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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One) þ     ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2004 OR o     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 BARRIER THERAPEUTICS, INC. 
  Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
    
    22-3828030
(I.R.S. Employer
Identification No.)600 College Road East, Suite 3200
Princeton, New Jersey
    
    08540(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (609) 945-1200 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share

(Title of Class)
 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 þ     No o 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.o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ The aggregate market value of the voting Common Stock held by nonaffiliates of the registrant as of June 30, 2004 was
approximately $88.6 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, 2004. 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 23, 2005 was 23,945,519. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrants definitive proxy statement for its 2005 annual meeting of stockholders are incorporated by reference
into Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K.




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TABLE OF CONTENTS  
 PageCautionary Note Regarding Forward-Looking Statements
    
    iiiPART IItem 1. Business
    
    
    4Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    57Item 8. Financial Statements and Supplementary Data
    
    
    57Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    57Item 9A. Controls and Procedures
    
    
    57Item 9B. Other Information
    
    
    58PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    58Item 11. Executive Compensation
    
    
    58Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    58Item 13. Certain Relationships and Related Transactions
    
    
    59Item 14. Principal Accountant Fees and Services
    
    
    59PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    59Signatures
    
    
    62Employment Agreement By and Between the Registrant and Alfred AltomariEmployment Agreement By and Between the Registrant and Albert BristowList of SubsidiariesConsent of Ernst & Young LLPCertification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification of Principal Executive OfficerSection 1350 Certification of Principal Financial Officer
  ii




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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 increasing trend of operating losses and the reasons for those losses;
    our spending on the clinical development of our later stage and earlier stage product candidates;
    our plans regarding the development or regulatory path for any of our product candidates;
    the timing of the initiation or completion of any clinical trials;
    the timing of filing for regulatory approvals with governmental agencies;
    the timing of the commercial launch of any of our product candidates, if approved;
    the commercialization of any of our product candidates, if approved; 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. We do
not intend to update publicly any forward-looking statement, whether as a result of new
information, future events or otherwise. 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 7 under the heading Risk Factors that May Affect Future Results, our ability to:  
    obtain substantial additional funds;
    obtain and maintain all necessary patents or licenses;
    demonstrate the safety and efficacy of product candidates at each stage of development;
    meet applicable regulatory standards and file for or receive required regulatory approvals;
    meet obligations and required milestones under our license and other agreements;
    produce drug candidates in commercial quantities at reasonable costs and compete
successfully against other products and companies; and
    market our products, if approved, and generate revenues. iii




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PART I 
 ITEM 1. BUSINESS Overview We are a pharmaceutical company focused on the discovery, development and commercialization of
pharmaceutical products in the field of dermatology. Our goal is to develop a portfolio of
innovative products that address major medical needs in the treatment of dermatological diseases
and disorders. We currently market Solagé® in the United States for the treatment of solar
lentigines, a common condition also known as age spots or liver spots, and for the broader
indication including related hyperpigmented lesions in Canada. Our product pipeline includes eight
product candidates in various stages of clinical development. We were incorporated in Delaware in
September 2001 and commenced active operations in May 2002. Our principal offices are located at
600 College Road, Princeton, New Jersey 08540. Recent Developments In February, 2005, we completed a follow-on public offering of 4 million shares of our common
stock at a price of $19.50 per share. Of the 4 million shares, two million were sold by existing
stockholders of the Company and 2 million were sold by the Company, which resulted in net proceeds
to the Company of approximately $36 million after payment of underwriting discounts and commissions
and other expenses. Barrier did not receive any proceeds from the sale of the shares sold by the
existing stockholders. None of Barriers executive officers sold shares in this offering. In February, 2005, we acquired the United States and Canadian rights to Solagé®, a product
commonly used for depigmenting lesions, from Moreland Enterprises Limited. In the United States,
Solagé® is indicated for the treatment of solar lentigines, commonly known as age spots, while
the Canadian indication also includes use for related hyperpigmented lesions. Under the terms of
the agreement, we made an initial cash payment to Moreland of $3 million and may make future
payments totaling up to an additional $2 million, depending upon future sales of the product. In
addition, the agreement provides that in the event Moreland proposes to grant rights to a third
party to distribute, license or otherwise divest its rights to the product outside the United
States and Canada, subject to the terms of the agreement, we have a right of first refusal to
acquire such rights. The agreement also provides for the assignment to us of all Solagé® United
States and Canadian marketing authorizations, patents, patent applications and trademarks and the
purchase by us of all existing inventory. The patent rights include United States and Canadian
patents and patent applications covering Solagé®s pharmaceutical composition and methods of use
until at least 2010. We have also entered into a distribution agreement with Galderma Laboratories
under which Galderma will provide us with distribution services and logistical support for Solagé®
through December 2005. Our Product Pipeline Our four most advanced product candidates are:  
    Zimycan: an ointment for the treatment of infants with diaper dermatitis complicated by
candidiasis, an inflammatory disease characterized by diaper rash complicated with an
infection by a yeast called Candida. On the basis of the positive Phase 3 pivotal clinical
trial results that we announced in August 2004, we filed an amendment to a pending new drug
application, or NDA, for Zimycan in the United States in November 2004. We expect to receive
a first action letter from the FDA relating to the potential approval of Zimycan in the
United States during the first half of 2005. Zimycan has received marketing approval from
the Belgian Health Authorities and is the subject of a mutual recognition procedure for
approval in Europe.
    Sebazole: a 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
chest. In December 2004, we announced positive results from a Phase 3 pivotal clinical trial
for Sebazole. We expect to file an NDA for Sebazole in the United States during the third
quarter of 2005. 4




