, coupons and Medicaid rebates, we must make significant judgments
and estimates. For example, in determining these amounts, we estimate prescription demand and the levels of inventory held by wholesalers. Making these determinations involves estimating whether trends in past buying patterns will predict future
product sales.

Calculating some of these items involves significant estimates and judgments and requires us to use information from
external sources.

ReturnsCustomers can return short-dated or expired product that meets the guidelines set forth in our
return goods policy. Returns are accepted from wholesalers and retail pharmacies. Wholesaler customers can return short dated product with six months or less shelf life remaining and expired product within twelve months



52



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following the expiration date. Retail pharmacies are not permitted to return short-dated product but can return full or partial quantities of expired product
only within twelve months following the expiration date. We base our estimates of product returns for each of our products on the percentage of returns that we have experienced historically or based on industry data for similar products.
Notwithstanding this, we may adjust our estimate of product returns if we are aware of other factors that we believe could meaningfully impact our expected return percentages. These factors could include, among others, our estimates of inventory
levels of our products in the distribution channel, known sales trends and existing or anticipated competitive market forces such as product entrants and/or pricing changes.

In 2006, we recorded a provision for returns at a weighted average rate of 0.3% of gross sales. Actual returns could exceed historical experience and our
estimates of expected future returns activity because of several factors, including, among other things, wholesaler and retailer stocking patterns and/or competition. If the returns provision percentage were to increase by 0.5% of 2006 gross sales
from our three products marketed in the U.S., then an additional provision of $35,000 would result.

RebatesPatient
Discount/CouponsFrom time to time we offer patients the opportunity to obtain free or discounted products through a program whereby physicians provide coupons or payment cards to qualified patients for redemption at retail pharmacies. We
reimburse retail pharmacies for the cost of these products through a third party administrator. We recognize the estimated cost of this reimbursement as a reduction of gross sales when product is sold. As a result of these patient discount and
coupon offers, at the time of product shipment, we must estimate the likelihood that products sold to wholesalers and pharmacies might be ultimately sold to a patient who redeems a coupon. We base our estimates on the historic coupon redemption
rates for similar products we receive from third party administrators, which detail historic patterns. We maintain an accrual for unused coupons based on inventory in the distribution channel and historical coupon usage rates and adjust this accrual
whenever changes in such coupon usage rates occur.

In 2006, we recorded a provision for coupons at a weighted average rate of 1.1% of
gross sales. Actual coupon usage could exceed historical experience and our estimates of expected future coupon activity. If the coupons provision percentage were to increase by 0.5% of 2006 gross sales from our three products marketed in the U.S.,
then an additional provision of $35,000 would result.

RebatesMedicaid discountsIn some states we participate or have
applied to participate in the Federal Medicaid rebate program, as well as several state government-managed supplemental Medicaid rebate programs, which were developed to provide assistance to certain vulnerable and needy individuals and families.
Under the Medicaid rebate program, we pay a rebate to each participating state and local government for our products that their programs reimburse. For purposes of this discussion, discounts and rebates provided through these programs are considered
Medicaid rebates and are included in our Medicaid rebate accrual.

We record accruals for Medicaid rebates as a reduction of sales when
product is sold to our wholesaler distributors. These reductions are based on historical rebate amounts and trends of sales eligible for these governmental programs for a period, as well as any expected changes to the trends of our total product
sales. In addition, we estimate the expected unit rebate amounts to be used and adjust our rebate accruals based on the expected changes in rebate pricing. Rebate amounts are generally invoiced and paid quarterly in arrears, so that our accrual
consists of an estimate of the amount expected to be incurred for the current quarters activity, plus an accrual for prior quarters unpaid rebates and an accrual for inventory in the distribution channel. We analyze the accrual at least
quarterly and will adjust the balance as required.

In 2006, we recorded a provision for Medicaid discounts at a weighted average rate of
9.1% of gross sales. Actual Medicaid discounts could exceed historical experience and our estimates of expected future Medicaid patient activity or unit rebate amounts. If the Medicaid discounts provision percentage were to increase by 0.5% of 2006
gross sales from our four products marketed in the U.S., then an additional provision of $35,000 million would result.



53



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We will adjust our allowances for product returns, Medicaid and coupon rebates based on our actual sales
experience, and we will likely be required to make adjustments to these allowances in the future. We continually monitor our allowances and make adjustments when we believe actual experience may differ from our estimates.

International Distribution Partners. Under our agreements with international distribution partners, we sell our product to our distribution
partners at a contractual price. These partners generally have no rights of return after they have accepted shipment of the product.

Other Revenues. Contract revenues include license fees and other payments associated with collaborations with third parties. Revenue is generally recognized when there is persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured.

Revenue from non-refundable, upfront license fees where we have a continuing involvement is recognized ratably over the performance period. We periodically re-evaluate our estimates of the performance period and revise our assumptions as
appropriate. These changes in assumptions may affect the amount of revenue recorded in our financial statements in future periods.

Grant
revenues are recognized when we provide the services stipulated in the underlying grant based on the time and materials incurred up to the amount of grant payments received. Amounts received in advance of services provided are recorded as deferred
revenue and amortized as revenue when the services are provided.

Inventories.Our inventories are valued at the lower of
cost or market, and include the cost of raw materials, labor, overhead and shipping and handling costs. Cost is computed on inventories using the first-in, first-out (FIFO) method. The majority of our inventories are subject to
expiration dating. We regularly evaluate the carrying value of our inventories and when, in our opinion, factors indicate that impairment has occurred, we establish a reserve against the inventories carrying value. Our determination that a
valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. We base our analysis, in part, on the level of inventories on hand in relation to our estimated forecast of product
demand, production requirements for forecasted product demand and the expiration dates of inventories. Although we make every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand
could have a material impact on the carrying value of our inventories and our reported operating results. In 2006, inventory adjustments totaled $0.2 million.

We expense our inventory costs associated with products prior to regulatory approval as research and development expense.

We have committed to make future minimum payments to third parties for certain product inventories. The minimum purchase commitments total $13.2 million as of December 31, 2006, the majority of which relate
to Vusion and Xolegel. We expect to fully utilize these contracts.

Marketable Securities

Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated
other comprehensive income. EITF 03-01, The Meaning of Other-Than-Temporary requires disclosures addressing other-than-temporary impairments in a qualitative and quantitative manner. There were no other-than-temporary impairments through
December 31, 2006.

Intangible Assets

Product rights are being amortized on a straight-line basis over the life of the underlying patent, which expires in 2013. We continually evaluate the reasonableness of the carrying value of its intangible assets. An



54



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impairment may be recognized if the expected future undiscounted cash flows are less than their carrying amounts. As of December 31, 2006, no impairment
exists.

Stock-based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Accounting for Stock-Based Compensation (FAS 123(R)) using the modified prospective method. FAS 123(R) requires
companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. We commenced the new method of valuing stock-based compensation as prescribed by FAS 123(R) on all stock-based awards
granted after the effective date. For year ended December 31, 2006, we recorded an expense for stock based compensation related to FAS 123(R) of $5.2 million, $1.4 million of which was recorded in research and development expense and $3.8
million was recorded in selling, general and administrative expenses.

Prior to January 1, 2006, as allowed by SFAS 123, we had
applied the intrinsic value-based method of accounting prescribed in APB 25 and its related interpretations, and, accordingly, did not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair
market value of the stock at the date of grant. For pro forma purposes, the stock compensation expense was based on an accelerated vesting method. SFAS 123 pro forma information regarding net loss was required by SFAS 123, and had been determined as
if we had accounted for its stock-based employee compensation under the fair value method prescribed in SFAS 123. The fair values of the options were estimated using the Black-Scholes pricing model. In addition, no compensation expense was recorded
in the financial statements for shares purchased under our Employee Stock Purchase Plan as that plan was considered non-compensatory under APB 25.

In addition, prior to the adoption of FAS 123(R), we presented our unamortized portion of deferred compensation cost for nonvested stock options in the statement of changes in shareholders equity with a corresponding credit to additional
paid in capital. Upon the adoption of FAS 123(R), these amounts were offset against each other. Under FAS 123(R), an equity instrument is not considered to be issued until the instrument vests. As a result, compensation cost is recognized over the
requisite service period with an offsetting credit to additional paid in capital, and the deferred compensation balance of $532,000 at December 31, 2005 was netted against additional paid in capital.

APB 25 did not permit the estimation of forfeitures for the unvested awards outstanding, and therefore forfeitures were recognized as they occurred.
Under FAS 123(R), an estimate of forfeitures must be made for the unvested awards outstanding as of the adoption date. As such, an adjustment to record the cumulative effect of a change in accounting principle is needed to reflect the compensation
cost that would not have been recognized in prior periods had forfeitures been estimated during those periods. This adjustment applies only to compensation cost previously recognized in the financial statements for awards that are unvested on the
adoption date. As such, we recognized a cumulative effect adjustment of $57,000 as of January 1, 2006 related to the accounting change for forfeitures.

FAS 123(R) does not change the accounting guidance for how we account for options issued to non-employees. We account for options issued to non-employees under SFAS No. 123 and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such, the value of such options is periodically re-measured and income or expense is
recognized during their vesting terms. We recorded $133,000, $378,000 and $756,000, non-employee stock compensation expense for years ended December 31, 2006, 2005, and 2004, respectively.

Recent Accounting Pronouncements

The Financial
Accounting Standards Board (FASB) recently issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), and FASB Interpretation No. 48, Accounting for Uncertainty in Income



55



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Taxes (FIN 48). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the impact this provision may have on our financial
position or results of operations.

FIN 48 is an interpretation of SFAS Statement No. 109, Accounting for Income Taxes
(SFAS No. 109), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. The Interpretation requires that we recognize in the financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN
48 also provides guidance on derecognition of a previously recognized tax position, classification, interest and penalties, accounting in interim periods and disclosures. The provisions of FIN 48 are effective beginning January 1, 2007
with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. We are in the process of evaluating the potential impact of FIN 48. We currently have a full valuation allowance
against our net deferred tax assets and therefore have not recognized the benefits from our tax positions in our earnings. We anticipate the impact, if any, of FIN 48 to be minimal.

Results of Operations

Years ended December 31, 2006, 2005 and 2004

Net Revenues. Net Revenues are summarized below:



|                           |  |                         |       |      |   |       |  |   |    
|-------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | ---
|                           |  | Year ended December 31,
|(in thousands)             |  | 2006                    |       | 2005 |   | 2004 
|Net product revenues       |  |                         |       |      |   |       |  |   |    
|U.S.                       |  | $                       | 5,331 |      | $ | 684   |  | $ |   
|International              |  |                         | 522   |      |   | 108   |  |   |   
|                           |  |                         |       |      |   |       |  |   |    
|Total net product revenues |  |                         | 5,853 |      |   | 792   |  |   |   
|Grant revenue              |  |                         | 256   |      |   | 1,059 |  |   | 797
|Contract revenue           |  |                         | 629   |      |   | 689   |  |   | 100
|                           |  |                         |       |      |   |       |  |   |    
|Total net revenue          |  | $                       | 6,738 |      | $ | 2,540 |  | $ | 897
|                           |  |                         |       |      |   |       |  |   |    

Total net revenues for 2006 increased $4.2 million over 2005 mostly related to the launch of
Vusion in the United States, offset by a decrease in grant revenue. Total net revenue in 2005 increased $1.6 million over 2004, mostly related to the initial product revenue from sales of Solagé and increased grant revenue.

Net Product Revenues. Net product revenues for the year ended December 31, 2006 increased $5.1 million compared to the same period in 2005
primarily due to the launch of Vusion. We expect product revenues to grow significantly as we expand the market for all of our products and we continue the U.S. launch of Xolegel. In 2005, we recognized product revenues of $0.8 million for our sales
of Solagé in the United States and Canada and sales of VANIQA in Canada. Prior to 2005, we had no product revenue.



| |  |  | VusionVusion is approved for the treatment of diaper dermatitis complicated by documented candidiasis. Vusion was approved by the FDA in February 2006 and we
commercially launched the product in the United States in May 2006. We have several country approvals in Europe and have marketed the product in Belgium and The Netherlands on a limited basis; however, weak pricing in Europe has constrained our
marketing effort.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SolagéSolagé is approved for the treatment of solar lentigines. We acquired Solagé in 2005 and market the product in both the United
States and Canada.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



56



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| |  |  | XolegelXolegel is approved for the treatment of seborrheic dermatitis. Xolegel was approved by the FDA in July 2006 and we commercially launched the product
in the United States in November 2006. In March 2007, we received marketing approval from Health Canada for Xolegel. We expect to launch this product in Canada in the second half of 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other productsWe are the exclusive distributor in Canada of VANIQA which is approved for slowing the growth of unwanted facial hair in women and Denavir which
is approved for cold sores.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Product Revenues are summarized below:



|                           |  |                         |       |      |   |    
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---
|                           |  | Year ended December 31,
|(in thousands)             |  | 2006                    |       | 2005
|Net product revenues       |  |                         |       |      |   |    
|Vusion                     |  | $                       | 3,785 |      | $ |   
|Solagé                     |  |                         | 1,595 |      |   | 787
|Xolegel                    |  |                         | 130   |      |   |   
|Other products             |  |                         | 343   |      |   | 5  
|                           |  |                         |       |      |   |    
|Total net product revenues |  | $                       | 5,853 |      | $ | 792
|                           |  |                         |       |      |   |    

Gross-to-Net Product Revenue Adjustments. We recognize product revenues net of allowances
and accruals for estimated cash discounts, wholesaler fees, rebates, product returns and chargeback discounts. Cash discounts deductions reflect prompt payment term discounts extended to our customers. Wholesaler service fees are fees paid to our
U.S wholesalers for distribution services. Allowance for sales returns are based on the actual returns history. Rebate deductions reflect estimates of coupon discounts and Medicaid rebates based on historical payment data and estimates of future
Medicaid beneficiary utilization.

The allowances for cash discounts, consumer rebates, sales returns and doubtful accounts are net against
trade receivables and totaled $37,000, $29,000, $24,000, and $12,000 at December 31, 2006, respectively. The aggregate total of these receivable allowances in 2005 was $14,000. We recognize bad debt expense in selling, general and
administrative expenses.

Accruals for state Medicaid rebates and wholesaler fees totaled $0.6 million and $0.1 million at
December 31, 2006, respectively, and are included in accrued liabilities. At December 31, 2005, we had no accrued liabilities for state Medicaid rebates and wholesaler fees.

Deferred Revenue of $430,000 at December 31, 2006, primarily reflects the deferral of sales related to the Xolegel launch in the U.S. along with
some Canadian sales. Deferred Revenue of $637,000 at December 31, 2005, reflects primarily the deferral of contract milestones related to our distribution agreements and some Canadian sales.

The following table summarizes our gross-to-net revenue deductions:



|                           |  |                         |       |      |   |    
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---
|                           |  | Year ended December 31,
|(in thousands)             |  | 2006                    |       | 2005
|Gross product revenues     |  | $                       | 7,077 |      | $ | 820
|Cash discounts             |  |                         | 134   |      |   | 18 
|Wholesaler fees            |  |                         | 347   |      |   |   
|Medicaid rebates           |  |                         | 641   |      |   |   
|Coupon rebates             |  |                         | 78    |      |   | 4  
|Product returns            |  |                         | 21    |      |   | 6  
|Chargebacks                |  |                         | 3     |      |   |   
|                           |  |                         |       |      |   |    
|Total net product revenues |  | $                       | 5,853 |      | $ | 792
|                           |  |                         |       |      |   |    



57



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Other Revenues. Other revenues consist of grant revenues and milestone payments for certain
product rights which are amortized over the estimated service period. Other revenues declined $0.9 million for the year ended December 31, 2006 compared to the same period in 2005. The lower grant revenue relates to payments on a Belgium
research grant. We received a new grant in 2006 from a Belgian governmental agency promoting technology in the Flemish region of Belgium that will pay 1.25 million (approximately $1.6 million) over a three-year period starting in 2006. In
2005, we recorded grant revenue from a similar Belgian governmental agency research grant of $1.1 million compared to $0.8 million for the previous year.