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
    Hyphanox: an oral therapeutic for the treatment of fungal infections, including vaginal
candidiasis, commonly known as vaginal yeast infection, and onychomycosis, commonly known as
nail fungus. We are currently conducting a Phase 3 pivotal clinical trial for Hyphanox for
the treatment of vaginal candidiasis to support applications for marketing approval in the
United States and Europe. We expect to complete this trial during the second quarter of
2005. We expect to commence two Phase 3 clinical trials for Hyphanox for the treatment of
onychomycosis during the second quarter of 2005.
    Liarozole: an oral therapeutic for the treatment of the group of conditions known as
congenital ichthyosis, a rare genetic disease characterized by dryness and scaling of the
skin. We expect to commence a Phase 2/3 clinical trial for Liarozole for the treatment of
the lamellar form of congenital ichthyosis during 2005. Both the FDA and the Commission for
the European Community have granted Liarozole orphan drug status for the treatment of
congenital ichthyosis. We have four other product candidates in earlier stages of clinical development for the
treatment of a range of dermatological conditions, including acne, psoriasis and fungal infections.
Our product pipeline also includes product candidates in preclinical development, as well as two
other product candidates that are marketed by third parties in some countries outside the United
States and Europe, which we would reformulate prior to initiating clinical trials. 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. We are currently conducting a screening program to
search for new product candidates in the field of dermatology. Our management team consists of a number of experienced pharmaceutical industry executives and
recognized experts in dermatological drug discovery, development and commercialization. We were
founded in 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 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. 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. Skin is a complex system composed of three major layers:  
    the epidermis is a protective layer and contains melanin, which is the pigment that gives
skin its color and protects it against the harmful effects of the sun;
    the dermis contains nerves, blood vessels, hair follicles and many of the functional
glands of the skin, including sweat glands and oil producing glands, known as sebaceous
glands; and
    the subcutaneous tissue is a layer of fat that helps insulate the body from heat and
cold. 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. 5




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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 harmful side effects. Our Business Strategy Our strategy is to develop a portfolio of innovative products that address major medical needs
in the treatment of dermatological diseases and disorders in order to become a global leader in the
discovery, development and commercialization of prescription pharmaceutical products to treat these
diseases and disorders. To achieve our goal, we intend to: Aggressively pursue the development and regulatory approval of our product candidates.We are
committing substantial resources towards completing development of, and obtaining regulatory
approvals for, our product candidates in the United States and in other markets worldwide. 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
plan to build our own sales force to market our products directly to dermatologists and other
target physicians in the United States and Canada. To accelerate global market penetration of our
products, we have entered into, and will continue to seek, collaborations with third parties
outside the United States and Canada. Maintain a diverse portfolio of product candidates.We are developing a product portfolio
that includes product candidates at various stages of preclinical and clinical development and is
not based on a single technology. 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
selective acquisitions of additional compounds and marketed products.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 we believe to be potentially superior to currently marketed
products and by seeking to selectively acquire marketed dermatological products that complement our
development and commercialization strategy. Product Development Pipeline We have eight product candidates in various stages of clinical development. In addition, we
have rights to other products, including two products that are marketed by third parties in some
countries outside the United


States and Europe which we would reformulate prior to initiating clinical trials. The FDA has not
approved any of our product candidates. We have based our assessment of the stage of development of our product candidates on our
ongoing development efforts, for certain products, and on the clinical trials that were performed
by or on behalf of Janssen Pharmaceutica Products, L.P. and its affiliates prior to our acquisition
of these product candidates in May 2002. Depending upon the scope and adequacy of the data from
these trials, directions or feedback we receive from regulatory agencies and our product
development strategy, we may need to perform additional preclinical studies and clinical trials
before proceeding to the next stage of clinical development or seeking regulatory approval. Many of
the previously performed clinical trials and our currently ongoing Phase 2a trials were and are
being conducted in Europe, where an investigational new drug application, or IND, or its foreign
equivalent, was not a prerequisite to performing pilot studies or early stage clinical trials. In
the United States, an IND must be filed with the FDA prior to performing clinical trials for each
drug candidate and for each indication. 6




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The following table summarizes our product candidates in clinical development, all of which we
plan to develop as prescription drugs. The names listed below are our current designations for
these programs and may not be the final approved trade name. Active Ingredients or
    
    Method of
    
    
    
    Stage ofProduct
    
    Class of Molecule
    
    Administration
    
    Indications
    
    DevelopmentZimycan
    
    miconazole
    
    Topical
    
    diaper dermatitis complicated by candidiasis
    
    NDA filedMRP-EuropeSebazole
    
    ketoconazole
    
    Topical
    
    seborrheic dermatitis
    
    Phase 3-completeHyphanox
    
    itraconazole
    
    Oral
    
    vaginal candidiasis
    
    Phase 3-ongoingonychomycosis
    
    Phase 3-plannedLiarozole
    
    RAMBA class
    
    Oral
    
    congenital ichthyosis (lamellar)
    
    Phase 2/3-plannedRambazole
    
    RAMBA class
    
    Oral
    
    psoriasis
    
    Phase 2a-ongoingnodular acne
    
    Phase 2a-ongoingRambazole
    
    RAMBA class
    
    Topical
    
    dermatological indications
    
    Phase 2a-plannedAzoline
    
    triazole antifungal
    
    Oral
    
    fungal infections
    
    Phase 2a-completeHivenyl
    
    H1 antihistamine
    
    Oral
    
    dermatological indications
    
    Phase 2a-ongoing
 Later Stage Product Candidates Zimycan.Zimycan is a topical ointment with an active ingredient of 0.25% miconazole, an
antifungal agent, in a zinc oxide and petrolatum base. We are developing Zimycan for use in the
treatment of infants with diaper dermatitis complicated by candidiasis, which is an inflammatory
disease in which an infants diaper rash is complicated with an infection by a yeast called
Candida. Candidayeasts thrive in the warm, moist conditions typically found in an infants diaper.
Miconazole is an antifungal agent that treats fungal infections such as those caused by Candida. In
the United States, there currently is no prescription drug specifically approved to treat diaper
dermatitis complicated by candidiasis. Product Background.Affiliates of Johnson & Johnson Consumer Companies, Inc. have received
regulatory approval for this product for the treatment of diaper dermatitis and market it under the
brand names Daktozin and Bebektin in some countries outside the United States. In August 1998, an NDA for marketing approval for the broad indication of diaper dermatitis,
without the restriction to diaper dermatitis complicated by candidiasis, was filed with the FDA. In
connection with its review, the FDA issued not approvable letters for the broad indication of
diaper dermatitis and requested an additional clinical trial focused specifically on infants with
diaper dermatitis complicated by candidiasis. We have completed the additional Phase 3 clinical
trial requested by the FDA and, based on the positive results described below, we filed an
amendment to this NDA in November 2004. Clinical Development.In August 2004, we announced results of a Phase 3 pivotal clinical
trial conducted in the United States and Latin America for the use of Zimycan in the treatment of
infants and children with proven diaper dermatitis complicated by candidiasis. The double-blind, vehicle-controlled study, which was conducted at 20 sites in the United
States and Latin America, included 236 children under the age of three years who were diagnosed
with diaper dermatitis that was complicated by the presence of Candida. These children were treated
for seven days with either the placebo vehicle, consisting of zinc oxide plus petrolatum, or with
Zimycan. The vehicle used in this study is generally recognized as the standard of care for
uncomplicated diaper dermatitis. The measurement used to assess the success of these trials, known
as the primary efficacy endpoint, was overall cure at day 14, one week after the end of treatment.
Overall cure was defined as eradication of the fungus and complete clearing of all signs and
symptoms of the disease. 7