Cost of Product Revenues. Total cost of product revenues including cost of finished goods, distribution expenses, and amortization expenses related to our commercial products was $1.4 million, or 24% of net
product revenues in 2006. Total cost of product revenues for year ended December 31, 2006 increased $0.9 million compared to the same period in 2005 due to higher sales volumes, primarily from Vusion, and the recording of a $0.2 million
allowance for inventory obsolescence in Europe. Cost of product revenue totaled $0.5 million for the year ended December 31, 2005. Cost of product revenue includes finished product costs, distribution expense related to product sales, including
one-time start-up distribution expenses and amortization of Solagé product rights. We did not report cost of product revenues during 2004 because we did not have product sales. In the first quarter of 2005, we acquired the United States and
Canadian rights to Solagé, and are amortizing the remaining intangible asset over the expected patent life. Amortization expense related to the product rights for the acquisition of Solagé was $351,000 and $320,000 for 2006 and 2005,
respectively. In Canada we are a distributor of Denavir and VANIQA and purchase these products from their respective manufacturers. We expect that our gross margin percentage of net sales will fluctuate based on the relative mix of our various
products sales.



|                                |  |                         |       |   |      |   |     |  
|------------------------------- |  | ----------------------- | ----- | - | ---- | - | --- | -
|                                |  | Year ended December 31, |      
|(in thousands)                  |  | 2006                    |       |   | 2005 |  
|Cost of product revenue         |  |                         |       |   |      |   |     |  
|Manufacturing costs             |  | $                       | 1,080 |   |      | $ | 224 |  
|Amortization of product rights  |  |                         | 351   |   |      |   | 320 |  
|                                |  |                         |       |   |      |   |     |  
|Total cost of product revenue   |  | $                       | 1,431 |   |      | $ | 544 |  
|                                |  |                         |       |   |      |   |     |  
|Percentage of net product sales |  |                         | 24    | % |      |   | 69  | %

Research and Development Expenses. Total research and development expenses for 2006 of
$25.9 million were $4.5 million, or 15%, lower than 2005. Total research and development expenses for 2005 were essentially unchanged with 2004.

Below is a summary of our research and development expenses:



|                                           |  |                        |        |           |     |   |      |   |           |  |     |      |  |           |        |  |     |  
|------------------------------------------ |  | ---------------------- | ------ | --------- | --- | - | ---- | - | --------- |  | --- | ---- |  | --------- | ------ |  | --- | -
|                                           |  | Year ended December 31 |       
|(in thousands)                             |  | 2006                   |        | % ofTotal |     |   | 2005 |   | % ofTotal |  |     | 2004 |  | % ofTotal |       
|Marketed products                          |  | $                      | 2,567  |           | 10  | % |      | $ | 6,280     |  | 21  | %    |  | $         | 7,526  |  | 25  | %
|Hyphanox                                   |  |                        | 2,576  |           | 10  | % |      |   | 4,992     |  | 17  | %    |  |           | 8,391  |  | 27  | %
|Rambazole                                  |  |                        | 5,207  |           | 20  | % |      |   | 3,444     |  | 11  | %    |  |           | 2,517  |  | 8   | %
|Azoline                                    |  |                        | 2,990  |           | 12  | % |      |   | 3,130     |  | 10  | %    |  |           | 361    |  | 1   | %
|Liarozole                                  |  |                        | 2,137  |           | 8   | % |      |   | 1,275     |  | 4   | %    |  |           | 1,249  |  | 4   | %
|Other clinical/pre-clinical stage products |  |                        | 1,145  |           | 4   | % |      |   | 1,640     |  | 5   | %    |  |           | 2,609  |  | 8   | %
|Internal costs                             |  |                        | 7,862  |           | 30  | % |      |   | 9,608     |  | 32  | %    |  |           | 8,251  |  | 27  | %
|FAS 123(R)                                 |  |                        | 1,411  |           | 6   | % |      |   | n/a       |  |     |      |  |           | n/a    |  |     |  
|                                           |  |                        |        |           |     |   |      |   |           |  |     |      |  |           |        |  |     |  
|Total research and development expenses    |  | $                      | 25,895 |           | 100 | % |      | $ | 30,369    |  | 100 | %    |  | $         | 30,904 |  | 100 | %
|                                           |  |                        |        |           |     |   |      |   |           |  |     |      |  |           |        |  |     |  



58



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In the preceding table, research and development expenses are set forth in the following seven
categories:



| |  |  | Marketed ProductsExpenses for year ending December 31, 2006 compared to the year ended December 31, 2005 decreased $3.7 million mostly related to
the absence in 2006 of the Xolegel long-term safety study and other regulatory filing and preparation expenses for both Xolegel and Vusion in 2005. Xolegel expenses for 2005 related primarily to the completion of our long-term safety study which
commenced in the third quarter of 2004, as well as regulatory and manufacturing costs related to the development of this product. During 2004, we also conducted a confirmatory Phase 3 clinical trial for Xolegel. Our costs related to Vusion for 2005
increased $0.5 million compared to 2004 primarily due to increased costs for manufacturing development and regulatory costs. In 2005, we incurred costs related to validation batches as well as a contract minimum payment made to our contract
manufacturer. Vusion costs for the year ended December 31, 2004 included our Phase 3 pivotal clinical trial, which began enrolling patients in the first half of 2003 and was completed during the third quarter of 2004, and the costs incurred in
connection with the preparation of regulatory filings and filing fees in the United States and Europe.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | HyphanoxHyphanox costs of $2.6 million in 2006 related primarily to the commencement of our Phase 3 clinical study in onychomycosis. Hyphanox costs in 2006
decreased $2.4 million from 2005 primarily due to the absence of the clinical cost for the Phase 3 trial in vaginal candidiasis, or VVC, conducted in 2004 and 2005. Our costs for Hyphanox for 2005 are related to the completion of the VVC trial,
supportive pharmacokinetics studies, and set-up costs for a Phase 3 clinical trial for the treatment of onychomycosis. The 2005 costs were $3.4 million, or 41%, lower than 2004, because the Phase 3 trial ran for only six months of 2005 compared
to twelve months of 2004. Manufacturing development costs in 2005 were also lower for Hyphanox as compared to 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | RambazoleRambazole expenses for year ended December 31, 2006 compared to year ended December 31, 2005 increased $1.8 million primarily due to costs
related to the Phase 2b study in psoriasis and manufacturing development and pre-clinical studies. Rambazole costs for 2005 increased over 2004 primarily due to higher manufacturing development and preclinical study costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AzolineAzoline expenses for year ended December 31, 2006 compared to year ended December 31, 2005 decreased $0.1 million. Increased clinical costs
related to the Phase 2b study were more than offset by savings in manufacturing development expenses. Azoline expenses in 2005 increased $2.8 million over 2004 levels. The 2005 costs were made up of manufacturing development, pre-clinical
studies, and preparation and set-up of our Phase 2b study. In 2004, Azoline expenses of $0.4 million included proof of concept and preclinical studies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | LiarozoleLiarozole expenses for year ended December 31, 2006 compared to year ended December 31, 2005 increased $0.9 million primarily due to
conduct of the Phase 2/3 trial for the treatment of lamellar ichthyosis in 2006, offset in part by lower manufacturing and pre-clinical expenses in 2006. Our costs for Liarozole in 2005 were marginally higher than our costs in 2004. Our costs in
2005 are related to the set-up costs for our Phase 2/3 trial for the treatment of lamellar ichthyosis as well as costs for clinical supplies and manufacturing of the active ingredient. Our costs for Liarozole in 2004 related to the cost of the
review of clinical data and the manufacturing of both the active ingredient and clinical supplies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other pre-clinical/clinical stage productsThese expenses generally encompass direct expenses relating to the development of our research and preclinical
product candidates, including Ecalcidene, which was discontinued in 2004, and the screening of molecules to identify new product candidates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internal costsInternal research and development expenses, including personnel and related costs and stock compensation, decreased $0.3 million as compared to
the corresponding period in 2005. Internal costs for the year ended December 31, 2006 reflect $1.7 million lower personnel, consulting and related costs offset in part by $1.4 million of stock compensation expense under FAS 123(R). Internal
costs for 2005 increased $1.4 million compared to 2004. Personnel and related costs totaled
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



59



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| | $6.7 million for 2005, an increase of $0.5 million over the corresponding period in 2004. This increase is primarily due to an increase in personnel,
partially offset by a decrease in amortization of deferred compensation of $0.4 million. Other costs, which include consultants, overhead and other expenses, totaled $3.0 million, an increase of $0.9 million compared to the corresponding period
in 2004. There was no stock compensation expense under FAS 123(R) in 2005 and 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We anticipate that research and
development expenses will increase as we further advance our mid- and late-stage product candidates through clinical development. In addition, we will continue to incur expenses for our earlier stage research and preclinical projects. We also expect
our personnel and related expenses for research and development to remain at current levels.

Selling, General and Administrative
expense.Selling, general and administrative expenses totaled $35.8 million for the year ended December 31, 2006, an increase of $15.5 million compared to the same period in 2005. This increase was mainly due to $8.5 million of
additional selling costs related to the expansion of our sales force, $3.6 million of marketing and infrastructure cost associated with the launch of two new U.S. products and $3.8 million of stock compensation expense under FAS 123(R), partially
offset by $0.4 million lower general and administrative expenses. Selling, general and administrative expense for 2005 totaled $20.3 million, an increase of $8.8 million over 2004. This increase was largely the result of personnel costs
related to the expansion of our commercial organization in 2005.



|                                                                  |      |                         |            |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  
|----------------------------------------------------------------- | ---- | ----------------------- | ---------- |  | --- | ---- |  | --------- | ------ |  | ---- | - | --------- | - | ------ |  | --- | -
|                                                                  |      | Year ended December 31, |           
|(in thousands)                                                    |     
|                                                                  | 2006 |                         | % of Total |  |     | 2005 |  | % ofTotal |        |  | 2004 |   | % ofTotal |  
|Selling, general and administrative                               |      |                         |            |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  
|Selling expenses                                                  |      | $                       | 11,210     |  | 32  | %    |  | $         | 2,686  |  | 13   | % |           | $ |       |  |     |  
|Commercial infrastructure, marketing and market research expenses |      |                         | 12,817     |  | 36  | %    |  |           | 9,158  |  | 45   | % |           |   | 4,310  |  | 38  | %
|Corporate administrative expenses                                 |      |                         | 7,993      |  | 22  | %    |  |           | 8,436  |  | 42   | % |           |   | 7,165  |  | 62  | %
|FAS 123(R)                                                        |      |                         | 3,775      |  | 10  | %    |  |           |       |  |      |   |           |   |       |  |     |  
|                                                                  |      |                         |            |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  
|Total selling, general and administrative expenses                |      | $                       | 35,795     |  | 100 | %    |  | $         | 20,280 |  | 100  | % |           | $ | 11,475 |  | 100 | %
|                                                                  |      |                         |            |  |     |      |  |           |        |  |      |   |           |   |        |  |     |  

Selling expensesThe expansion of our U.S. sales force from 21 to 60 sales associates in the
second quarter of 2006 accounted for $8.5 million of the increase in 2006 expenses as compared to the same period in 2005. Sales force costs for 2005 increased $2.7 million over 2004 as a result of the creation of our 21 territory sales team in
the United States and four person sales team in Canada.

Commercial infrastructure, marketing and market researchCommercial expenses
increased $3.6 million in 2006 primarily due to higher brand marketing and market research expenses compared to the same period in 2005. This increase is related to costs for the launch of Vusion and Xolegel, and support of our other commercial
products in the U.S., Canada and Europe. In 2005 we also increased spending on our commercial infrastructure by $2.6 million over 2004. This increase includes commercial management, supply chain expenses and support staff. Marketing expenses in
2005 increased $2.2 million, and included costs for the launch and promotion of Solagé and preparation costs for the launch of Vusion. The 2004 commercial expenses included initial personnel and market research expenses.

Corporate general and administrative expenses totaled $8.0 million for 2006, which represents a decrease of $0.4 million compared to the same period
in 2005. Corporate administrative expenses in 2005 increased $1.3 million from 2004 due to higher personnel, consulting, overhead and other expenses related to becoming a public company.

In 2006 we recorded $3.8 million of stock compensation expense under FAS 123(R) in selling, general and administrative expenses. There were no expenses
from FAS123(R) prior to our adoption in 2006.



60



---

We expect sales force costs and brand marketing and market research costs to increase in 2007 as we have
a full year of selling expenses related to our 60 territory sales team, support the launch of Xolegel and continue to invest in Vusion and our other commercial products. If we were to acquire or in-license additional products the related sales and
marketing costs may also increase. We expect corporate administrative costs to increase modestly as required to support our growth.

Interest Income, net of interest expense. Interest income, net of interest expense, totaled $3.0 million for 2006, and was comparable to $2.9 million for 2005. Interest income in 2005 was $1.5 million higher than the
corresponding period in 2004. This increase was primarily due to our higher balances of cash, cash equivalents and marketable securities from our initial public offering and follow-on offering in 2005 compared to the 2004 period and higher average
interest rates.

Income Taxes. The income tax benefit of $0.7 million in 2006 increased $0.1 million from 2005. The income tax
benefit of $0.5 million in 2005 increased $0.2 million from 2004. Income tax benefits in all three years represent the net proceeds from the sale of a portion of unused prior years New Jersey State net operating loss carryforwards.

Liquidity and Capital Resources

Sources of
Liquidity. Since our inception, we have funded our operations principally from issuances of our convertible preferred stock, the proceeds from our initial public offering of common stock, our follow-on public offering of common stock and a
registered direct offering. We raised net proceeds of approximately $24.0 million from our public offering in September 2006, $36.0 million from our follow-on public offering in February 2005, $67.9 million from our initial public
offering in May 2004, and we have issued preferred stock, including notes converted into preferred stock, for aggregate net cash proceeds of approximately $77.3 million. All of the preferred stock that we issued converted to common stock
in connection with our initial public offering.

In September 2006, we issued and sold through a registered direct offering 4,820,000
shares of our common stock at $5.25 per share for aggregate net proceeds of approximately $24.0 million after deducting estimated fees and expenses associated with the offering.

In September 2003, we entered into an equipment and furniture financing arrangement with a third party for up to $750,000, which was increased to
$1.5 million in 2004, with an interest rate of 6.15%, plus the three year Treasury Constant Maturities rate at the time of funding. Each time we receive funding, we enter into a promissory note with a term of 3 years, secured by the related
equipment and furniture.

Cash, cash equivalents and investments at December 31, 2006 were $58.9 million, representing 88% of
total assets, down from $78.1 million, representing 92% of total assets, at December 31, 2005.

Cash Flows. At
December 31, 2006 we had $11.1 million in cash and cash equivalents, as compared to $16.9 million at December 31, 2005. Our major uses of cash in 2006 include $43.3 million of cash used in operations, mostly related to
research and development spending and commercialization of two new products in the United States including the expansion of our sales force from 21 to 60 territories. At December 31, 2005 we had $16.9 million in cash and cash equivalents,
as compared to $11.9 million at December 31, 2004. Our major uses of cash in 2005 include $44.2 million of cash used in operations, mostly related to research and development spending and the start-up of commercial operations. Cash
used in operations for the year ended December 31, 2004 was $32.2 million.



61



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The change in cash and cash equivalents is as follows:



|                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                             |  | Year ended December 31, |        
|(in thousands)                                               |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Net cash used in operating activities                        |  | $                       | (43,307 | ) |      | $ | (44,238 | )    |  | $ | (32,188 | )
|Net cash provided by (used in) investing activities          |  |                         | 13,198  |   |      |   | 12,550  |      |  |   | (35,712 | )
|Net cash provided by financing activities                    |  |                         | 24,263  |   |      |   | 36,703  |      |  |   | 68,335  |  
|Effect of exchange rate changes on cash and cash equivalents |  |                         | 16      |   |      |   | (32     | )    |  |   | 1       |  
|                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents         |  | $                       | (5,830  | ) |      | $ | 4,983   |      |  | $ | 436     |  
|                                                             |  |                         |         |   |      |   |         |      |  |   |         |  

Working capital, which is calculated as current assets less current liabilities, decreased $22.7
million to $50.1 million at December 31, 2006 compared to $72.8 million at December 31, 2005 primarily due to $19.2 million in lower cash and marketable securities balances and $5.6 million in higher accounts payable and accrued
expenses partially offset by higher receivable and inventory balances. The increase in current liabilities was largely attributable to increased obligations related to the expansion of our sales organization and associated promotional expenses along
with the clinical and pre-clinical costs related to development of our clinical product candidates. Receivables and inventory increases were directly attributable to our net product revenue growth in 2006.

Net Cash Used in Operating Activities

Cash used in
operating activities for 2006 was $43.3 million, mostly related to our $52.7 million net loss resulting primarily from our spending on research and development, commercial operations, and corporate administration offset in part by $6.2 million
non-cash expenses for depreciation, amortization of product rights and stock-based compensation. In addition, we had an increase of $5.6 million in our accounts payable and accrued liabilities accounts since year-end 2005 reflecting higher clinical
trial liabilities, mostly associated with our Hyphanox Phase 3 trial, and commercial liabilities associated with our expanded sales organization, marketing and other costs associated with our two new products. This favorable cash item was offset by
$2.4 million of additional cash usage related to higher accounts receivable, inventory and prepaid expenses mostly associated with our expanded commercial infrastructure.

Cash provided by investing activities for the year ended December 31, 2006 was $13.2 million. This was primarily attributable to $13.4 million of
net proceeds from marketable securities transactions offset slightly by fixed asset purchases. Our investing activities reflect investments in marketable securities, purchase of product rights and purchases of fixed assets necessary for operations.
We plan to continue utilizing third parties to manufacture our products and to conduct laboratory-based research. Therefore, we do not expect to make significant capital expenditures for the foreseeable future.

Net cash provided by financing activities was $24.3 million for the year ended December 31, 2006, related to proceeds from a registered direct
offering in September 2006 with net proceeds of approximately $24.0 million, employee stock option exercises and purchase of common stock in our Employee Stock Purchase Plan, offset by repayment of notes payable.

We expect that our existing cash at December 31, 2006 will be sufficient to fund our anticipated operating expenses, debt obligations and capital
requirements for at least the next 12 months. We currently have no additional commitments or arrangements for any additional financing to fund the commercialization of our marketed products and the research, development and commercial launch of our
product candidates. We will require additional funding in order to continue our commercialization efforts and our research and development programs, including preclinical studies and clinical trials of our product candidates, pursue regulatory
approvals for our product candidates, pursue the commercial launch of our product candidates, expand our sales and marketing capabilities and for general corporate purposes. Our future capital requirements will depend on many factors, including:



| |  |  | the success of our development and commercialization of our product candidates;
| | - |  | -------------------------------------------------------------------------------



62



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| |  |  | the scope and results of our clinical trials;
| | - |  | ---------------------------------------------



| |  |  | advancement of other product candidates into clinical development;
| | - |  | ------------------------------------------------------------------



| |  |  | potential acquisition or in-licensing of other products or technologies;
| | - |  | ------------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------------



| |  |  | the costs of manufacturing activities; and
| | - |  | ------------------------------------------



| |  |  | the costs of commercialization activities, including product marketing, sales and distribution and related working capital needs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

Commitments

The following table summarizes our
material commitments as of December 31, 2006:



|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  
|--------------------------- |  | ----- | ------ | ----------------- | - | ----------------- |  | ------------------ | ------ | --------------- | - | --- |  | - | -
|(in thousands)              |  | Total |        | Less than OneYear |   | One to ThreeYears |  | Three to FiveYears |        | After FiveYears
|Commitments                 |  |       |        |                   |  
|Notes payable               |  | $     | 625    |                   | $ | 345               |  | $                  | 280    |                 | $ |    |  | $ | 
|Operating lease obligations |  |       | 2,360  |                   |   | 632               |  |                    | 1,255  |                 |   | 473 |  |   | 
|Other commitments(a)        |  |       | 38,495 |                   |   | 24,857            |  |                    | 13,638 |                 |   |    |  |   | 
|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  
|Total                       |  | $     | 41,480 |                   | $ | 25,834            |  | $                  | 15,173 |                 | $ | 473 |  | $ | 
|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  

---

|(a) | The other commitments reflected in the table include obligations to purchase product and product candidate materials contingent on the delivery of the materials and to fund various
clinical trials contingent on the performance of services. These obligations also include long-term obligations, including milestone payments that may arise under agreements that we may terminate prior to the milestone payments being due. The table
excludes contingent royalty payments that we may be obligated to pay in the future.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|-------- | -----------------------------------------------------------

Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, corporate debt securities and United States
treasury notes, with the effective duration of the portfolio less than one year, which we believe are subject to limited credit risk. We currently do not hedge our interest rate exposure. Due to the short-term nature of our investments, we do not
believe that we have any material exposure to interest rate risk arising from our investments.

Most of our transactions are conducted in
United States dollars, although we do have some agreements with vendors located outside the United States. Transactions under some of these agreements are conducted in United States dollars, subject to adjustment based on significant fluctuations in
currency exchange rates. Transactions under other of these agreements are conducted in the local foreign currency. We have a wholly-owned subsidiary, Barrier Therapeutics, N.V., which is located in Geel, Belgium and a wholly owned subsidiary,
Barrier Therapeutics Canada Inc., which is located in Toronto, Canada. Except for funding being received under our grant from a Belgian governmental agency which is denominated in Euros, and locally earned interest income, all research costs
incurred by Barrier Therapeutics, N.V. are funded under a service agreement with Barrier Therapeutics, Inc. from investments denominated in dollars. Our Canadian subsidiary, Barrier Therapeutics Canada, Inc. became operational in the third quarter
of 2005. While we expect that there will be some income from sales of products during the next year which will be denominated in Canadian dollars, most of the funding for these operations will also come from investments denominated in dollars.
Therefore, we are subject to currency fluctuations and exchange rate gains and losses on these transactions. If the exchange rate undergoes a change of 10%, we do not believe that it would have a material impact on our results of operations or cash
flows.



63



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Our
financial statements are annexed to this Annual Report on Form 10-K beginning on page F-1.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of
the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. 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.

Managements
Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our
principal executive, principal financial officer, principal accounting officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this
assessment, management believes that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which appears below.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended December 31, 2006, that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



64



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Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of
Directors and Stockholders

Barrier Therapeutics, Inc.

We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Barrier Therapeutics, Inc. (the Company) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO
criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related consolidated statements of operations, common stockholders equity and cash flows for each of the three years in the period ended
December 31, 2006, and our report dated March 8, 2007, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

MetroPark, New Jersey

March 8, 2007



65



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ---------------------------------------------------------

The information required by Item 10 is incorporated by reference to the information which shall be included in our definitive proxy statement for the 2007 annual meeting of stockholders.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by
Item 11 is incorporated by reference to the information which shall be included in our definitive proxy statement for the 2007 annual meeting of stockholders.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by Item 12 is incorporated by reference to the information which shall be included in our definitive proxy statement for the
2007 annual meeting of stockholders.



|ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ---------------------------------------------------------------------

The information required by Item 13 is incorporated by reference to the information which shall be included in our definitive proxy statement for the 2007 annual meeting of stockholders.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The
information required by Item 14 is incorporated by reference to the information which shall be included in our definitive proxy statement for the 2007 annual meeting of stockholders.

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



| | ITEM 1B. | DOCUMENTS FILED AS PART OF THIS REPORT
| | -------- | --------------------------------------

The
following is a list of our consolidated financial statements and our subsidiaries and supplementary data included in this report under Item 8 of Part II hereof:



| | 1. | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
| | -- | ------------------------------------------

Report
of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2006 and 2005.

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Stockholders Equity for the period from December 31, 2003 to December 31, 2006.

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.

Notes to Consolidated Financial Statements.



66



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| | 2. | FINANCIAL STATEMENT SCHEDULES
| | -- | -----------------------------

Schedules are
omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto.

Exhibits

The following is a list of exhibits filed as part of this annual report on Form 10-K. Where
so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.

|            |  |                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                       
|1.1         |  | Underwriting Agreement dated September 14, 2006 entered into by and between the Registrant and Pacific Growth Equities, LLC, filed as Exhibit 1.1 to Form 8-K filed on September 15,
2006                                                                                                         
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                 
|            | 
|3.2         |  | Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.4 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                     
|            | 
|4.1         |  | Specimen copy of stock certificate for shares of Common Stock of the Registrant, filed as Exhibit 4.1 to the Companys Registration Statement on Form S-1 (File
No. 333-112539)                                                                                                                   
|            | 
|4.2         |  | Amended and Restated Investors Rights Agreement, dated as of April 20, 2004, by and among the Registrant and the Investors listed therein, filed as Exhibit 4.2 to the Companys Registration
Statement on Form S-1 (File No. 333-112539)                                                         
|            | 
|10.1       |  | 2002 Equity Compensation Plan, filed as Exhibit 10.1 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                    
|            | 
|10.2(1)     |  | Intellectual Property Transfer and License Agreement, dated as of May 6, 2002, by and between the Registrant and Johnson & Johnson Consumer Companies, Inc., filed as Exhibit 10.2 to the
Companys Registration Statement on Form S-1 (File No. 333-112539)                                      
|            | 
|10.3        |  | Amendment No. 1 to the Intellectual Property Transfer and License Agreement dated as of September 7, 2004, by and between Barrier Therapeutics, Inc. and Johnson & Johnson Consumer Companies,
Inc., filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 10, 2004
|            | 
|10.4(1)     |  | Intellectual Property Transfer and License Agreement, dated as of May 6, 2002, by and among the Registrant and Janssen Pharmaceutica Products, L.P. and Ortho-McNeil Pharmaceutical, Inc., filed
as Exhibit 10.3 to the Companys Registration Statement on Form S-1 (File No. 333-112539)        
|            | 
|10.5        |  | Amendment No. 1 to the Intellectual Property Transfer and License Agreement, dated as of September 7, 2004, by and between Barrier Therapeutics, Inc. and Janssen Pharmaceutica Products,
L.P. , filed as Exhibit 10.2 to the Companys Current Report on Form 8-K filed on September 10, 2004    
|            | 
|10.6       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.4 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                  
|            | 
|10.7       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Charles Nomides, filed as Exhibit 10.5 to the Companys Registration Statement on Form S-1 (File
No. 333-112539)                                                                                           



67



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|            |  |                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                               
|10.8       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.6 to the Companys Registration Statement on Form S-1 (File
No. 333-112539)                                                                                                                                   
|            | 
|10.11      |  | Restricted Stock Purchase Agreement, dated as of October 31, 2001, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.7 to the Companys Registration
Statement on Form S-1 (File No. 333-112539)                                                                                                            
|            | 
|10.12      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated as of May 7, 2002, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.8 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                              
|            | 
|10.13      |  | Amendment No. 2 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.18 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                           
|            | 
|10.14      |  | Restricted Stock Purchase Agreement, dated as of February 20, 2002, by and between the Registrant and Charles Nomides, filed as Exhibit 10.9 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                    
|            | 
|10.15      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated May 7, 2002, by and between the Registrant and Charles Nomides, filed as Exhibit 10.10 to the Companys Registration Statement
on Form S-1 (File No. 333-112539)                                                                                                            
|            | 
|10.16      |  | Amendment No. 2 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Charles Nomides, filed as Exhibit 10.19 to the Companys Registration
Statement on Form S-1 (File No. 333-112539)                                                                                                    
|            | 
|10.17      |  | Restricted Stock Purchase Agreement, dated as of August 1, 2002, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.11 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                      
|            | 
|10.18      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.20 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                                    
|            | 
|10.19       |  | Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600 College Road East, Princeton Forrestal Center, New Jersey,
filed as Exhibit 10.12 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                           
|            | 
|10.20       |  | Amendment No. 1 dated November 6, 2003, to Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600 College Road East,
Princeton Forrestal Center, New Jersey, filed as Exhibit 10.13 to the Companys Registration Statement on Form S-1 (File No. 333-112539)
|            | 
|10.21       |  | Master Security Agreement, dated as of August 21, 2003 and Amendment, dated as of September 3, 2003, between the Registrant and General Electric Capital Corporation, filed as
Exhibit 10.14 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                    
|            | 
|10.22(1)    |  | Development and Supply Agreement, dated as of May 16, 2002, between the Registrant and Abbott GmbH & Co. KG, filed as Exhibit 10.15 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                             



68



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|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                         
|10.23      |  | 2004 Stock Incentive Plan, filed as Exhibit 10.16 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                                                         
|            | 
|10.24      |  | Employee Stock Purchase Plan, filed as Exhibit 10.17 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                                                      
|            | 
|10.25       |  | Amendment No. 2 dated May 13, 2004, to Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600 College Road
East, Princeton Forrestal Center, New Jersey, filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on August 11, 2004.
|            | 
|10.26(1)    |  | Distribution and License Agreement dated November 4, 2004 between the Registrant and Grupo Ferrer Internacional, S.A., filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on November 9, 2004.                                                                                                                 
|            | 
|10.27       |  | Finished Product Supply Agreement dated July 14, 2004 between the Registrant and Janssen Pharmaceutica, NV, filed as Exhibit 10.25 to the Companys Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-122261).                                                                                                
|            | 
|10.28       |  | Product Acquisition Agreement dated February 5, 2005 between the Registrant and Moreland Enterprises Limited, filed as Exhibit 10.26 to the Companys Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-122261).                                                                                              
|            | 
|10.29       |  | Amendment No. 2 to the Intellectual Property Transfer and License Agreement, dated as of May 12, 2005, by and between the Registrant and Janssen Pharmaceutica Products, L.P., filed as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on August 11, 2005.                                                       
|            | 
|10.30       |  | Scientific Advisory Board Consulting Agreement dated as of August 1, 2005 by and between the Registrant and Carl W. Ehmann, M.D., filed as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q filed on August 11, 2005.                                                                                                    
|            | 
|10.31       |  | Amendment dated as of August 26, 2005 to the Finished Product Supply Agreement by and between the Registrant and Janssen Pharmaceutica, NV, filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed on November 14, 2005.                                                                                        
|            | 
|10.32*(1)   |  | Pharmaceutical Product Supply Agreement dated as of January 27, 2005 by and between the Registrant and DSM Pharmaceuticals, Inc.                                                                                                                                                                                                    
|            | 
|10.33*(1)   |  | Manufacturing Agreement dated as of March 31, 2005 by and between the Registrant and DPT Laboratories, Ltd.                                                                                                                                                                                                                         
|            | 
|10.34*(1)   |  | Amendment No. 1 dated December 6, 2005 to Pharmaceutical Product Supply Agreement dated as of January 27, 2005 by and between the Registrant and DSM Pharmaceuticals,
Inc.                                                                                                                                                          
|            | 
|10.35*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Geert Cauwenbergh, Ph.D.                                                                                                                                                                                                 
|            | 
|10.36*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Charles Nomides                                                                                                                                                                                                          
|            | 
|10.37*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Anne M. VanLent                                                                                                                                                                                                          
|            | 
|10.38*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Alfred Altomari                                                                                                                                                                                                          
|            | 
|10.39*      |  | Amended and Restated Employment Agreement, dated as of April 1, 2004, by and between the Registrant and Albert Bristow                                                                                                                                                                                                              



69



---

|            |  |                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                          
|10.40*      |  | Sales Force Services Agreement, dated March 2, 2007, by and between the Registrant and Novartis Consumer Health, Inc.
|            | 
|*21         |  | List of Subsidiaries                                                                                                 
|            | 
|*23.1       |  | Consent of Ernst & Young LLP                                                                                         
|            | 
|*23.2       |  | Power of Attorney (included on signature page)                                                                       
|            | 
|*31.1       |  | Certification of principal executive officer required by Rule 13a-14(a)                                              
|            | 
|*31.2       |  | Certification of principal financial officer required by Rule 13a-14(a)                                              
|            | 
|¤32.1       |  | Section 1350 Certification of principal executive officer                                                            
|            | 
|¤32.2       |  | Section 1350 Certification of principal financial officer                                                            

---

|* | Filed herewith.
|- | ---------------

|¤ | Furnished herewith
|- | ------------------

| | Compensation plans and arrangements for executives and others.
|- | --------------------------------------------------------------

|(1) | Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment granted by the Securities and Exchange Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



70



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |                                         |  |                                                                                                            
|-------------- |  | --------------------------------------- |  | -----------------------------------------------------------------------------------------------------------
|March 12, 2007 |  | BARRIER THERAPEUTICS, INC. (Registrant)
|               |  |                                        
|               |  | By:                                     |  | Geert Cauwenbergh                                                                                          
|               |  |                                         |  | Geert Cauwenbergh, Ph.D. Chairman And Chief Executive
Officer (Principal Executive Officer)                
|               |  |                                        
|               |  | By:                                     |  | Anne M. VanLent                                                                                            
|               |  |                                         |  | Anne M. VanLent Executive Vice President, Chief
Financial Officer & Treasurer (Principal Financial Officer)
|               |  |                                        
|               |  | By:                                     |  | Dennis P. Reilly                                                                                           
|               |  |                                         |  | Dennis P. Reilly Vice President Finance (Principal Accounting Officer)                                     



71



---

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each
person whose signature appears below in so signing also makes, constitutes and appoints Geert Cauwenbergh, Ph.D. and Anne M. VanLent and each of them acting alone, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to this Annual Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.



|                                                 |  |                                                                                               |  |               
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                                         |  | Date          
|                                                 |  |                                                                                              
|GEERT CAUWENBERGH Geert Cauwenbergh,
Ph.D.       |  | Chief Executive Officer (Principal Executive
Officer)                                         |  | March 12, 2007
|                                                 |  |                                                                                              
|ANNE M. VANLENT Anne M.
VanLent                  |  | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |  | March 12, 2007
|                                                 |  |                                                                                              
|DENNIS P. REILLY Dennis P.
Reilly                |  | Vice President Finance (Principal Accounting
Officer)                                         |  | March 12, 2007
|                                                 |  |                                                                                              
|SRINIVAS AKKARAJU Srinivas Akkaraju,
M.D., Ph.D. |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|ROBERT CAMPBELL Robert
Campbell                  |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|CARL EHMANN Carl Ehmann,
M.D.                    |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|EDWARD L. ERICKSON Edward L.
Erickson            |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|PETER ERNSTER Peter
Ernster                      |  | Chairman                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|CHARLES F. JACEY, JR. Charles F.
Jacey, Jr.      |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|CAROL RAPHAEL Carol
Raphael                      |  | Director                                                                                      |  | March 12, 2007
|                                                 |  |                                                                                              
|NICHOLAS SIMON Nicholas
Simon                    |  | Director                                                                                      |  | March 12, 2007



72



---

BARRIER THERAPEUTICS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                              |  |    
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm                                                                                       |  | F-2
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                                  |  | F-3
|Consolidated Statements of Operations for each of the three years in the period ended December 31, 2006                                       |  | F-4
|Consolidated Statements of Stockholders Equity (Deficiency) for each of the years in the period ended December 31, 2003 to December 31, 2006 |  | F-5
|Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2006                                       |  | F-6
|Notes to Consolidated Financial Statements                                                                                                    |  | F-7



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders Barrier Therapeutics, Inc.