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In the study, Zimycan achieved statistical significance compared to vehicle for all primary
and secondary endpoints. A clinical trial result is statistically significant if it is unlikely to
have occurred by chance. The statistical significance of clinical trial results is determined by a
widely used statistical method that establishes the p-value of the results. A p-value of 0.05 or
less for clinical trial results is generally considered by regulatory authorities as indicating
statistically significant results for evidence of effectiveness. The overall cure rates from this study are summarized in the table below: Overall Cure Rates at Day 14(7 Days after the End ofTreatment)Zimycan
    
    
    23
    %Vehicle
    
    
    10
    %p-value
    
    
    .005
 As indicated in the table, the results of the study were statistically significant with a
p-value of 0.005. More than twice the percentage of patients treated with Zimycan reached the
primary endpoint as compared with patients treated with the vehicle. We also performed a
subanalysis on the data from this trial that showed that at the end of the seven-day treatment
period, the average reduction in the signs and symptoms score was 72% in infants treated with
Zimycan compared to 25% in infants treated with the vehicle ointment. In the study, both Zimycan and the vehicle were well tolerated. There were no serious adverse
events in either group nor were there adverse events related to treatment in either group. The
non-serious adverse events were evenly distributed between the groups and were considered typical
of this patient population. Regulatory Strategy.In November 2004, we filed with the FDA an amendment to the Zimycan NDA
seeking marketing approval for Zimycan for the treatment of diaper dermatitis complicated by
candidiasis in infants and children. We expect to receive a first action letter from the FDA
relating to the approval of Zimycan during the first half of 2005. Zimycan has received marketing approval from the Belgian Health Authorities and is the subject
of a mutual recognition procedure in Europe. The mutual recognition procedure has been completed
in the following eight countries: Austria, Denmark, Finland, Greece, Luxemburg, the Netherlands,
Portugal and Sweden meaning that these countries have indicated they are prepared to grant
marketing authorization. In the remaining European countries which we had included in our initial
MRP filing, including the United Kingdom, Germany and Spain, we expect to make an additional MRP
filing containing additional clinical data to address questions raised by the regulatory
authorities in those countries. Proprietary Rights.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 and zinc
oxide contained in Zimycan and methods of treating diaper dermatitis. The United States patent
expires in 2007. We also have a license to corresponding patents in Europe, Japan and other foreign
countries. The issued patents and any additional patents issuing from the patent applications in
Europe, Japan and other foreign countries will expire in 2005. The active ingredient of Zimycan,
miconazole, is off patent. Sebazole.Sebazole is a topical formulation of 2.0% ketoconazole, an antifungal agent, in a
waterless gel that we are developing as a once daily treatment for seborrheic dermatitis.
Seborrheic dermatitis is a type of eczema that is characterized by a red, scaly, itchy rash
primarily occurring on the face, scalp, behind the ears and in the middle of the chest. 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 Sebazole to deliver the benefits of ketoconazole with
the advantages of our waterless gel. Product Background.We are developing Sebazole as part of our program to develop a once daily
treatment for seborrheic dermatitis using our waterless gel. The program initially focused
primarily on the gel containing a combination of 2.0% ketoconazole and 0.05% of the steroid
desonide in addition to Sebazole, which does not contain a steroid. 8




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Clinical Development.In November 2003, we completed two Phase 3 clinical trials which
enrolled more than 900 patients in approximately 50 locations in the United States and Europe. Each
trial compared the safety and efficacy of Sebazole, the gel containing the combination of 2.0%
ketoconazole and 0.05% desonide, the gel containing 0.05% of the steroid desonide and a placebo
consisting of our gel with no active ingredients. Patients were treated once daily for a period of
two weeks. The primary efficacy endpoint in these trials was the proportion of patients that were
effectively treated at day 28, which was 14 days following the end of treatment. Effectively
treated for the purpose of these Phase 3 clinical trials means a patient was cleared or almost
cleared of seborrheic dermatitis. We initially designed the trials primarily for the product
containing both ketoconazole and the steroid and, as a result, we conducted the trials following
FDA regulations for combination product development. However, based on the results of these
clinical trials, we determined that Sebazole was the stronger product candidate. In both trials,
Sebazole achieved the primary efficacy endpoint versus the vehicle gel with statistical
significance. We found Sebazole to be comparable to our waterless gel containing desonide and to
the combination of ketoconazole with desonide, suggesting that adding a steroid to the topical
regimen does not provide additional benefit at 14 days following treatment. In these trials,
Sebazole was well tolerated, with no serious drug-related adverse events reported. Upon review of the results from these trials, the FDA requested that we perform one additional
Phase 3 pivotal clinical trial of Sebazole. We completed this trial in December 2004. In this
trial, we enrolled 459 patients in 24 locations in the United States. The trial compared the safety
and efficacy of Sebazole to a placebo consisting of our gel with no active ingredient. Patients
were treated once daily for a period of two weeks. The primary efficacy endpoint was the same as in
on our two earlier Phase 3 trials  the proportion of patients that were effectively treated at day
28, which was 14 days following the end of treatment. In this trial, Sebazole was well tolerated,
with no serious drug-related adverse events reported. The results of the primary efficacy endpoint from all three Phase 3 trials of Sebazole are
summarized in the table below: Percentage of Patients Effectively Treated at Day 28(14 Days after the End of Treatment)Study (location)
    