We have audited the accompanying consolidated balance sheets of Barrier Therapeutics, Inc. (the Company) as of
December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2006 the Company adopted SFAS No. 123(R), Share Based Payments
applying the modified prospective method at the beginning of fiscal year 2006.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

MetroPark, New Jersey

March 8, 2007



F-2



---

BARRIER THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                          |  | Year Ended December 31, |         
|(Dollars, In Thousands)                                                                                                                                                   |  | 2006                    |          |   | 2005 |  
|Assets                                                                                                                                                                    |  |                         |          |   |      |   |          |  
|Current assets:                                                                                                                                                           |  |                         |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                 |  | $                       | 11,061   |   |      | $ | 16,891   |  
|Marketable securities                                                                                                                                                     |  |                         | 47,823   |   |      |   | 61,229   |  
|Receivables, net of allowances of $102 and $14, respectively                                                                                                              |  |                         | 1,839    |   |      |   | 593      |  
|Interest receivable                                                                                                                                                       |  |                         | 218      |   |      |   | 755      |  
|Finished goods inventories, net                                                                                                                                           |  |                         | 1,179    |   |      |   | 380      |  
|Prepaid expenses and other current assets                                                                                                                                 |  |                         | 1,624    |   |      |   | 1,227    |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Total current assets                                                                                                                                                      |  |                         | 63,744   |   |      |   | 81,075   |  
|Property and equipment, net                                                                                                                                               |  |                         | 873      |   |      |   | 1,055    |  
|Product rights, net                                                                                                                                                       |  |                         | 2,429    |   |      |   | 2,780    |  
|Other assets                                                                                                                                                              |  |                         | 135      |   |      |   | 51       |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Total assets                                                                                                                                                              |  | $                       | 67,181   |   |      | $ | 84,961   |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Liabilities and stockholders equity                                                                                                                                      |  |                         |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                      |  |                         |          |   |      |   |          |  
|Notes payable, current portion                                                                                                                                            |  | $                       | 345      |   |      | $ | 379      |  
|Accounts payable                                                                                                                                                          |  |                         | 5,618    |   |      |   | 3,110    |  
|Accrued expenses                                                                                                                                                          |  |                         | 7,286    |   |      |   | 4,146    |  
|Deferred revenue                                                                                                                                                          |  |                         | 430      |   |      |   | 637      |  
|Other current liabilities                                                                                                                                                 |  |                         | 9        |   |      |   | 18       |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                 |  |                         | 13,688   |   |      |   | 8,290    |  
|Notes payable, long-term portion                                                                                                                                          |  |                         | 280      |   |      |   | 405      |  
|Commitments and contingencies                                                                                                                                             |  |                         |         |   |      |   |         |  
|Stockholders equity:                                                                                                                                                     |  |                         |          |   |      |   |          |  
|Common stock, $.0001 par value; 80,000,000 authorized, 29,197,974 issued and outstanding at December 31, 2006; and 24,095,875 issued and
outstanding at December 31, 2005 |  |                         | 3        |   |      |   | 2        |  
|Additional paid-in capital                                                                                                                                                |  |                         | 257,649  |   |      |   | 228,490  |  
|Accumulated deficit                                                                                                                                                       |  |                         | (204,158 | ) |      |   | (151,441 | )
|Deferred compensation                                                                                                                                                     |  |                         |         |   |      |   | (532     | )
|Accumulated other comprehensive loss                                                                                                                                      |  |                         | (281     | ) |      |   | (253     | )
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                |  |                         | 53,213   |   |      |   | 76,266   |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                |  | $                       | 67,181   |   |      | $ | 84,961   |  
|                                                                                                                                                                          |  |                         |          |   |      |   |          |  

See accompanying Notes to Consolidated Financial Statements



F-3



---

BARRIER THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                          |  | Year Ended December 31, |           
|(In Thousands, except share and per-share amounts)                                                        |  | 2006                    |            |   | 2005 |   |            | 2004 | 
|Revenues:                                                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Net product revenue                                                                                       |  | $                       | 5,853      |   |      | $ | 792        |      |  | $ |           |  
|Other revenue                                                                                             |  |                         | 885        |   |      |   | 1,748      |      |  |   | 897        |  
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Total net revenue                                                                                         |  |                         | 6,738      |   |      |   | 2,540      |      |  |   | 897        |  
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Costs and Expenses:                                                                                       |  |                         |            |   |      |   |            |      |  |   |            |  
|Cost of product revenues                                                                                  |  |                         | 1,431      |   |      |   | 544        |      |  |   |           |  
|Research and development                                                                                  |  |                         | 25,895     |   |      |   | 30,369     |      |  |   | 30,904     |  
|Selling, general and administrative                                                                       |  |                         | 35,795     |   |      |   | 20,280     |      |  |   | 11,475     |  
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                                                                  |  |                         | 63,121     |   |      |   | 51,193     |      |  |   | 42,379     |  
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Loss from operations                                                                                      |  |                         | (56,383    | ) |      |   | (48,653    | )    |  |   | (41,482    | )
|Interest income                                                                                           |  |                         | 3,015      |   |      |   | 2,929      |      |  |   | 1,408      |  
|Interest expense                                                                                          |  |                         | (61        | ) |      |   | (53        | )    |  |   | (36        | )
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Loss before income tax benefit                                                                            |  |                         | (53,429    | ) |      |   | (45,777    | )    |  |   | (40,110    | )
|Income tax benefit                                                                                        |  |                         | 655        |   |      |   | 536        |      |  |   | 367        |  
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Net loss before cumulative effect of change in accounting principle and preferred stock accretion         |  |                         | (52,774    | ) |      |   | (45,241    | )    |  |   | (39,743    | )
|Cumulative effect of change in accounting principle                                                       |  |                         | 57         |   |      |   |           |      |  |   |           |  
|Preferred stock accretion                                                                                 |  |                         |           |   |      |   |           |      |  |   | (4,592     | )
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Net loss attributable to common stockholders                                                              |  | $                       | (52,717    | ) |      | $ | (45,241    | )    |  | $ | (44,335    | )
|                                                                                                          |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss before and after cumulative effect of change in accounting principle per share |  | $                       | (2.06      | ) |      | $ | (1.91      | )    |  | $ | (3.02      | )
|Weighted-average shares outstandingbasic and diluted                                                     |  |                         | 25,583,259 |   |      |   | 23,656,306 |      |  |   | 14,677,710 |  

See accompanying Notes to Consolidated Financial Statements



F-4



---

BARRIER THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)



|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------ |  | ------------------------- | - |  | ------------------ | ------- | - | -------------------- | - | -------- | --------------------------------- |  | - | ------------------------------------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                         |  | Common Stock |  | AdditionalPaid-in Capital |   |  | AccumulatedDeficit |         |   | DeferredCompensation |   |          | AccumulatedOtherComprehensiveLoss |  |   | TotalStockholdersEquity(Deficiency) |  
|(In Thousands, except share amounts)                                     |  | Shares       |  | Amount                    |   |  |                    |         |  
|Balance at December 31, 2003                                             |  | 822,500      |  | $                         |  |  | $                  | 887     |   |                      | $ | (61,865  | )                                 |  | $ | (527                                 | ) |  | $ | (29  | ) |  | $ | (61,534 | )
|Net loss                                                                 |  |              |  |                           |   |  |                    |         |   |                      |   | (39,743  | )                                 |  |   |                                      |   |  |   |      |   |  |   | (39,743 | )
|Unrealized loss on available for sale securities                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | (179 | ) |  |   | (179    | )
|Foreign currency translation loss                                        |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | (82  | ) |  |   | (82     | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Total comprehensive loss                                                 |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | (40,004 | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Conversion of preferred stock to common stock                            |  | 15,960,898   |  |                           | 2 |  |                    | 118,835 |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 118,837 |  
|Issuance of common stock                                                 |  | 5,000,000    |  |                           |  |  |                    | 67,941  |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 67,941  |  
|Stock issued upon exercise of stock options                              |  | 107,382      |  |                           |  |  |                    | 117     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 117     |  
|Stock issued under employee stock purchase plan                          |  | 4,050        |  |                           |  |  |                    | 36      |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 36      |  
|Compensation expense related to options issued to non-employees          |  |              |  |                           |   |  |                    | 756     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 756     |  
|Restricted stock no longer subject to repurchase                         |  |              |  |                           |   |  |                    | 12      |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 12      |  
|Deferred compensation relating to stock options                          |  |              |  |                           |   |  |                    | 2,995   |   |                      |   |          |                                   |  |   | (2,995                               | ) |  |   |      |   |  |   |        |  
|Amortization of deferred compensation                                    |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   | 2,001                                |   |  |   |      |   |  |   | 2,001   |  
|Reversal of deferred compensation due to employee terminations           |  |              |  |                           |   |  |                    | (11     | ) |                      |   |          |                                   |  |   | 11                                   |   |  |   |      |   |  |   |        |  
|Preferred stock accretion                                                |  |              |  |                           |   |  |                    |         |   |                      |   | (4,592   | )                                 |  |   |                                      |   |  |   |      |   |  |   | (4,592  | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2004                                             |  | 21,894,830   |  |                           | 2 |  |                    | 191,568 |   |                      |   | (106,200 | )                                 |  |   | (1,510                               | ) |  |   | (290 | ) |  |   | 83,570  |  
|Net loss                                                                 |  |              |  |                           |   |  |                    |         |   |                      |   | (45,241  | )                                 |  |   |                                      |   |  |   |      |   |  |   | (45,241 | )
|Unrealized gain on available for sale securities                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | 64   |   |  |   | 64      |  
|Foreign currency translation loss                                        |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | (27  | ) |  |   | (27     | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Total comprehensive loss                                                 |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | (45,204 | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Issuance of common stock                                                 |  | 2,000,000    |  |                           |  |  |                    | 36,043  |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 36,043  |  
|Stock issued upon exercise of stock options                              |  | 183,521      |  |                           |  |  |                    | 430     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 430     |  
|Stock issued under employee stock purchase plan                          |  | 17,524       |  |                           |  |  |                    | 150     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 150     |  
|Compensation expense related to options issued to non-employees          |  |              |  |                           |   |  |                    | 378     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 378     |  
|Restricted stock no longer subject to repurchase                         |  |              |  |                           |   |  |                    | 10      |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 10      |  
|Amortization of deferred compensation                                    |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   | 889                                  |   |  |   |      |   |  |   | 889     |  
|Reversal of deferred compensation due to employee terminations           |  |              |  |                           |   |  |                    | (89     | ) |                      |   |          |                                   |  |   | 89                                   |   |  |   |      |   |  |   |        |  
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2005                                             |  | 24,095,875   |  |                           | 2 |  |                    | 228,490 |   |                      |   | (151,441 | )                                 |  |   | (532                                 | ) |  |   | (253 | ) |  |   | 76,266  |  
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Net loss                                                                 |  |              |  |                           |   |  |                    |         |   |                      |   | (52,717  | )                                 |  |   |                                      |   |  |   |      |   |  |   | (52,717 | )
|Unrealized gain on available for sale securities                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | 143  |   |  |   | 143     |  
|Foreign currency translation loss                                        |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   | (171 | ) |  |   | (171    | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Total comprehensive loss                                                 |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | (52,745 | )
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Issuance of common stock                                                 |  | 4,820,000    |  |                           | 1 |  |                    | 23,997  |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 23,998  |  
|Stock issued upon exercise of stock options                              |  | 73,778       |  |                           |  |  |                    | 120     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 120     |  
|Stock issued under employee stock purchase plan                          |  | 50,406       |  |                           |  |  |                    | 304     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 304     |  
|Compensation expense related to options issued to non-employees          |  |              |  |                           |   |  |                    | 133     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 133     |  
|Restricted stock no longer subject to repurchase                         |  |              |  |                           |   |  |                    | 9       |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 9       |  
|FAS 123R stock compensation                                              |  |              |  |                           |   |  |                    | 4,893   |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 4,893   |  
|Elimination of Deferred Compensation as a result of adoption of FAS 123R |  |              |  |                           |   |  |                    | (532    | ) |                      |   |          |                                   |  |   | 532                                  |   |  |   |      |   |  |   |        |  
|Restricted stock issued to employees                                     |  | 157,915      |  |                           |  |  |                    | 235     |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   | 235     |  
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  
|Balance at December 31, 2006                                             |  | 29,197,974   |  | $                         | 3 |  | $                  | 257,649 |   |                      | $ | (204,158 | )                                 |  | $ |                                     |   |  | $ | (281 | ) |  | $ | 53,213  |  
|                                                                         |  |              |  |                           |   |  |                    |         |   |                      |   |          |                                   |  |   |                                      |   |  |   |      |   |  |   |         |  

See accompanying Notes to Consolidated Financial Statements



F-5



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BARRIER THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                            |  | December 31, |        
|(In thousands)                                                              |  | 2006         |         |   | 2005 |   |         | 2004 | 
|Operating activities                                                        |  |              |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                    |  | $            | (52,717 | ) |      | $ | (45,241 | )    |  | $ | (39,743  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |              |         |   |      |   |         |      |  |   |          |  
|Depreciation                                                                |  |              | 533     |   |      |   | 428     |      |  |   | 381      |  
|Amortization of deferred compensation                                       |  |              |        |   |      |   | 889     |      |  |   | 2,001    |  
|Amortization of product rights                                              |  |              | 351     |   |      |   | 320     |      |  |   |         |  
|Stock based compensation expense                                            |  |              | 5,270   |   |      |   | 378     |      |  |   | 756      |  
|Changes in operating assets and liabilities:                                |  |              |         |   |      |   |         |      |  |   |          |  
|Prepaid expenses and other current assets                                   |  |              | (397    | ) |      |   | 383     |      |  |   | (371     | )
|Accounts receivable                                                         |  |              | (1,246  | ) |      |   | (593    | )    |  |   |         |  
|Inventory                                                                   |  |              | (799    | ) |      |   | (380    | )    |  |   |         |  
|Interest receivable                                                         |  |              | 537     |   |      |   | 171     |      |  |   | (209     | )
|Accounts payable and accrued expenses                                       |  |              | 5,648   |   |      |   | (579    | )    |  |   | 4,879    |  
|Deferred revenue                                                            |  |              | (207    | ) |      |   | (13     | )    |  |   | 197      |  
|Other, net                                                                  |  |              | (280    | ) |      |   | (1      | )    |  |   | (79      | )
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Net cash used in operating activities                                       |  |              | (43,307 | ) |      |   | (44,238 | )    |  |   | (32,188  | )
|Investing activities                                                        |  |              |         |   |      |   |         |      |  |   |          |  
|Purchase of fixed assets                                                    |  |              | (351    | ) |      |   | (358    | )    |  |   | (660     | )
|Purchase of product rights                                                  |  |              |        |   |      |   | (3,100  | )    |  |   |         |  
|Security deposits                                                           |  |              |        |   |      |   |        |      |  |   | (4       | )
|Purchase of marketable securities                                           |  |              | (71,741 | ) |      |   | (94,057 | )    |  |   | (104,324 | )
|Maturities of marketable securities                                         |  |              | 85,290  |   |      |   | 110,065 |      |  |   | 69,276   |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Net cash provided by (used in) investing activities                         |  |              | 13,198  |   |      |   | 12,550  |      |  |   | (35,712  | )
|Financing activities                                                        |  |              |         |   |      |   |         |      |  |   |          |  
|Borrowings under notes payable                                              |  |              | 220     |   |      |   | 341     |      |  |   | 555      |  
|Repayment of notes payable                                                  |  |              | (379    | ) |      |   | (261    | )    |  |   | (298     | )
|Proceeds from issuance of preferred stock                                   |  |              |        |   |      |   |        |      |  |   | (16      | )
|Proceeds from issuance of common stock, net                                 |  |              | 23,998  |   |      |   | 36,043  |      |  |   | 67,941   |  
|Proceeds from exercise of stock options and other benefit plans             |  |              | 424     |   |      |   | 580     |      |  |   | 153      |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Net cash provided by financing activities                                   |  |              | 24,263  |   |      |   | 36,703  |      |  |   | 68,335   |  
|Effect of exchange rate on cash and cash equivalents                        |  |              | 16      |   |      |   | (32     | )    |  |   | 1        |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Net (decrease)/increase in cash and cash equivalents                        |  |              | (5,830  | ) |      |   | 4,983   |      |  |   | 436      |  
|Cash and cash equivalents, beginning of period                              |  |              | 16,891  |   |      |   | 11,908  |      |  |   | 11,472   |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Cash and cash equivalents, end of period                                    |  | $            | 11,061  |   |      | $ | 16,891  |      |  | $ | 11,908   |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Supplemental disclosures of cash flow information                           |  |              |         |   |      |   |         |      |  |   |          |  
|Cash paid during the period for interest                                    |  | $            | 61      |   |      | $ | 53      |      |  | $ | 36       |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Non-cash investing and financing activities                                 |  |              |         |   |      |   |         |      |  |   |          |  
|Release of formerly restricted stock                                        |  | $            | 2       |   |      | $ | 10      |      |  | $ | 12       |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Conversion of preferred stock                                               |  | $            |        |   |      | $ |        |      |  | $ | 118,837  |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  
|Initial public offering expenses reclassified to Additional Paid-in Capital |  | $            |        |   |      | $ |        |      |  | $ | 1,809    |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |          |  

See accompanying Notes to Consolidated Financial Statements



F-6



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BARRIER THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006

1. Summary of Significant Accounting Policies

Organization,
Description of Business and Basis of Presentation

Barrier Therapeutics, Inc. (the Company) was incorporated in Delaware
on September 17, 2001 and commenced active operations in May 2002. The Company is a pharmaceutical company focused on the development and commercialization of pharmaceutical products in the field of dermatology. The Companys strategy
is to develop a portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders. With the acquisition of the United States and Canadian rights to Solagé in February 2005, the
Company commenced its planned principal operations of selling dermatology products and has transitioned from a company primarily focused on research and development to a company that also markets and sells pharmaceutical products. As a result, the
Company no longer considers itself a development stage enterprise. The Company has offices in Princeton, New Jersey, Toronto, Canada and Geel, Belgium.

Since inception, the Company has relied primarily upon the sale of equity securities to fund operations, most recently through the Companys initial public offering in April 2004 and follow-on public
offerings in February 2005 and September 2006. The Company believes that its existing resources should be sufficient to meet its capital and liquidity requirements for at least the next 12 months. However, the Companys capital
requirements will depend on many factors, including the success of its development and commercialization of the Companys product candidates. Even if the Company succeeds in developing and commercializing additional product candidates, it may
never generate sufficient sales revenue to achieve or maintain profitability. There can be no assurance that the Company will be able to obtain additional capital when needed on acceptable terms, if at all.

Public Offerings

On May 4, 2004, the
Company completed an initial public offering (IPO) of 5,000,000 shares of the Companys common stock which resulted in net proceeds of approximately $67.9 million after payment of underwriting discounts and commissions and other
expenses aggregating $7.1 million.

On February 15, 2005, the Company completed a follow-on offering of 2,000,000 shares of common
stock, which resulted in net proceeds to the Company of $36.0 million. In connection with the stock sale, the Company paid $2.3 million in underwriting discounts and commissions to underwriters.

On September 14, 2006, the Company completed a follow-on offering of 4,820,000 shares of its common stock which resulted in net proceeds of
approximately $24.0 million. In connection with the stock sale, the Company paid $1.3 million of estimated fees and expenses associated with the offering.

Consolidation

The financial statements include the accounts of Barrier Therapeutics, Inc. and
its wholly-owned subsidiaries, Barrier Therapeutics, NV and Barrier Therapeutics Canada Inc. All significant inter-company transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



F-7



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Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2006, the Company has substantially all of its cash and cash
equivalents deposited with one financial institution.

Marketable Securities

Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated
other comprehensive income. EITF 03-01, The Meaning of Other-Than-Temporary requires disclosures addressing other-than-temporary impairments in a qualitative and quantitative manner. There were no other-than-temporary impairments through
December 31, 2006.

Fair Value of Financial Instruments

The carrying amounts of the Companys financial instruments, which include cash and cash equivalents, marketable securities, accounts payable, accrued expenses, and notes payable approximate their fair values.

Inventories

Inventories are
valued at the lower of cost or market, and include the cost of raw materials, labor, overhead and shipping and handling costs. Cost of inventories is computed using the first-in, first-out (FIFO) method. The majority of inventories are
subject to expiration dating. The Company regularly evaluates the carrying value of its inventories and when, in the Companys opinion, factors indicate that impairment has occurred, the Company will establish a reserve against the
inventories carrying value. The Companys determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires it to utilize significant judgment. The Company bases its analysis, in part,
on the level of inventories on hand in relation to its estimated forecast of product demand, production requirements for forecasted product demand and the expiration dates of inventories. Although the Company makes every effort to ensure the
accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of its inventories and reported operating results. In 2006, inventory adjustments totaled
$0.2 million.

The Company expenses our inventory costs associated with products prior to regulatory approval as research and
development expense.

Fixed Assets

Fixed assets include furniture and fixtures, computer and office equipment, software and leasehold improvements. Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the
respective assets, generally three to five years, using the straight-line method. Leasehold improvements are amortized over the estimated useful lives of the assets or related initial lease terms, whichever is shorter.

Impairment of Long-Lived Assets

In accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,the Company recognizes impairment losses on long-lived assets when indicators of impairment are present and future undiscounted cash flows are
insufficient to support the assets recovery. There were no impairments through December 31, 2006.

Intangible Assets

Product rights are being amortized on a straight-line basis over the life of the underlying patent, which expires in 2013. The Company continually
evaluates the reasonableness of the carrying value of its intangible



F-8



---

assets. An impairment may be recognized if the expected future undiscounted cash flows are less than their carrying amounts. As of December 31, 2006, no
impairment exists.

Revenue Recognition

The Company uses revenue recognition criteria in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, Emerging Issues Task Force (EITF) Issue 00-21 Revenue Arrangements with
Multiple Deliverables (EITF 00-21) and Statement of Financial Accounting Standards No 48 (FAS 48) Revenue Recognition When Right of Return Exists. Revenue arrangements that include multiple deliverables are
divided into separate units of accounting if the deliverables meet certain criteria, including whether the fair value of the delivered items can be determined and whether there is evidence of fair value of the undelivered items. In addition, the
consideration is allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units of accounting.

Net Product Revenue. In the United States and Canada, the Company sells its products primarily to wholesalers and distributors, who, in turn, sell to
pharmacies. The following are the Companys revenue recognition policies.

New Product LaunchAt the time of a new product
launch, the Company utilizes a pull-through sales method that recognizes revenue based on estimated prescription demand based on third party market research data and revenue for a normal level of wholesaler inventory based on estimated current
prescription demand. Estimating the amount of returns and discounts for new products is based on specific facts and circumstances including acceptance rates from established products with similar marketing characteristics. At the time of a new
product launch, absent the ability to make reliable estimates, the Company defers revenue on sales to wholesalers until the Company can make reliable estimates of returns, discounts and related end user demand. The Company attempts to monitor its
inventory levels at wholesalers and pharmacies to ensure these levels remain within normal levels. The Company estimates inventory at wholesalers based on historical sales to wholesalers, inventory data provided by these wholesalers and from third
party market research data related to prescription trends and patient demand. Making these determinations involves estimating whether trends in past buying patterns will predict future product sales.

Product Sales AllowancesThe Company records product sales net of the following significant categories of product sales allowances: prompt
payment discounts, wholesaler fees, returns, coupons, discounts for Medicaid, managed care and governmental contracts. In determining allowances for product returns, coupons and Medicaid rebates, the Company must make significant judgments and
estimates. For example, in determining these amounts, the Company estimates prescription demand and the levels of inventory held by wholesalers. Making these determinations involves estimating whether trends in past buying patterns will predict
future product sales.

Calculating some of these items involves significant estimates and judgments and requires the use of information
from external sources.

ReturnsCustomers can return short-dated or expired product that meets the guidelines set forth in the
Companys return goods policy. Returns are accepted from wholesalers and retail pharmacies. Wholesaler customers can return short dated product with six months or less shelf life remaining and expired product within 12 months following the
expiration date. Retail pharmacies are not permitted to return short-dated product but can return full or partial quantities of expired product only within 12 months following the expiration date. The Company bases its estimates of product returns
for each of its products on the percentage of returns that it has experienced historically or based on industry data for similar products. Notwithstanding this, the Company may adjust its estimate of product returns if the Company is aware of other
factors that it believes could meaningfully impact its expected return percentages. These factors could include, among others, estimates of inventory levels of its products in the distribution channel, known sales trends and existing or anticipated
competitive market forces such as product entrants and/or pricing changes.



F-9



---

In 2006, the Company recorded a provision for returns at a weighted average rate of 0.3% of gross sales.
Actual returns could exceed historical experience and its estimates of expected future returns activity because of several factors, including, among other things, wholesaler and retailer stocking patterns and/or competition.

RebatesPatient Discount/CouponsFrom time to time the Company offers patients the opportunity to obtain free or discounted products
through a program whereby physicians provide coupons or payment cards to qualified patients for redemption at retail pharmacies. The Company reimburses retail pharmacies for the cost of these products through a third party administrator. The Company
recognizes the estimated cost of this reimbursement as a reduction of gross sales when product is sold. As a result of these patient discount and coupon offers, at the time of product shipment, the Company must estimate the likelihood that products
sold to wholesalers and pharmacies might be ultimately sold to a patient who redeems a coupon. The Company bases its estimates on the historic coupon redemption rates for similar products it receives from third party administrators, which detail
historic patterns. The Company maintains an accrual for unused coupons based on inventory in the distribution channel and historical coupon usage rates and adjusts this accrual whenever changes in such coupon usage rates occur.

In 2006, the Company recorded a provision for coupons at a weighted average rate of 1.1% of gross sales. Actual coupon usage could exceed historical
experience and its estimates of expected future coupon activity.

RebatesMedicaid discountsIn some states the Company
participates or has applied to participate in the Federal Medicaid rebate program, as well as several state government-managed supplemental Medicaid rebate programs, which were developed to provide assistance to certain vulnerable and needy
individuals and families. Under the Medicaid rebate program, the Company pays a rebate to each participating state and local government for its products that their programs reimburse. For purposes of this discussion, discounts and rebates provided
through these programs are considered Medicaid rebates and are included in our Medicaid rebate accrual.

The Company records accruals for
Medicaid rebates as a reduction of sales when product is sold to its wholesaler distributors. These reductions are based on historical rebate amounts and trends of sales eligible for these governmental programs for a period, as well as any expected
changes to the trends of total product sales. In addition, the Company estimates the expected unit rebate amounts to be used and adjusts its rebate accruals based on the expected changes in rebate pricing. Rebate amounts are generally invoiced and
paid quarterly in arrears, so that the accrual consists of an estimate of the amount expected to be incurred for the current quarters activity, plus an accrual for prior quarters unpaid rebates and an accrual for inventory in the
distribution channel. The Company analyzes the accrual at least quarterly and will adjust the balance as required.

In 2006, the Company
recorded a provision for Medicaid discounts at a weighted average rate of 9.1% of gross sales. Actual Medicaid discounts could exceed historical experience and our estimates of expected future Medicaid patient activity or unit rebate amounts.

The Company will adjust its allowances for product returns, Medicaid and coupon rebates based on its actual sales experience, and will
likely be required to make adjustments to these allowances in the future. The Company continually monitors its allowances and makes adjustments when it believes actual experience may differ from its estimates.

International Distribution Partners.Under agreements with international distribution partners, the Company sells its product to distribution
partners at a contractual price. These partners generally have no rights of return after they have accepted shipment of the product.

Other Revenues. Contract revenues include license fees and other payments associated with collaborations with third parties. Revenue is generally recognized when there is persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured.



F-10



---

Revenue from non-refundable, upfront license fees where the Company has a continuing involvement is
recognized ratably over the performance period. The Company periodically re-evaluates its estimates of the performance period and revises its assumptions as appropriate. These changes in assumptions may affect the amount of revenue recorded in its
financial statements in future periods.

Grant revenues are recognized when the Company provides the services stipulated in the underlying
grant based on the time and materials incurred up to the amount of grant payments received. Amounts received in advance of services provided are recorded as deferred revenue and amortized as revenue when the services are provided.

Research and Development Costs

Costs to
develop the Companys products are expensed as incurred. Assets acquired that are used for research and development and have no future alternative use are expensed as in-process research and development. There were no in-process research and
development expenses recorded for the period ended December 31, 2006.

Advertising Fees

Advertising fees are expenses as incurred. Advertising costs were approximately $780,000 and $389,000 for the years ended December 31, 2006 and 2005
respectively. There were no advertising costs for 2004.

Concentration of Credit Risk

The Companys financial instruments that are exposed to concentration of credit risks consist primarily of cash and cash equivalents and marketable
securities. The Company maintains its cash and cash equivalents in bank accounts which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to significant
credit risk on cash and cash equivalents and marketable securities.

The Companys trade accounts receivable are reported net of
allowances for charge-backs, cash discounts and doubtful accounts. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for doubtful accounts; the balance at
December 31, 2006 was $12,000, while the amount was not material for 2005.

In the United States and Canada, the Company sells
products primarily to wholesalers and distributors, who, in turn, sell to pharmacies. In the United States, three wholesalers, Cardinal Health, McKesson and AmerisourceBergen make up approximately 87% of total product revenue.

Income Taxes

The Company accounts for income
taxes under the asset and liability method whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Foreign Currency Translation

The functional currencies of the Companys foreign
subsidiaries are the local currencies: the Euro and Canadian dollar. Assets and liabilities are translated into U.S. dollars at year-end exchange rates and equity accounts are translated at historical exchange rates. The Company translates income
and expense accounts at



F-11



---

weighted average rates for each month and records gains and losses from the translation of financial statements in foreign currencies into U.S. dollars in
other comprehensive income. Foreign exchange transaction gains and losses are included in the results of operations and are not material to the Companys consolidated financial statements.

Comprehensive Loss

Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, requires components of other comprehensive loss, including unrealized gains and losses on available-for-sale securities and foreign currency translation, to be included as
part of total comprehensive loss. The components of comprehensive loss are included in the statements of stockholders equity.

Adoption of FAS
123(R)

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Accounting for Stock-Based Compensation (FAS 123(R)) using the modified prospective method. FAS 123(R) requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to
employees. The Company commenced the new method of valuing stock-based compensation as prescribed by FAS 123(R) on all stock-based awards granted after the effective date. For the year ended December 31, 2006, the Company recorded stock based
compensation expense related to FAS 123(R) of $5.2 million ($1.4 million recorded in research and development expense and $3.8 million recorded in selling, general and administrative expenses).

As a result of adopting FAS 123(R), the Companys net loss is larger than had it continued to account for share-based compensation under Accounting
Principles Board Opinion 25 (APB 25). For the year ended December 31, 2006, the Companys net loss was approximately $5.2 million higher than if the Company had continued to account for share-based compensation under APB 25.

Prior to January 1, 2006, as allowed by SFAS 123, the Company had applied the intrinsic value-based method of accounting prescribed in APB 25 and
its related interpretations, and, accordingly, did not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the fair market value of the stock at the date of grant. For pro forma purposes, the
stock compensation expense was based on an accelerated vesting method. SFAS 123 pro forma information regarding net loss was required by SFAS 123, and had been determined as if the Company had accounted for its stock-based employee compensation
under the fair value method prescribed in SFAS 123. The fair value of the options were estimated using the Black-Scholes pricing model. In addition, no compensation expense was recorded in the financial statements for shares purchased under the
Companys Employee Stock Purchase Plan as that plan was considered non-compensatory under APB 25.