    Sebazole
    
    
    Vehicle
    
    
    p-valuePivotal (United States)
    
    
    25
    %
    
    
    14
    %
    
    
    0.001Supportive (United States)
    
    
    28
    %
    
    
    7
    %
    
    
    <0.001Supportive (Europe)
    
    
    37
    %
    
    
    22
    %
    
    
    0.021
 As indicated in the table, the results of each trial were statistically significant. In
addition, in our pivotal trial, the results with respect to the secondary efficacy endpoint for
mean change from baseline for scaling were statistically significant. The results with respect to
the secondary efficacy endpoint for redness and itching were better as compared to vehicle alone
but were not statistically significant. We also performed a cumulative irritation patch study in
volunteers in which we observed that Sebazole was approximately five times less irritating than a
ketoconazole cream. Additionally, we are currently conducting a clinical study, for which enrollment is complete,
to assess the long-term safety of Sebazole for up to one year of intermittent use. In January 2005,
the FDA informed us that we should submit data for six months of intermittent use from this study
at the time of the initial filing of our Sebazole NDA. The FDA also asked us to perform a study for
Sebazole known as a percutaneous absorption study, which measures the amount of a drugs
absorption, if any, into the bloodstream through the skin. The FDA requested that we submit data
from this study at the time of the initial filing of our Sebazole NDA. Regulatory Strategy.Based on the positive results of these three Phase 3 clinical trials, we
expect to file an NDA with the FDA seeking marketing approval for Sebazole for the treatment of
seborrheic dermatitis during the third quarter of 2005. Proprietary Rights.We have an exclusive, royalty-free license in the field of dermatology to
a United States patent application claiming specific formulations of ketoconazole in a waterless
gel. Any patent issued in the United States from this application would expire in 2018. We also
have an exclusive, royalty-free license to corresponding patent applications in Europe, Japan and
other foreign countries. Any patents issued from the patent applications in Europe, Japan and other
foreign countries would expire in 2019. The active ingredient of Sebazole, ketoconazole, is off
patent. 9




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Hyphanox.Hyphanox is an oral formulation of itraconazole, an antifungal agent that we are
developing for the treatment of various fungal infections, including vaginal candidiasis, and
onychomycosis. Itraconazole is effective in treating these fungal infections. 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, but not for the treatment of vaginal candidiasis. Sporanox is approved for
vaginal candidiasis and onychomycosis in Europe. 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 will allow for more convenient once daily dosing and provide for higher bioavailability
and less inter-patient variability. 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 makes it possible to formulate itraconazole into tablets.
We obtained the rights to Janssens tablet formulation under our license agreements. In the fourth quarter of 2003, we conducted a bioequivalence study of Hyphanox relative to
Sporanox on 52 subjects. Bioequivalence between different formulations of a drug exists when the
bioavailability of one formulation relative to the other formulation is within a specified
regulatory range. Bioavailability is a measure of the degree to which a drug becomes available to
the bloodstream after administration. Based on data from this study, the bioavailability of
Hyphanox relative to Sporanox is slightly above the upper limit of the regulatory range to
establish bioequivalence. In addition, in this bioequivalence study, we observed that there was lower inter-patient
variability in itraconazole plasma levels in subjects taking Hyphanox compared to subjects taking
Sporanox. This may help us to differentiate Hyphanox, if approved, from other itraconazole products
such as Sporanox, since decreased variability between subjects could result in greater consistency
in the delivery of the active ingredient, itraconazole, in a patients body. Clinical Development.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. We expect to enroll approximately 1,200 women
in the trial, approximately 800 of whom will be measured for clinical and mycological cure rates 25
days after treatment. In this trial, we will be required to demonstrate that Hyphanox is not
clinically inferior to fluconazole, the active ingredient in Diflucan marketed by Pfizer. We
established the trial design after discussions with the FDA. In the first half of 2005, we plan to
initiate two Phase 3 pivotal clinical trials using pulse therapy designed to test a once daily
dosage of two 200 mg tablets of Hyphanox for the treatment of onychomycosis. Regulatory Strategy.If our ongoing Phase 3 clinical trial of Hyphanox in the treatment of
vaginal candidiasis is successful, in the second half of 2005, we expect to file an NDA with the
FDA seeking marketing approval for Hyphanox for the treatment of vaginal candidiasis. If our
planned Phase 3 clinical trials of Hyphanox in the treatment of onychomycosis are successful, we
expect to file an NDA with the FDA seeking marketing approval for Hyphanox for the treatment of
onychomycosis. 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. 10