In addition, prior to the adoption
of FAS 123(R), the Company presented its unamortized portion of deferred compensation cost for nonvested stock options in the statement of changes in shareholders equity with a corresponding credit to additional paid in capital. Under FAS 123(R), an
equity instrument is not considered to be issued until the instrument vests. Upon the adoption of FAS 123(R), the deferred compensation balance of $532,000 at December 31, 2005 was netted against additional paid in capital.

Application of APB 25 caused forfeitures to be recognized as incurred. Under FAS 123(R), an estimate of forfeitures must be made for the unvested awards
outstanding as of the adoption date. As such, an adjustment to record the cumulative effect of a change in accounting principle is needed to reflect the compensation cost that would not have been recognized in prior periods had forfeitures been
estimated during those periods. This adjustment applies only to compensation cost previously recognized in the financial statements for awards that are unvested on the adoption date. As such, the Company recognized a cumulative effect adjustment of
$57,000 as of January 1, 2006 related to the accounting change for forfeitures.



F-12



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Deferred Stock Compensation

In connection with the grant of stock options to employees and directors, the Company recorded deferred stock compensation prior to the Companys initial public offering (IPO) on May 4, 2004.
Prior to January 1, 2006, the deferred compensation amounts were included as a reduction of stockholders equity and were being amortized over the vesting period of the individual options, generally four years, using an accelerated vesting
method. The accelerated vesting method provides for vesting of portions of the overall award at interim dates and results in higher vesting in earlier years than straight-line vesting.

Net Loss Per Common Share

The Company computes basic net loss per common share (Basic
EPS) by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by the weighted-average number of common shares and dilutive
common shares equivalents then outstanding. Common equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock, and the shares issuable upon the exercise of stock options. Diluted EPS is identical to
Basic EPS since common equivalent shares are excluded from the calculations, as their effect is anti-dilutive. The following table summarizes the Companys calculation of net loss per common share:



|                                                                     |  |                         |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                     |  | Year Ended December 31, |           
|(In thousands, except share and per-share amounts)                   |  | 2006                    |            |   | 2005 |   |            | 2004 | 
|Net loss attributable to common stockholders                         |  | $                       | (52,717    | ) |      | $ | (45,241    | )    |  | $ | (44,335    | )
|                                                                     |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic and diluted:                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Weighted-average shares of common stock outstanding                  |  |                         | 25,671,740 |   |      |   | 23,798,922 |      |  |   | 14,988,799 |  
|Less: weighted-average shares subject to repurchase                  |  |                         | (88,481    | ) |      |   | (142,616   | )    |  |   | (311,089   | )
|                                                                     |  |                         |            |   |      |   |            |      |  |   |            |  
|Shares used in computing basic and diluted net loss per common share |  |                         | 25,583,259 |   |      |   | 23,656,306 |      |  |   | 14,677,710 |  
|                                                                     |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss per common share                          |  | $                       | (2.06      | ) |      | $ | (1.91      | )    |  | $ | (3.02      | )
|                                                                     |  |                         |            |   |      |   |            |      |  |   |            |  

The following table shows dilutive common share equivalents outstanding, which are not included in
the above historical calculation, as the effect of their inclusion is anti-dilutive during each period.



|                |  |                         |  |           |  |          
|--------------- |  | ----------------------- |  | --------- |  | ---------
|                |  | Year Ended December 31,
|                |  | 2006                    |  | 2005      |  | 2004     
|Preferred stock |  |                        |  |          |  |         
|Options         |  | 2,638,024               |  | 1,819,587 |  | 1,438,937

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) recently issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), and FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company currently is assessing the impact this provision may have on its financial position or
results of operations.

FIN 48 is an interpretation of SFAS Statement No. 109, Accounting for Income Taxes (SFAS
No. 109), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Interpretation requires that the Company recognize in the financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognition of a previously recognized tax position, classification, interest and penalties, accounting in interim periods and disclosures. The



F-13



---

provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment
to the opening balance of retained earnings. The Company currently has a full valuation allowance against its net deferred tax assets and therefore has not recognized the benefits from tax positions in earnings. The Company anticipates the impact,
if any, of FIN 48 to be minimal.

2. Available for Sale Investments

The following is a summary of available for sale investments as of December 31, 2006 and December 31, 2005:



|                            |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|--------------------------- |  | ---- | ------ | --------------------- | - | ---------------------- |  | - | ---------- | - |  | - | ------
|(In thousands)              |  | Cost |        | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | Fair Value
|December 31, 2006           |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Maturities within one year: |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Corporate notes             |  | $    | 41,317 |                       | $ | 16                     |  | $ | (1         | ) |  | $ | 41,332
|Asset-backed securities     |  |      | 6,490  |                       |   | 1                      |  |   |           |   |  |   | 6,491 
|                            |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Total                       |  | $    | 47,807 |                       | $ | 17                     |  | $ | (1         | ) |  | $ | 47,823
|                            |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|December 31, 2005           |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Maturities within one year: |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Corporate notes             |  | $    | 36,273 |                       | $ | 1                      |  | $ | (74        | ) |  | $ | 36,200
|Federal agency notes        |  |      | 11,397 |                       |   |                       |  |   | (16        | ) |  |   | 11,381
|Asset-backed securities     |  |      | 13,686 |                       |   |                       |  |   | (38        | ) |  |   | 13,648
|                            |  |      |        |                       |   |                        |  |   |            |   |  |   |       
|Total                       |  | $    | 61,356 |                       | $ | 1                      |  | $ | (128       | ) |  | $ | 61,229
|                            |  |      |        |                       |   |                        |  |   |            |   |  |   |       

Unrealized gains and losses are reported as a component of accumulated other comprehensive income
(loss) in stockholders equity. The amortized cost of debt securities is adjusted for amortization of premiums and discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction
from the coupon interest earned on the investments. There are no realized gains or losses on marketable securities as the Company has not sold any marketable securities during the periods presented.

Unrealized losses in the Companys portfolio relate primarily to fixed income debt securities and all of the unrealized losses are one year or less.
For these securities, the unrealized losses are due to increases in interest rates and not changes in credit risk. The gross unrealized losses in the portfolio of investments represent less than one percent of the total fair value of the portfolio.
The Company has concluded that the unrealized losses in its marketable securities are temporary and the Company has the ability to hold the securities to maturity or a planned forecasted recovery.

3. Property and Equipment

Fixed assets consist of
the following:



|                                          |  |                |   |  |              |        |   |      |   |       |  
|----------------------------------------- |  | -------------- | - |  | ------------ | ------ | - | ---- | - | ----- | -
|                                          |  |                |   |  | December 31, |       
|(in thousands)                            |  | Estimated Life |   |  | 2006         |        |   | 2005 |  
|Furniture and fixtures                    |  | 5 years        |   |  | $            | 688    |   |      | $ | 592   |  
|Computer, laboratory and office equipment |  | 3 years        |   |  |              | 911    |   |      |   | 770   |  
|Computer software                         |  | 3 years        |   |  |              | 498    |   |      |   | 468   |  
|Leasehold improvements                    |  | (a             | ) |  |              | 299    |   |      |   | 215   |  
|                                          |  |                |   |  |              |        |   |      |   |       |  
|                                          |  |                |   |  |              | 2,396  |   |      |   | 2,045 |  
|Less accumulated depreciation             |  |                |   |  |              | (1,523 | ) |      |   | (990  | )
|                                          |  |                |   |  |              |        |   |      |   |       |  
|                                          |  |                |   |  | $            | 873    |   |      | $ | 1,055 |  
|                                          |  |                |   |  |              |        |   |      |   |       |  

| | 
| | 

| | (a) | Leasehold improvements are depreciated over the estimated useful lives of the assets or related initial lease terms, whichever is shorter.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



F-14



---

Depreciation expense was approximately $533,000, $428,000, and $381,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.

4. Intangible Assets

On February 7, 2005, the Company entered into a Product Acquisition Agreement with Moreland Enterprises, Ltd. (Moreland). Under the terms
of the Product Acquisition Agreement, the Company acquired the United States and Canadian rights to Solagé (mequinol 2%, tretinoin 0.01%) Topical Solution, and all existing finished goods inventory. The Company was assigned all U. S. and
Canadian marketing authorizations, patents, and trademarks for the product. The patent rights include U.S. and Canadian patents covering the pharmaceutical composition of Solagé and methods of use until at least 2013.

The Company acquired the intellectual property and finished goods inventory for $3.1 million and will make future payments totaling up to an additional
$2.0 million, if certain sales targets are met. The total initial purchase price was allocated $3.0 million to product rights and $61,000 to inventory. During 2005, the Company recorded a liability and a corresponding increase to the intangible
asset product rights of $100,000 for future amounts payable to Moreland based on product sales during the period. Product rights are being amortized on a straight-line basis over the life of the underlying patent, which expires in 2013.

The following information relates to acquired product rights as of December 31, 2006:



|               |  |                      |       |                         |   |                      |  |                         |       |  |   |    
|-------------- |  | -------------------- | ----- | ----------------------- | - | -------------------- |  | ----------------------- | ----- |  | - | ---
|               |  | 2006                 |       | 2005                   
|(in thousands) |  | Gross CarryingAmount |       | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Product Rights |  | $                    | 3,100 |                         | $ | 671                  |  | $                       | 3,100 |  | $ | 320

Total amortization expense for intangible assets was $351,000 and $320,000 at December 31,
2006 and 2005, respectively. As of December 31, 2006, the estimated amortization expense for each of the five succeeding years will be $351,000 per year.

5. Balance Sheet Detail

Accrued liabilities consist of the following as of December 31:



|                                  |  |              |       |      |   |      
|--------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                  |  | December 31,
|(In Thousands)                    |  | 2006         |       | 2005
|Accrued product costs             |  | $            | 1,817 |      | $ | 566  
|Accrued compensation and benefits |  |              | 2,346 |      |   | 2,027
|Product reserves and rebates      |  |              | 742   |      |   |     
|Accrued other                     |  |              | 2,381 |      |   | 1,553
|                                  |  |              |       |      |   |      
|                                  |  | $            | 7,286 |      | $ | 4,146
|                                  |  |              |       |      |   |      

6. Notes Payable

In September 2003, the Company entered into an equipment and furniture financing arrangement with a third party for up to $750,000 which was increased to $1,500,000 in 2004, with an interest rate of 6.15% plus the
three year Treasury Constant Maturities rates at the time of funding. Each time it receives funding, the Company will enter into a promissory note with a term of three years, collateralized by the related equipment and furniture.

In November 2003, the Company entered into a promissory note for $267,851, payable in 35 monthly installments of $8,498, including interest at 8.84%. In
August 2004, the Company entered into a promissory note for $407,179, payable in 35 monthly installments of $12,939, including interest at 8.95%. In December 2004, the



F-15



---

Company entered into a promissory note for $148,014, payable in 35 monthly installments of $4,732, including interest at 9.37%. In December 2005, the Company
entered into a promissory note for $340,391, payable in 35 monthly installments of $11,067, including interest at 10.52%. In December 31, 2006, the Company entered into a promissory note for $219,633, payable in 35 monthly installments of
$7,147, including interest at 10.58%.

Principal payments under notes payable are as follows (in thousands):



|     |  |   |    
|---- |  | - | ---
|2007 |  | $ | 345
|2008 |  |   | 199
|2009 |  |   | 81 
|     |  |   |    
|     |  | $ | 625
|     |  |   |    

7. Income Taxes

There is no tax provision for federal income taxes as the Company has incurred operating losses since inception. At December 31, 2006, the Company has net operating loss carryforwards for federal income tax
purposes of approximately $149,305,000, which begin to expire in 2021. The Company has research tax credit carryovers for federal income tax purposes at December 31, 2006 of approximately $4,733,000, which begin to expire in 2021.

During 2006, 2005 and 2004, the Company sold a portion of its unused New Jersey State operating loss carryforwards, through a program sponsored by the
State of New Jersey and the New Jersey Economic Development Authority. Cash proceeds of approximately $655,000, $536,000 and $367,000, net of fees of $18,000, $63,000 and $49,000, respectively, were received by the Company resulting in the
recognition of a tax benefit.

The benefit for income taxes is as follows:



|                      |  |                         |     |      |   |    
|--------------------- |  | ----------------------- | --- | ---- | - | ---
|                      |  | Year Ended December 31,
|(In Thousands)        |  | 2006                    |     | 2005
|Federal income taxes: |  |                         |     |      |   |    
|Current expense       |  | $                       |    |      | $ |   
|Deferred expense      |  |                         |    |      |   |   
|State income taxes:   |  |                         |     |      |   |    
|Current benefit       |  |                         | 655 |      |   | 536
|Deferred expense      |  |                         |    |      |   |   
|Foreign income taxes: |  |                         |     |      |   |    
|Current expense       |  |                         |    |      |   |   
|Deferred expense      |  |                         |    |      |   |   
|                      |  |                         |     |      |   |    
|Income tax benefit    |  | $                       | 655 |      | $ | 536
|                      |  |                         |     |      |   |    

Utilization of the net operating loss carryforwards and credits may be subject to a substantial
annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under
Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The



F-16



---

Companys deferred tax assets relate primarily to its net operating loss carryforwards. At December 31, 2006 and December 31, 2005, a
valuation allowance was recorded to fully offset the net deferred tax asset. The change in the valuation allowance for the years ended December 31, 2006 and 2005 was approximately $20,254,000 and $19,532,000, respectively. Significant
components of the Companys deferred tax assets at December 31, 2006 and 2005 are as follows:



|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|(In Thousands)                       |  | 2006 |         |   | 2005 |  
|Deferred tax assets:                 |  |      |         |   |      |   |         |  
|Net operating loss carryforwards     |  | $    | 59,409  |   |      | $ | 40,398  |  
|Stock-based compensation             |  |      | 734     |   |      |   | 358     |  
|Research tax credits                 |  |      | 6,425   |   |      |   | 5,895   |  
|Deferred revenue                     |  |      | 138     |   |      |   | 247     |  
|Other                                |  |      | 894     |   |      |   | 526     |  
|                                     |  |      |         |   |      |   |         |  
|Total deferred tax asset             |  |      | 67,600  |   |      |   | 47,424  |  
|Deferred tax liabilities:            |  |      |         |   |      |   |         |  
|Depreciation                         |  |      | (15     | ) |      |   | (93     | )
|                                     |  |      |         |   |      |   |         |  
|Total gross deferred tax liabilities |  |      | (15     | ) |      |   | (93     | )
|Less valuation allowance             |  |      | (67,585 | ) |      |   | (47,331 | )
|                                     |  |      |         |   |      |   |         |  
|Net deferred tax asset               |  | $    |        |   |      | $ |        |  
|                                     |  |      |         |   |      |   |         |  

A reconciliation of the statutory tax rates and the effective tax rates for the years ended
December 31, 2006 and 2005 is as follows:



|                              |  |            |    |  |      |   
|----------------------------- |  | ---------- | -- |  | ---- | --
|                              |  | Year Ended |   
|                              |  | 2006       |    |  | 2005 |   
|Statutory rate                |  | (34        | )% |  | (34  | )%
|State income tax              |  | (5         | )% |  | (7   | )%
|Research tax credits          |  | (2         | )% |  | (2   | )%
|Other                         |  | 2          | %  |  |     |   
|Change in valuation allowance |  | 38         | %  |  | 42   | % 
|                              |  |            |    |  |      |   
|Benefit for income tax        |  | (1         | )% |  | (1   | )%
|                              |  |            |    |  |      |   

8. Stockholders Equity and Capital Structure

Preferred Stock

In connection with the IPO the
Companys Series A, Series B, and Series C redeemable convertible preferred stock were converted into one share of common stock for each preferred share held by the investor. Fractional shares were redeemed for cash. Pursuant to the
Companys Amended and Restated Certificate of Incorporation filed on May 3, 2004, the Company has 5,000,000 shares of authorized blank-check preferred stock. The Board of Directors is authorized to issue these shares in one or
more series without stockholder approval. The Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation
preferences of each series of preferred stock.

Common Stock

The Company is authorized to issue 80,000,000 shares of common stock. The Company is required to, at all times, reserve and keep available out of its authorized but unissued shares of common stock sufficient shares to
effect the conversion of the shares of the redeemable convertible preferred stock and stock options.



F-17



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Employee Stock Purchase Plan

The Company established an Employee Stock Purchase Plan (the ESPP) in February 2004 which was approved by the stockholders in March 2004. The plan allows eligible employees the opportunity to acquire
shares of Barriers common stock (the Common Stock) at periodic intervals through accumulated payroll deductions. These deductions will be applied at semi-annual intervals to purchase shares of Common Stock at a discount from the
then current market price. The purchase price per share will be equal to 85% of the fair market value per share on the date in which the participant is enrolled, or, if lower, 85% of the fair market value per share on the semi-annual purchase
date. Semi-annual purchase dates are the last business day of January and July each year. Under FAS 123(R), the Company records compensation expense related to its ESPP.

Initially 200,000 shares were reserved for issuance. The number of shares reserved for the plan will be automatically increased each year on the
first trading day in January by an amount equal to .5% of the total number of outstanding shares of common stock on the last trading day of December in the prior year, not to exceed 150,000 shares. There is a 1,500 share purchase limitation per
participant and 75,000 aggregate purchase limitation per purchase date.

As of December 31, 2006, a total of 71,890 shares of common
stock were purchased under this plan; 4,050 shares were purchased at $8.94 per share, 7,354 shares were purchased at $9.35 per share, 10,170 shares were purchased at $7.97 per share, 23,147 were purchased at $6.77 and 27,259 shares were purchased at
$5.70.

Stock Option Plan

On
April 26, 2002, the Companys Board of Directors and stockholders approved the Companys 2002 Equity Compensation Plan (the 2002 Plan). In March 2004, the Companys Board of Directors and stockholders approved the
Companys 2004 Stock Incentive Plan (the 2004 Plan). On that date, the outstanding options under the 2002 Plan were transferred to the 2004 Plan. No further options may be granted under the 2002 Plan. The 2002 Plan options
will continue to be governed by their existing terms, unless the Board or its committee elects to extend one or more features of the 2004 Plan to these options. The options granted under the 2004 Plan and the 2002 Plan have substantially the
same terms.

The 2004 Plan allows the Company to offer shares of its common stock to key employees, Directors, advisors and consultants
pursuant to option grants, stand-alone stock appreciation rights, direct stock issuances and other stock based awards. All stock based awards under the 2004 Plan are made at not less than the fair market value on the date of grant. The number of
shares of common stock reserved for issuance under the 2004 Plan will automatically increase each year on the first trading day in January of each calendar year by an amount equal to 5% of the total number of shares of common stock outstanding on
the last trading day in December, not in excess of 1,000,000 shares.

The 2004 Plan is intended to encourage ownership of stock by
employees, Directors, advisors and consultants of the Company and to provide additional incentives for them to promote the success of the Companys business and is administered by the Board of Directors or committee consisting of members of the
Board. Options granted pursuant to the 2004 Plan generally vest 25% after the first year, and the remaining 75% vest monthly over the next three years.

Deferred Stock Compensation

In connection with the grant of stock options to employees and directors, the Company
recorded deferred stock compensation prior to the Companys initial public offering (IPO) on May 4, 2004. Prior to January 1, 2006, the deferred compensation amounts were included as a reduction of stockholders
equity and were being amortized over the vesting period of the individual options, generally four years, using an accelerated vesting method. The accelerated vesting method provides for vesting of portions of the overall award at interim dates and
results in higher vesting in earlier years than straight-line vesting.



F-18



---

Stock Options

Stock options are granted to employees at exercise prices equal to the fair market value of the Companys stock at date of grant. Stock options generally vest over four years and have a term of 10 years.
Compensation cost is recognized over the requisite service period for each separately vesting portion of the stock option. The expense is recognized, net of forfeitures, over the vesting period of the options using an accelerated method. The Company
has never paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on historical volatility of the Companys stock price, which is compared to the
volatility of a peer group of companies for reasonableness. The expected life of stock options is calculated using the shortcut approach in developing our estimate of expected term for plain vanilla stock options granted by
using the mid-point between the vesting date and contractual termination date as allowed by Staff Accounting Bulletin No. 107. The risk-free interest rates are derived from the U.S. Treasury rates. In addition, the Company applies an
expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. The Company is currently using an estimated forfeiture rate of 8.2%.
The fair value of the options was estimated using the Black-Scholes pricing model with the following assumptions:



|                        |      |                         |      |           |      |          
|----------------------- | ---- | ----------------------- | ---- | --------- | ---- | ---------
|                        |      | Year Ended December 31,
|                        | 2006 |                         | 2005 |           | 2004
|Risk-free interest rate |      | 4.75%                   |      | 4.0%      |      | 4.0%     
|Dividend yield          |      | 0%                      |      | 0%        |      | 0%       
|Expected life           |      | 6.0 years               |      | 6.0 years |      | 8.5 years
|Volatility              |      | 70%                     |      | 75%       |      | 75%      

The following table summarizes the components and classification of stock-based compensation
expense for the year ended December 31, 2006:



|                                       |  |      |      
|-------------------------------------- |  | ---- | -----
|                                       |  | 2006
|Employee stock options                 |  | $    | 4,827
|Restricted stock                       |  |      | 235  
|ESPP                                   |  |      | 75   
|Stock options issued to non-employees  |  |      | 133  
|                                       |  |      |      
|Total stock-based compensation expense |  | $    | 5,270
|                                       |  |      |      
|Included in:                           |  |      |      
|Research and development               |  |      | 1,411
|Selling, general and administrative    |  |      | 3,859
|                                       |  |      |      
|Total stock-based compensation expense |  | $    | 5,270
|                                       |  |      |      

The following table illustrates the effect on net income and earnings per share for the years
ended December 31, 2005 and 2004, had the Company applied the fair value recognition provisions of SFAS 123 to all of its stock-based compensation plans.



|                                                                                                               |  |                         |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | -
|(In thousands, except per-share amounts)                                                                       |  | Year Ended December 31, |        
|                                                                                                               |  | 2005                    |         |   | 2004 |  
|Net loss attributable to common stockholders                                                                   |  | $                       | (45,241 | ) |      | $ | (44,335 | )
|Add non-cash employee compensation as reported                                                                 |  |                         | 889     |   |      |   | 2,001   |  
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                         | (5,095  | ) |      |   | (3,871  | )
|                                                                                                               |  |                         |         |   |      |   |         |  
|SFAS 123 pro forma net loss                                                                                    |  | $                       | (49,447 | ) |      | $ | (46,205 | )
|                                                                                                               |  |                         |         |   |      |   |         |  
|Basic and diluted loss attributable per common share                                                           |  | $                       | (1.91   | ) |      | $ | (3.02   | )
|                                                                                                               |  |                         |         |   |      |   |         |  
|Basic and diluted loss attributable to common stockholders per share, SFAS 123 pro forma                       |  | $                       | (2.09   | ) |      | $ | (3.15   | )
|                                                                                                               |  |                         |         |   |      |   |         |  



F-19



---

The following table summarizes information about stock options outstanding at December 31, 2006:



|                             |                            |                     |   |                  |           |   |                              |   |                                  |  |   |      
|---------------------------- | -------------------------- | ------------------- | - | ---------------- | --------- | - | ---------------------------- | - | -------------------------------- |  | - | -----
|                             |                            | Options Outstanding
|                             | Shares Available for Grant |                     |   | Number of Shares |           |   | Option Price Per Share Range |   | Weighted- Average Exercise Price
|Balance at December 31, 2003 |                            | 548,917             |   |                  | 878,583   |   |                              | $ | 0.60-3.00                        |  |   | 0.88 
|Shares authorized            |                            | 500,000             |   |                  |          |   |                              |   |                                 |  |   |     
|Options granted              |                            | (691,050            | ) |                  | 691,050   |   |                              |   | 3.50-17.70                       |  |   | 8.50 
|Options exercised            |                            |                    |   |                  | (107,382  | ) |                              |   | 0.60-4.00                        |  |   | 1.09 
|Options forfeited            |                            | 23,314              |   |                  | (23,314   | ) |                              |   | 0.60-3.50                        |  |   | 0.94 
|                             |                            |                     |   |                  |           |   |                              |   |                                  |  |   |      
|Balance at December 31, 2004 |                            | 381,181             |   |                  | 1,438,937 |   |                              |   | 0.60-17.70                       |  |   | 4.52 
|Shares authorized            |                            | 1,000,000           |   |                  |          |   |                              |   |                                 |  |   |     
|Options granted              |                            | (713,800            | ) |                  | 713,800   |   |                              |   | 7.05-19.98                       |  |   | 14.12
|Options exercised            |                            |                    |   |                  | (183,521  | ) |                              |   | 0.60-14.74                       |  |   | 2.35 
|Options forfeited            |                            | 149,629             |   |                  | (149,629  | ) |                              |   | 0.60-18.56                       |  |   | 6.70 
|                             |                            |                     |   |                  |           |   |                              |   |                                  |  |   |      
|Balance at December 31, 2005 |                            | 817,010             |   |                  | 1,819,587 |   |                              |   | 0.60-19.98                       |  |   | 8.32 
|Shares authorized            |                            | 1,000,000           |   |                  |          |   |                              |   |                                 |  |   |     
|Options granted              |                            | (1,067,000          | ) |                  | 1,067,000 |   |                              |   | 5.40-11.23                       |  |   | 7.85 
|Options exercised            |                            |                    |   |                  | (73,778   | ) |                              |   | 0.60-8.60                        |  |   | 1.62 
|Options forfeited            |                            | 174,785             |   |                  | (174,785  | ) |                              |   | 0.60-17.76                       |  |   | 10.54
|                             |                            |                     |   |                  |           |   |                              |   |                                  |  |   |      
|Balance at December 31, 2006 |                            | 924,795             |   |                  | 2,638,024 |   |                              | $ | 0.60-19.98                       |  | $ | 8.17 
|                             |                            |                     |   |                  |           |   |                              |   |                                  |  |   |      

The following table summarizes information about vested stock options outstanding:



|                                |      |              |           |  |      |         |  |   |        
|------------------------------- | ---- | ------------ | --------- |  | ---- | ------- |  | - | -------
|                                |      | December 31,
|                                | 2006 |              | 2005      |  | 2004
|Vested stock options            |      |              | 1,275,178 |  |      | 696,010 |  |   | 383,586
|Weighted-average exercise price |      | $            | 7.00      |  | $    | 4.68    |  | $ | 1.09   

The following table summarizes information about stock options outstanding at December 31,
2006:



|               |  |                  |  |                                  |       |                                                     |     |                  |           |                                  |   |      
|-------------- |  | ---------------- |  | -------------------------------- | ----- | --------------------------------------------------- | --- | ---------------- | --------- | -------------------------------- | - | -----
|               |  | Outstanding      |  | Exercisable                     
|Exercise Price |  | Number ofOptions |  | Weighted- Average Exercise Price |       | Weighted- Average Remaining ContractualLife (years) |     | Number ofOptions |           | Weighted- Average Exercise Price
|$0.60 - $1.50  |  | 469,627          |  | $                                | 0.85  |                                                     | 6.0 |                  | 434,508   |                                  | $ | 0.82 
|3.00 - 4.00    |  | 130,707          |  |                                  | 3.62  |                                                     | 7.0 |                  | 113,908   |                                  |   | 3.60 
|4.01 - 8.00    |  | 848,100          |  |                                  | 7.31  |                                                     | 9.1 |                  | 245,129   |                                  |   | 7.76 
|8.01 - 10.00   |  | 519,266          |  |                                  | 9.01  |                                                     | 8.6 |                  | 171,092   |                                  |   | 8.97 
|10.01 - 14.00  |  | 270,400          |  |                                  | 12.32 |                                                     | 7.3 |                  | 202,626   |                                  |   | 12.31
|14.01 - 20.00  |  | 399,924          |  |                                  | 16.22 |                                                     | 7.5 |                  | 192,915   |                                  |   | 16.15
|               |  |                  |  |                                  |       |                                                     |     |                  |           |                                  |   |      
|               |  | 2,638,024        |  |                                  | 8.17  |                                                     | 7.9 |                  | 1,360,178 |                                  |   | 7.22 

The difference between the number of vested stock options and the number of options exercisable
relate to options granted to each non-employee, non-investor member of the Board of Directors. Stock options granted to Board members are immediately exercisable, but not immediately vested.

The weighted-average fair value of stock options granted for the years ended December 31, 2006, 2005 and 2004, was $7.85, $14.12 and $8.50,
respectively. The intrinsic value of stock options exercised was



F-20



---

approximately $457,000, $2,480,000 and $1,146,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The total fair value of shares
vested during the years ended December 31, 2006, 2005 and 2004 was $3.7 million, $2.7 million and $1.5 million, respectively.

The
total remaining unrecognized compensation costs related to unvested stock options was $5.3 million as of December 31, 2006 and will be amortized over the weighted-average remaining service period of 3.4 years.

Awards of Restricted Stock

The following is a
summary of restricted stock awards issued for the year ended December 31, 2006 under the 2004 Plan:



|                            |  |         |  |                          |     
|--------------------------- |  | ------- |  | ------------------------ | ----
|                            |  | Shares  |  | Wtd. Avg. ValuePer Share
|Unvested, December 31, 2005 |  |        |  |                          |    
|Granted                     |  | 157,915 |  | $                        | 7.43
|Vested                      |  | 31,583  |  | $                        | 7.43
|                            |  |         |  |                          |     
|Unvested, December 31, 2006 |  | 126,332 |  | $                        | 7.43

The Company recognized $0.2 million in expense related to awards granted in 2006. The Company
did not issue any shares of restricted stock prior to 2006.

No other share-based awards are outstanding under any of the Plans. At
December 31, 2006, there were 766,880 shares available for grant under the Plans.

The Company accounts for options issued to
non-employees under SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such, the value of such
options is periodically re-measured and income or expense is recognized during their vesting terms. The Company recorded $133,000, $378,000 and $756,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

9. Commitments and Contingencies

Commitments

The following table summarizes the Companys material commitments as of December 31, 2006:



|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  
|--------------------------- |  | ----- | ------ | ----------------- | - | ----------------- |  | ------------------ | ------ | --------------- | - | --- |  | - | -
|(in thousands) Commitments  |  | Total |        | Less than OneYear |   | One to ThreeYears |  | Three to FiveYears |        | After FiveYears
|Notes payable               |  | $     | 625    |                   | $ | 345               |  | $                  | 280    |                 | $ |    |  | $ | 
|Operating lease obligations |  |       | 2,360  |                   |   | 632               |  |                    | 1,255  |                 |   | 473 |  |   | 
|Other commitments(a)        |  |       | 38,495 |                   |   | 24,857            |  |                    | 13,638 |                 |   |    |  |   | 
|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  
|Total                       |  | $     | 41,480 |                   | $ | 25,834            |  | $                  | 15,173 |                 | $ | 473 |  | $ | 
|                            |  |       |        |                   |   |                   |  |                    |        |                 |   |     |  |   |  

---

|(a) | The other commitments reflected in the table include obligations to purchase product and product candidate materials contingent on the delivery of the materials and to fund various
clinical trials contingent on the performance of services. These obligations also include long-term obligations, including milestone payments that may arise under agreements that the Company may terminate prior to the milestone payments being due.
The table excludes contingent royalty payments that we may be obligated to pay in the future.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Johnson & Johnson

In addition to the Series A exchanged for the acquisition of in-process research and development, Janssen Pharmaceutica Products,
L.P., Johnson & Johnson Consumer Companies, Inc., and Ortho-McNeil



F-21



---

Pharmaceutical, Inc., received certain rights of first negotiation for the marketing and sales of those drugs which the Company successfully develops from
that portfolio. The most significant terms of the license provide the following:

(a) the licenses are subject to a right of
first negotiation for the marketing and sale of those drugs which the Company elects not to market itself or through contract sales organizations on a territory-by-territory basis, and

(b) the licenses are royalty-free, except for the so-called itraconazole melt extrusion, Hyphanox, which will require the
payment of a royalty with respect to those sales of a licensee or sublicense of the Company (other than a contract sales organization) or by the Company after a change of control.

10. Geographic Segments

The Company manages its business and operations as one segment and is
focused on the development and commercialization of its product candidates and approved products for marketing. The Company operates in United States, Belgium and Canada.