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Janssen Option.Janssen has an exclusive option to acquire the right to commercialize
Hyphanox on a region-by-region basis. In order to permit Janssen to exercise this right, we are
obligated to notify them if we are able to manufacture Hyphanox batches that are reproducible and
bioequivalent to Janssens melt extrusion formulation or Sporanox or if we prove clinical efficacy
in subsequent Phase 3 clinical trials. Based on the data from the bioequivalence study described
above, the bioavailability of Hyphanox relative to Sporanox is slightly above the upper limit of
the regulatory range to establish bioequivalence. Accordingly, our study did not demonstrate
bioequivalence between Hyphanox and Sporanox and thus did not trigger the Janssen option. However,
this option would be triggered if any subsequent study demonstrates bioequivalence or if our Phase
3 clinical trials for Hyphanox demonstrate clinical efficacy. Please see Johnson & Johnson
License AgreementsAdditional Terms Applicable to Hyphanox for a further description of Janssens
option. Liarozole.Liarozole is our first product candidate based on a class of molecules known as
retinoic acid metabolism blocking agents, or RAMBAs. We are developing Liarozole as an oral
treatment for the group of conditions known as congenital ichthyosis. Congenital ichthyosis is a
rare genetic disease, affecting one in 6,000 people in the United States. The disease is
characterized by severe dryness and scaling of the skin, with the scaling often occurring over
large areas of the body. There is no prescription drug currently approved in the United States that
is indicated for the treatment of congenital ichthyosis. 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. We believe that one of the potential advantages
of Liarozole and other RAMBAs over synthetic retinoids may be the reduction or absence of long-term
risk for birth defects. Because of the risk of birth defects arising from the tissue retention of
synthetic retinoids, long-term contraception is strongly recommended in women after the use of
these agents. Preclinical studies conducted in rats dosed with Liarozole showed no birth defects in
pups conceived one week after completion of a one week treatment with Liarozole. In contrast, after
treatment is completed with acitretin, the active ingredient in Soriatane, there is a risk of birth
defects for several months. Product Background.Liarozole was originally developed for the treatment of prostate cancer
and was tested in clinical trials at various doses of up to 600 mg per day. In these clinical
trials, subjects treated with higher levels of Liarozole experienced serious toxic side effects as
is often the situation with anti-cancer therapies. However, because subjects in these trials
exhibited retinoid-like effects in the skin, a development program was started to explore the
therapeutic potential of Liarozole at lower doses in a variety of retinoid-responsive diseases,
including congenital ichthyosis. To date, Liarozole has been the subject of the Phase 2 and Phase 3 clinical trials described
below. However, no assessment of the efficacy or safety of a product candidate can be considered
definitive until all clinical trials needed to support a submission for marketing approval are
complete. Success in earlier clinical trials does not mean that subsequent trials will confirm the
earlier findings. In a Phase 2 clinical trial of Liarozole for the treatment of congenital ichthyosis, that was
conducted prior to our acquisition of rights to Liarozole, 11 of 12 subjects that were treated with
a twice daily 150 mg dosage of oral Liarozole showed marked improvement. The other subject showed
moderate improvement. In addition, in a Phase 3 clinical trial of Liarozole and acitretin, 15 of
the 32 subjects with severe ichthyosis were treated with a twice daily 75 mg dosage of Liarozole.
In this trial, Liarozole demonstrated similar efficacy as acitretin and was well tolerated. Clinical Development.We performed a retrospective review of the side effects observed in
people treated with Liarozole at doses of up to 600 mg per day. The results of this review suggest
that the serious side effects seen at higher doses are less likely to be encountered at our
proposed 150 mg per day dose for dermatological use. 11




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Regulatory Strategy.Both the FDA and the Commission for the European Community have granted
Liarozole orphan drug status for the treatment of congenital ichthyosis. We have had discussions
with the European Medicines Agency for the Evaluation of Medicinal Products, or EMEA, and the FDA
concerning clinical requirements for us to obtain marketing approval for Liarozole for the
treatment of congenital ichthyosis. In this regard, we plan to conduct a Phase 2/3 clinical trial
in the United States, Europe and other countries to evaluate both the appropriate dose and efficacy
of Liarozole. The specific type of congenital ichthyosis to be studied is expected to be lamellar
ichthyosis. We expect to begin this trial in 2005. Because of its orphan drug status, if Liarozole
is the first product candidate to receive FDA approval for congenital ichthyosis, it will be
entitled to orphan drug exclusivity. This means that the FDA may not approve any other application
to market the same drug for the same indication for a period of seven years, except in limited
circumstances, such as a showing of clinical superiority or improved safety to the product with
orphan exclusivity. Proprietary Rights.We have an exclusive, royalty-free license in the field of dermatology to
United States patents claiming the chemical compound Liarozole, pharmaceutical formulations
containing Liarozole and methods of treatment with Liarozole. The United States patents claiming
the chemical compound Liarozole and pharmaceutical formulations containing Liarozole expire in
2006. The United States patent claiming methods of treatment for congenital ichthyosis using
Liarozole as a RAMBA expires in 2009. We also have an exclusive, royalty-free 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 2007 through 2009. Earlier Stage Clinical Candidates Our product development pipeline includes four product candidates that are in earlier stages
of clinical development. All of these product candidates are based on intellectual property
licensed by 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
and fungal infections. 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 Phase 1
clinical trials and our available resources. The preliminary observations of efficacy and safety
from any of our preclinical or clinical trials for our earlier stage product candidates are not
necessarily indicative of the results that may be demonstrated in future clinical trials. We will
need to conduct significant additional preclinical or clinical trials prior to seeking marketing
approval for our earlier stage product candidates. Rambazole.Rambazole is our second product candidate based on the RAMBA class of molecules.
We are developing an oral formulation of Rambazole for the treatment of psoriasis and severe acne
and a topical formulation for dermatological indications, including common forms of acne and mild
to moderate 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. Product Background  Oral Rambazole.Various preclinical and clinical studies were conducted
on Rambazole prior to our acquisition of rights to this product candidate. In preclinical in vitro
and animal studies, oral Rambazole demonstrated potential effectiveness in the treatment of
psoriasis and acne. These studies also suggested that Rambazole is more selective and more active
than first generation RAMBA-based product candidates, such as Liarozole. An oral formulation of
Rambazole was tested in two Phase 1 clinical trials. One of these clinical trials was a single dose
escalation study, and the other was a multiple dose escalation study. In the multiple dose
escalation study, increased doses of Rambazole resulted in increased manifestation of skin effects
typical for retinoid therapy, including dry lips and skin. Product Background  Topical Rambazole.In preclinical in vitroand animal studies, topical
Rambazole demonstrated potential effectiveness in the treatment of psoriasis, acne and
photo-damage. In addition, animal studies conducted with RAMBAs indicate that topical RAMBA
treatment may produce the same therapeutic results as retinoic acid treatments but potentially with
less irritation. However, as with any study performed on animals, this data is not necessarily
indicative of the results that may be demonstrated in future clinical trials. A Phase 2 clinical
trial for acne compared 13 subjects treated with a topical formulation of Rambazole to 13 subjects
treated with a placebo. 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
placebo. In addition, topical Rambazole was well tolerated, with no serious drug-related adverse
events reported. 12




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Clinical Development.We are currently conducting 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. Each study will enroll approximately 17 subjects. The goal of these studies is to
determine safety and preliminary indications of effectiveness of oral Rambazole in the treatment of
both psoriasis and severe or nodular acne. A review of initial Phase 2a trial data from 17 patients
with moderate to severe psoriasis demonstrated a reduction in the psoriasis area severity index,
commonly known as PASI score, by approximately 50% in patients treated with 1mg once daily for
eight consecutive weeks. These PASI scores were measured at week 10, two weeks after stopping the
treatment. There were no serious treatment-related adverse effects reported, while non-serious side
effects experienced by this limited patient group included dryness of skin and lips. Regulatory
Strategy.Based on these data, in mid-2005, we plan to submit an
IND or its European equivalent necessary for us to commence Phase 2b clinical trials of oral
Rambazole for psoriasis. In addition, in 2005, we plan to initiate a Phase 2a clinical trial in
Europe to evaluate the effectiveness of topical Rambazole in mild to moderate acne. Azoline.Azoline is an antifungal agent that we are developing as an oral treatment for skin
and mucosal fungal infections. 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. We have completed a one week Phase 1 clinical trial for Azoline in
two different dose strengths. The results of this trial indicate that at the doses tested, Azoline
has a half-life in the body of approximately 81 hours, which is nearly three times longer than that
of itraconazole. As a result, we believe that Azoline may be an effective short course oral
treatment for fungal infections. In this trial, Azoline was well tolerated, with no serious drug-
related adverse events reported. We recently conducted 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 dermatitis. In these trials, at day 28, more than three weeks after
treatment, patients treated for one day demonstrated response rates of 60% and patients treated for
three or five days demonstrated clinical response rates (percent reduction in overall signs and
symptoms) of between 78% and 100%, depending on the skin condition treated. There were no serious
treatment-related adverse effects reported. Based on this data, we plan to submit an IND to the FDA
and commence Phase 2b clinical trials of Azoline in the United States during 2005. 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 and those associated
with poison ivy, which may not cause 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. We are currently conducting a Phase 2a clinical trial in Europe
for Hivenyl. Other Product Candidates One of our clinical product candidates, Atopik, is currently undergoing reformulation and will
require additional preclinical evaluation. In addition, we have rights to two other products,
ketanserin and oxatomide, that are marketed by third parties in some countries outside the United
States and Europe which we would reformulate prior to initiating clinical trials. Atopik.Atopik is a PDE4 inhibitor meaning that it helps prevent the bodys production of an
enzyme known as PDE4 that is associated with some types of skin reactions. We are developing Atopik
as a topical treatment for eczema, which is a group of inflammatory skin conditions. In a pilot
clinical study, Atopik reduced inflammatory response to stimuli that cause dermatitis. A second
study conducted by us during 2004 did not show the same results. We are working on an optimized
topical formulation of Atopik that seeks to minimize systemic absorption while maintaining
effectiveness. We plan to complete this reformulation prior to pursuing further clinical
development of this product candidate. 13




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Ketanserin.Ketanserin is a topical serotonin 2 antagonist that an affiliate of Janssen
Pharmaceutica Products, L.P. developed and markets in some countries outside the United States and
Europe as a wound healing agent for the treatment of chronic skin ulcers. We plan to reformulate
ketanserin prior to pursuing further clinical development for the treatment of diabetic and
arterial ulcers and serious cracking of the skin. We are currently conducting a placebo-controlled
pilot clinical study with ketanserin for the treatment of anal fissures. Oxatomide.Oxatomide is a topical histamine, serotonin and leukotriene antagonist that an
affiliate of Janssen Pharmaceutica Products, L.P. developed and markets in some countries outside
of the United States and Europe for the prevention and treatment of allergies. In preclinical
studies, a topical formulation of oxatomide demonstrated early indications of effectiveness in the
treatment of pain and itch. We plan to reformulate oxatomide as a topical ointment prior to
pursuing further clinical development for the treatment of itch associated with various skin
conditions. We have completed an open-label pilot clinical study with oxatomide for the treatment
of atopic eczema in 2004. Based upon the encouraging results of this study, we are evaluating the
next steps to take in the development of this product candidate. 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. Members of our management team have
worked extensively with these compounds prior to the formation of our company. 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. In October 2002, we
entered into an agreement with a third party to obtain an exclusive, worldwide license, with the
right to grant sublicenses, under the patents and know-how related to Ecalcidene to research,
develop and commercialize products containing Ecalcidene. In recent preclinical studies that we
conducted, we were not able to replicate some of the results previously seen with Ecalcidene. As a
result, we are likely to discontinue the development of Ecalcidene. Johnson & Johnson License Agreements In May 2002, we licensed our initial portfolio of product candidates, other than Ecalcidene,
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 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 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. 14




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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. 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:  
    Zimycan 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.
    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. 15




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We triggered this right of first negotiation with respect to Sebazole, Liarozole and
ketanserin by indicating our intention to commercialize these product candidates outside the United
States through third-party arrangements. The 90-day offer period for these product candidates in
this territory has expired. Therefore, if we receive marketing approvals, we have the exclusive
right to commercialize Sebazole, 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 intend to commercialize these four 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 Zimycan 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. The 90-day offer period for Zimycan
has expired. Therefore, if we receive marketing approvals, we have the exclusive right to
commercialize Zimycan, either by ourselves or with a third party, in all such territories. 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. Additional Terms Applicable to Hyphanox The following is a summary of agreement terms that are unique to Hyphanox: Royalties.The license is royalty free unless we decide to use a third party to commercialize
Hyphanox, in which case 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 license is exclusive and worldwide. Janssen Option.Janssen has an exclusive option to acquire the right to commercialize
Hyphanox on a geographic region-by-region basis. We are obligated to notify Janssen if we are able
to manufacture Hyphanox batches that are reproducible and bioequivalent with the Janssen melt
extrusion formulation or Sporanox or if we prove clinical efficacy in subsequent Phase 3 clinical
trials. Janssen has 90 days following its receipt of this notice to inform us if it wishes to
exercise its option and, if so, for which territories. If Janssen exercises its option, we will
enter into a license agreement in a form that we have already negotiated pursuant to which Janssen
will become obligated to:  
    pay us an up-front license fee and a regulatory milestone payment;
    reimburse us for our reasonable development costs related to Hyphanox; and
    pay us a royalty on net sales of Hyphanox, including a provision for minimum royalties by territory. As described elsewhere in this document, because the data from our bioequivalence study of
Hyphanox relative to Sporanox indicate that the bioavailability of Hyphanox relative to Sporanox is
slightly above the upper limit of the regulatory range for bioequivalence, the study did not
demonstrate their bioequivalence. As a result, our bioequivalence study did not trigger this
option. However, this option may be triggered if any other study we conduct demonstrates
bioequivalence or if our Phase 3 clinical trials for Hyphanox demonstrate clinical efficacy. 16