The following table presents financial information by product for the years ended December 31, 2006 and 2005:



|                           |  |                         |       |      |   |    
|-------------------------- |  | ----------------------- | ----- | ---- | - | ---
|                           |  | Year ended December 31,
|(in thousands)             |  | 2006                    |       | 2005
|Net product revenues       |  |                         |       |      |   |    
|Vusion                     |  | $                       | 3,785 |      | $ |   
|Solagé                     |  |                         | 1,595 |      |   | 787
|Xolegel                    |  |                         | 130   |      |   |   
|Other products             |  |                         | 343   |      |   | 5  
|                           |  |                         |       |      |   |    
|Total net product revenues |  | $                       | 5,853 |      | $ | 792
|                           |  |                         |       |      |   |    

The following tables present financial information based on the geographic location of the
facilities of the Company and for the years ended December 31, 2006 and 2005:



|                          |  |                         |       |      |   |    
|------------------------- |  | ----------------------- | ----- | ---- | - | ---
|                          |  | Year Ended December 31,
|(in thousands)            |  | 2006                    |       | 2005
|Net product revenue       |  |                         |       |      |   |    
|U.S.                      |  | $                       | 5,331 |      | $ | 684
|International             |  |                         | 522   |      |   | 108
|                          |  |                         |       |      |   |    
|Total net product revenue |  | $                       | 5,853 |      | $ | 792
|                          |  |                         |       |      |   |    



|                                     |  |                         |         |   |      |   |         |  
|------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                     |  | Year Ended December 31, |        
|(in thousands)                       |  | 2006                    |         |   | 2005 |  
|Loss before income tax benefit       |  |                         |         |   |      |   |         |  
|U.S.                                 |  | $                       | (44,509 | ) |      | $ | (37,379 | )
|International                        |  |                         | (8,920  | ) |      |   | (8,398  | )
|                                     |  |                         |         |   |      |   |         |  
|Total loss before income tax benefit |  | $                       | (53,429 | ) |      | $ | (45,777 | )
|                                     |  |                         |         |   |      |   |         |  



F-22



---

|               |  |                         |        |      |   |       
|-------------- |  | ----------------------- | ------ | ---- | - | ------
|               |  | Year Ended December 31,
|(in thousands) |  | 2006                    |        | 2005
|Total assets   |  |                         |        |      |   |       
|U.S.           |  | $                       | 65,670 |      | $ | 83,212
|International  |  |                         | 1,511  |      |   | 1,749 
|               |  |                         |        |      |   |       
|Total assets   |  | $                       | 67,181 |      | $ | 84,961
|               |  |                         |        |      |   |       



|                                  |  |                         |     |      |   |      
|--------------------------------- |  | ----------------------- | --- | ---- | - | -----
|                                  |  | Year Ended December 31,
|(in thousands)                    |  | 2006                    |     | 2005
|Property and equipment, net       |  |                         |     |      |   |      
|U.S.                              |  | $                       | 674 |      | $ | 831  
|International                     |  |                         | 199 |      |   | 224  
|                                  |  |                         |     |      |   |      
|Total property and equipment, net |  | $                       | 873 |      | $ | 1,055
|                                  |  |                         |     |      |   |      

11. Related Party Transactions

In July 2004, the Company entered into an agreement with Janssen Pharmaceutica, NV under which the Company committed to purchase  1,000,000
(approximately $1,365,000) of inventory within the two-year period ending July 2008. The Company purchased approximately $186,000 and $57,000 in 2006 and 2005, respectively, related to this agreement. The Company monitors this commitment
periodically against sales projections.

The Company expensed approximately $112,000, $14,000, and $21,000 for the purchase of raw
materials and clinical supplies from Janssen during 2006, 2005, and 2004, respectively.

12. Leases

The Company leases its U.S. corporate facilities in Princeton, New Jersey under a lease which expires in September 2010. The Company leases space in Geel,
Belgium under a short-term service agreement with a monthly fee of approximately $13,800. Future minimum lease commitments are as follows (in thousands):



|     |  |   |      
|---- |  | - | -----
|2007 |  |   | 632  
|2008 |  |   | 624  
|2009 |  |   | 631  
|2010 |  |   | 473  
|     |  |   |      
|     |  | $ | 2,360
|     |  |   |      

Total rent expense was $666,000 in 2006, $743,000 in 2005, and $425,000 in 2004.

13. Benefit Plan

In July 2002, the Company
established a 401(k) plan (the Plan) covering all eligible employees. Beginning January 1, 2005, the Company elected to match a portion of the employees contribution. The Companys contributions for 2006 and 2005 were
approximately $95,000 and $78,000.



F-23



---

14. Selected Quarterly Financial Data (Unaudited)



|                                               |           |               |         |          |  |   |               |   |  |              |         |   |  |   |         |  
|---------------------------------------------- | --------- | ------------- | ------- | -------- |  | - | ------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|(In Thousands except per share amounts)        |           | Quarter Ended |        
|                                               | March 31, |               |         | June 30, |  |   | September 30, |   |  | December 31, |        
|2006                                           |           |               |         |          |  |   |               |   |  |              |         |   |  |   |         |  
|Net revenue                                    |           | $             | 472     |          |  | $ | 1,081         |   |  | $            | 2,116   |   |  | $ | 3,069   |  
|Cost of product revenues                       |           |               | (215    | )        |  |   | (483          | ) |  |              | (351    | ) |  |   | (381    | )
|Total operating expenses                       |           |               | 12,679  |          |  |   | 15,719        |   |  |              | 15,509  |   |  |   | 19,214  |  
|Net loss attributable to common stockholders   |           |               | (11,374 | )        |  |   | (13,913       | ) |  |              | (12,658 | ) |  |   | (14,772 | )
|Basic and diluted net loss per common share(1) |           | $             | (0.47   | )        |  | $ | (0.58         | ) |  | $            | (0.50   | ) |  | $ | (0.51   | )
|2005                                           |           |               |         |          |  |   |               |   |  |              |         |   |  |   |         |  
|Net revenue                                    |           | $             | 653     |          |  | $ | 472           |   |  | $            | 626     |   |  | $ | 789     |  
|Cost of product revenues                       |           |               | (82     | )        |  |   | (103          | ) |  |              | (163    | ) |  |   | (195    | )
|Total operating expenses                       |           |               | (13,403 | )        |  |   | (12,026       | ) |  |              | (13,437 | ) |  |   | (12,328 | )
|Net loss attributable to common stockholders   |           |               | (12,158 | )        |  |   | (10,809       | ) |  |              | (12,050 | ) |  |   | (10,225 | )
|Basic and diluted net loss per common share(1) |           | $             | (0.53   | )        |  | $ | (0.45         | ) |  | $            | (0.50   | ) |  | $ | (0.43   | )

---

|(1) | Per common share amounts for the quarters and full years have been calculated separately. Accordingly, quarterly amounts do not add to the annual amount because of differences in
the weighted-average common shares outstanding during each period principally due to the effect of the Companys issuing shares of its common stock during the year.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As discussed in Note 1, Summary of Significant Accounting Policiesto the consolidated financial statements, effective January 1,
2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (FAS 123(R)).

Diluted EPS is identical to Basic EPS since common equivalent shares are excluded from the calculation, as their effect is anti-dilutive.

The above amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year amounts.

15. Legal Matters

In October 2005, a purported class action lawsuit was filed in the United States District Court for the
District of New Jersey against the Company and certain of its officers on behalf of all persons who purchased or acquired securities of Barrier Therapeutics, Inc. between April 29, 2004 and June 29, 2005. The complaints alleged violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and under Sections 11, 12 and 15 of the Securities Exchange Act of 1933. In November 2006, the case was voluntarily dismissed by
plaintiffs counsel, in its entirety and with prejudice.

16. Subsequent Events

In March 2007, the Company announced that it had entered into an agreement with Novartis Consumer Health, Inc. whereby Novartis Consumer Health will
promote its Vusion product to pediatricians in the U.S.



F-24



---

INDEX OF EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                       
|1.1         |  | Underwriting Agreement dated September 14, 2006 entered into by and between the Registrant and Pacific Growth Equities, LLC, filed as Exhibit 1.1 to Form 8-K filed on September 15,
2006                                                                                                         
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                 
|            | 
|3.2         |  | Amended and Restated Bylaws of the Registrant, filed as Exhibit 3.4 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                     
|            | 
|4.1         |  | Specimen copy of stock certificate for shares of Common Stock of the Registrant, filed as Exhibit 4.1 to the Companys Registration Statement on Form S-1 (File
No. 333-112539)                                                                                                                   
|            | 
|4.2         |  | Amended and Restated Investors Rights Agreement, dated as of April 20, 2004, by and among the Registrant and the Investors listed therein, filed as Exhibit 4.2 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                         
|            | 
|10.1       |  | 2002 Equity Compensation Plan, filed as Exhibit 10.1 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                    
|            | 
|10.2(1)     |  | Intellectual Property Transfer and License Agreement, dated as of May 6, 2002, by and between the Registrant and Johnson & Johnson Consumer Companies, Inc., filed as Exhibit 10.2
to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                      
|            | 
|10.3        |  | Amendment No. 1 to the Intellectual Property Transfer and License Agreement dated as of September 7, 2004, by and between Barrier Therapeutics, Inc. and Johnson & Johnson Consumer
Companies, Inc., filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 10, 2004
|            | 
|10.4(1)     |  | Intellectual Property Transfer and License Agreement, dated as of May 6, 2002, by and among the Registrant and Janssen Pharmaceutica Products, L.P. and Ortho-McNeil Pharmaceutical, Inc.,
filed as Exhibit 10.3 to the Companys Registration Statement on Form S-1 (File No. 333-112539)        
|            | 
|10.5        |  | Amendment No. 1 to the Intellectual Property Transfer and License Agreement, dated as of September 7, 2004, by and between Barrier Therapeutics, Inc. and Janssen Pharmaceutica
Products, L.P. , filed as Exhibit 10.2 to the Companys Current Report on Form 8-K filed on September 10, 2004    
|            | 
|10.6       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.4 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                  
|            | 
|10.7       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Charles Nomides, filed as Exhibit 10.5 to the Companys Registration Statement on Form S-1
(File No. 333-112539)                                                                                           
|            | 
|10.8       |  | Employment Agreement, effective as of April 1, 2004, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.6 to the Companys Registration Statement on Form S-1
(File No. 333-112539)                                                                                           



1



---

|            |  |                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                               
|10.11      |  | Restricted Stock Purchase Agreement, dated as of October 31, 2001, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.7 to the Companys Registration
Statement on Form S-1 (File No. 333-112539)                                                                                                            
|            | 
|10.12      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated as of May 7, 2002, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.8 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                              
|            | 
|10.13      |  | Amendment No. 2 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Geert Cauwenbergh, Ph.D., filed as Exhibit 10.18 to the
Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                           
|            | 
|10.14      |  | Restricted Stock Purchase Agreement, dated as of February 20, 2002, by and between the Registrant and Charles Nomides, filed as Exhibit 10.9 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                    
|            | 
|10.15      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated May 7, 2002, by and between the Registrant and Charles Nomides, filed as Exhibit 10.10 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                                            
|            | 
|10.16      |  | Amendment No. 2 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Charles Nomides, filed as Exhibit 10.19 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                                    
|            | 
|10.17      |  | Restricted Stock Purchase Agreement, dated as of August 1, 2002, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.11 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                      
|            | 
|10.18      |  | Amendment No. 1 to Restricted Stock Purchase Agreement, dated as of April 1, 2004, by and between the Registrant and Anne M. VanLent, filed as Exhibit 10.20 to the Companys
Registration Statement on Form S-1 (File No. 333-112539)                                                                                                    
|            | 
|10.19       |  | Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600 College Road East, Princeton Forrestal Center, New
Jersey, filed as Exhibit 10.12 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                           
|            | 
|10.20       |  | Amendment No. 1 dated November 6, 2003, to Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600
College Road East, Princeton Forrestal Center, New Jersey, filed as Exhibit 10.13 to the Companys Registration Statement on Form S-1 (File No. 333-112539)
|            | 
|10.21       |  | Master Security Agreement, dated as of August 21, 2003 and Amendment, dated as of September 3, 2003, between the Registrant and General Electric Capital Corporation, filed as
Exhibit 10.14 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                    
|            | 
|10.22(1)    |  | Development and Supply Agreement, dated as of May 16, 2002, between the Registrant and Abbott GmbH & Co. KG, filed as Exhibit 10.15 to the Companys Registration Statement on
Form S-1 (File No. 333-112539)                                                                                                                             
|            | 
|10.23      |  | 2004 Stock Incentive Plan, filed as Exhibit 10.16 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                                                               
|            | 
|10.24      |  | Employee Stock Purchase Plan, filed as Exhibit 10.17 to the Companys Registration Statement on Form S-1 (File No. 333-112539)                                                                                                                                                                                                            
|            | 
|10.25       |  | Amendment No. 2 dated May 13, 2004, to Lease Agreement, dated May 28, 2003, between the Registrant and Peregrine Investment Partners-I relating to property located at 600 College
Road East, Princeton Forrestal Center, New Jersey, filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on August 11, 2004.      



2



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|            |  |                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                  
|10.26(1)    |  | Distribution and License Agreement dated November 4, 2004 between the Registrant and Grupo Ferrer Internacional, S.A., filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on November 9, 2004.                                                          
|            | 
|10.27       |  | Finished Product Supply Agreement dated July 14, 2004 between the Registrant and Janssen Pharmaceutica, NV, filed as Exhibit 10.25 to the Companys Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-122261).                                         
|            | 
|10.28       |  | Product Acquisition Agreement dated February 5, 2005 between the Registrant and Moreland Enterprises Limited, filed as Exhibit 10.26 to the Companys Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-122261).                                       
|            | 
|10.29       |  | Amendment No. 2 to the Intellectual Property Transfer and License Agreement, dated as of May 12, 2005, by and between the Registrant and Janssen Pharmaceutica Products, L.P., filed as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed on August 11, 2005.
|            | 
|10.30       |  | Scientific Advisory Board Consulting Agreement dated as of August 1, 2005 by and between the Registrant and Carl W. Ehmann, M.D., filed as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q filed on August 11, 2005.                                             
|            | 
|10.31       |  | Amendment dated as of August 26, 2005 to the Finished Product Supply Agreement by and between the Registrant and Janssen Pharmaceutica, NV, filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed on November 14, 2005.                                 
|            | 
|10.32*(1)   |  | Pharmaceutical Product Supply Agreement dated as of January 27, 2005 by and between the Registrant and DSM Pharmaceuticals, Inc.                                                                                                                                             
|            | 
|10.33*(1)   |  | Manufacturing Agreement dated as of March 31, 2005 by and between the Registrant and DPT Laboratories, Ltd.                                                                                                                                                                  
|            | 
|10.34*(1)   |  | Amendment No. 1 dated December 6, 2005 to Pharmaceutical Product Supply Agreement dated as of January 27, 2005 by and between the Registrant and DSM Pharmaceuticals,
Inc.                                                                                                   
|            | 
|10.35*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Geert Cauwenbergh, Ph.D.                                                                                                                                          
|            | 
|10.36*      |  | Amended and Restated Employment Agreement, dated as of April 1, 2004, by and between the Registrant and Charles Nomides                                                                                                                                                      
|            | 
|10.37*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Anne M. VanLent                                                                                                                                                   
|            | 
|10.38*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Alfred Altomari                                                                                                                                                   
|            | 
|10.39*      |  | Amended and Restated Employment Agreement, dated as of December 6, 2006, by and between the Registrant and Albert Bristow                                                                                                                                                    
|            | 
|10.40*      |  | Sales Force Services Agreement, dated March 2, 2007, by and between the Registrant and Novartis Consumer Health, Inc.                                                                                                                                                        
|            | 
|*21         |  | List of Subsidiaries                                                                                                                                                                                                                                                         
|            | 
|*23.1       |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                 
|            | 
|*23.2       |  | Power of Attorney (included on signature page)                                                                                                                                                                                                                               
|            | 
|*31.1       |  | Certification of principal executive officer required by Rule 13a-14(a)                                                                                                                                                                                                      
|            | 
|*31.2       |  | Certification of principal financial officer required by Rule 13a-14(a)                                                                                                                                                                                                      



3



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|            |  |                                                                         
|----------- |  | ------------------------------------------------------------------------
|Exhibit No. |  | Description                                                             
|*31.3       |  | Certification of principal accounting officer required by Rule 13a-14(a)
|            | 
|¤32.1       |  | Section 1350 Certification of principal executive officer               
|            | 
|¤32.2       |  | Section 1350 Certification of principal financial officer               
|            | 
|¤32.3       |  | Section 1350 Certification of principal accounting officer              

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|* | Filed herewith.
|- | ---------------

|¤ | Furnished herewith
|- | ------------------

| | Compensation plans and arrangements for executives and others.
|- | --------------------------------------------------------------

|(1) | Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment granted by the Securities and Exchange Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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