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We retain the right to commercialize Hyphanox in each of the territories of the world for
which Janssen does not exercise its option. If we commercialize Hyphanox through a licensee or
sublicense in any country in which we retain commercialization rights, we are obligated to pay
Janssen a royalty on our net sales of Hyphanox. If we distribute Hyphanox ourselves or use a
contract marketing or sales organization to distribute Hyphanox in any country in which we
retain commercialization rights, we are not required to pay Janssen a royalty. If we do not
enter into a commercialization agreement with a third party during a specified period following the
90-day period after we provide the notice to Janssen described above, Janssen is entitled to
specified rights of first negotiation. 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 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 Zimycan, Sebazole, 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 provides for an initial fee of
500,000, or approximately
$650,000, which we received in January 2005, and we may receive up to an additional 600,000, or
approximately $780,000, based on the achievement of certain regulatory and sales milestones. 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. Patent Protection and Intellectual Property; 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. 17




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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 later stage products 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 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. Orphan Drug Designation Some jurisdictions, including Europe and the United States, may designate drugs for relatively
small patient populations as orphan drugs. The FDA and the Commission for the European Community
have granted Liarozole orphan drug status for the treatment of congenital ichthyosis. The FDA
grants orphan drug designation to drugs intended to treat a rare disease or condition that affects
fewer than 200,000 individuals in the United States or more than 200,000 individuals in the United
States and for which there is no reasonable expectation that the cost of developing and making
available in the United States a drug for this type of disease or condition will be recovered from
sales in the United States for that drug. In the United States, orphan drug designation must be
requested before submitting an application for marketing approval. Orphan drug designation does not
convey any advantage in, or shorten the duration of, the regulatory review and approval process. If
a product which has an orphan drug designation subsequently receives the first FDA approval for the
indication for which it has such designation, the product is entitled to orphan drug exclusivity,
which means the FDA may not approve any other application to market the same drug for the same
indication for a period of seven years, except in limited circumstances, such as a showing of
clinical superiority to the product with orphan exclusivity. Also, competitors may receive approval
of different drugs or biologics for the indications for which the orphan product has exclusivity. Under European Union medicines laws, criteria for designation as an orphan medicine are
similar but somewhat different from those in the United States. Orphan medicines are entitled to
ten years of market exclusivity, except under certain limited circumstances comparable to United
States law. During this period of market exclusivity, no similar product, whether or not
supported by full safety and efficacy data, will be approved unless a second applicant can
establish that its product is safer, more effective or otherwise clinically superior. This period
may be reduced to six years if the conditions that originally justified orphan designation change
or the sponsor makes excessive profits. 18




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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. 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, in consultation with the FDA, reviews and approves the application for patent
term extension. We are considering applying for patent term extensions for some of our current
patents, to add patent life beyond the expiration date, depending on the expected length of
clinical trials and other factors involved in the filing of a new drug application. Pediatric Treatment Exclusivity The Best Pharmaceuticals for Children Act signed into law January 4, 2002, 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. On December 3, 2003, President Bush signed the
Pediatric Research Equity Act of 2003, or PREA, into law, authorizing 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 We have no experience in, and we do not own any facilities for, manufacturing products or our
product candidates. We have relied and will continue to rely on third-party contract manufacturers
to produce sufficient quantities of our product candidates for use in our preclinical studies and
clinical trials. Except as described below, we are not obligated to obtain our product candidates
from any particular third-party contract manufacturer, and we believe that we would be able to
obtain our product candidates from a number of third-party manufacturers at comparable cost. If any of our product candidates are approved, we plan to rely on third-party contract
manufacturers to produce sufficient quantities for large scale commercialization. Johnson & Johnson
and its affiliates has a right of first negotiation for the manufacture of our product candidates
in some circumstances, the terms of which are described above under the caption Johnson & Johnson
License Agreements. If we do enter into manufacturing arrangements with third parties, these
contract manufacturers will be subject to extensive governmental regulation. Regulatory authorities
in the markets which we intend to serve require that drugs be manufactured, packaged and labeled in
conformity with current Good Manufacturing Practices, or cGMPs. In this regard, we plan to engage
only contract manufacturers who have the capability to manufacture drug products in compliance with
cGMPs in bulk quantities for commercialization. 19




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Our product candidates include both oral and topical formulations and are produced through a
variety of manufacturing processes of varying degrees of difficulty. For example, Zimycan is
produced through a fairly common process, which combines miconazole in a zinc oxide and petrolatum
base, 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. The active
pharmaceutical ingredients of three of our later stage product candidates are generic and are
currently available from a number of suppliers. The active pharmaceutical ingredient of Liarozole
and a number of our earlier stage clinical candidates are proprietary. We are currently in the
process of negotiating contracts with third parties to develop and supply us with these active
pharmaceutical ingredients as well as finished products on commercial scale. Marketing and Sales We currently have no sales or distribution capabilities and limited marketing capabilities.
However, we have a Chief Commercial Officer with significant experience in sales and marketing
roles at large pharmaceutical companies. We have also hired, and plan to continue to hire,
additional experienced, qualified employees to our commercial team. In addition, we contracted with
a third party for logistics and distribution services. In order to commercialize any of our product
candidates, we must either continue to internally develop or acquire sales, marketing and
distribution capabilities, or make arrangements with third parties to perform these services for
us. In the United States and Canada, we plan to build our own sales force to market our product
candidates that receive marketing approval directly to dermatologists and other target physicians.
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. We are, however,
engaged in discussions with parties who could provide sales and distribution services for us as a
contract sales organization until we are able to build our sales force or until we have sufficient
products to market in the United States. If we initially use a contract sales organization, we may
transition the contract sales organization into a proprietary sales force. In general, should we
decide to enter into third-party distribution arrangements and marketing alliances for the
marketing and sale of any of our later stage product candidates 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. In addition, we have entered
into an agreement with a third party to distribute, if approved, our Zimycan product candidate to
health care institutions in the United States and Canada. We intend to market our products globally. We have entered into third-party distribution
arrangements and marketing alliances for some of our later stage product candidates with potential
collaborators and distributors for the major countries outside the United States and Canada in
addition to less significant markets. In addition to the agreement with Grupo Ferrer described
above, we have distribution agreements for Zimycan for the United Kingdom, Ireland, Israel, Turkey,
the territories administered by the Palestinian Authority and Scandinavia. We plan to enter into
similar third-party distribution arrangements and marketing alliances for our other products when
and if we determine that these products have progressed to later stages of development. Government Regulation Government authorities in the United States, at the federal, state, and local level, and
foreign countries extensively regulate, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and
export of our proposed products. 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. 20




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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 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. 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. 21




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Phase 1
    
    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. 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. 22




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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, 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.  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. 23




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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, is 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. 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. Our recently acquired Solagé® product faces competition 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. 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 product candidates are:  
    For Zimycan, in the treatment of diaper dermatitis complicated by candidiasis, 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.
    For Sebazole, 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 Hyphanox, in the treatment of vaginal candidiasis, Diflucan from Pfizer Inc., generic
fluconazole tablets, Sporanox from Janssen and generic itraconazole capsules. For Hyphanox,
in the treatment of onychomycosis, Sporanox from Janssen, Lamisil from Novartis AG and
Penlac from Dermik Laboratories.
    For Liarozole, in the treatment of congenital ichthyosis, Soriatane from Hoffmann-La
Roche Inc. and Connetics Corporation and over-the-counter topical moisturizers and
emollients.
    For oral Rambazole, in the treatment of acne, Accutane from Hoffman-La Roche and generic
manufacturers. For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La
Roche and Connetics, biologic agents such as Amevive from Biogen Idec Inc. and Raptiva from
Genentech, Inc., methotrexate from generic manufacturers. We also believe that many of the competitive products for our later stage product candidates
and Rambazole will similarly compete with our earlier stage product candidates because of the
indications for these product candidates. 24




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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, 2004, we had 64 employees, all of whom were full-time employees. Fourteen
of our employees hold Ph.D., M.D. or equivalent degrees. Of the total 64 employees, 43 are located
at our corporate headquarters in Princeton, New Jersey, 20 are located at the facility of our
subsidiary, Barrier Therapeutics, N.V. in Geel, Belgium and one is located in Canada. None of our
employees is represented by a collective bargaining arrangement, and we believe our relationship
with our employees is good. Trademarks We are seeking United States trademark registrations for our proposed trademarks Barrier
Therapeutics, Sebazole, Zimycan, Hyphanox, Rambazole and Hivenyl. Liarozole, Azoline and
Atopik are temporary designations. We are developing commercial names for Liarozole, Azoline and
Atopik product candidates. In connection with our acquisition of the Solagé® product, we acquired
the rights to the United States and Canadian trademark registrations for Solagé® Topical Solution. Available Information We maintain a website at www.barriertherapeutics.com. 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 by contacting our General Counsel at Barrier
Therapeutics, Inc., 600 College Road, Suite 3200, Princeton, NJ 08540. 25




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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 We are currently not a party to any material legal proceedings. 
 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 2004. OUR EXECUTIVE OFFICERS The following table identifies our current executive officers: Name
    
    Age
    
    PositionGeert Cauwenbergh, Ph.D
    
    
    51
    
    
    Chairman of the Board, Chief Executive
Officer and DirectorCharles T. Nomides
    
    
    48
    
    
    Chief Operating OfficerMarcel Borgers, Ph.D
    
    
    65
    
    
    Chief Scientific OfficerAlfred Altomari
    
    
    46
    
    
    Chief Commercial OfficerAnne M. VanLent
    
    
    57
    
    
    Executive Vice President, Chief Financial
Officer and TreasurerAlbert C. Bristow
    
    
    35
    
    
    General Counsel and Secretary
 Geert Cauwenbergh, Ph.D.is the founder of our company and has been our Chairman of the Board
and Chief Executive Officer since our inception in September 2001. 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. Charles T. Nomideshas been our Chief Operating Officer since July 2002. 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. Marcel Borgers, Ph.D.has been our Chief Scientific Officer and Chairman of our Scientific
Advisory Board since May 2002. Prior to joining us, from September 1969 to April 2000, Dr. Borgers
was the Vice President of Life Sciences for the Janssen Research Foundation. Dr. Borgers held the
Dr. Paul Janssen Chair in Cell Biology at the University of Antwerp from 1992 to 2002. Dr. Borgers
also has served as a professor at the Faculty of Medicine and Pharmaceutical Sciences of the Free
University of Brussels since 1994 and as a Professor of Cell Biology, Faculty of Medicine,
University of Maastricht, the Netherlands since 1991. He received his doctorate in sciences from
the University of Paris, Faculty of Sciences. Alfred Altomarihas been our Chief Commercial Officer since August 2003. 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 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. 26




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Anne M. VanLenthas 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. Albert C. Bristowhas 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, 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. 
 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. We began
trading on the NASDAQ National Market on April 29, 2004. 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
    
    
    Low2004Second Quarter (Commencing April 29, 2004)
    
    $
    15.75
    
    
    $
    10.86Third Quarter
    
    $
    15.00
    
    
    $
    8.50Fourth Quarter
    
    $
    18.11
    
    
    $
    11.70
 As
of March 23, 2005 there were 34 holders of record of our Common Stock. On March
23, 2005, the last reported sale price of our common stock as reported on the NASDAQ National
Market was $15.46 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. Recent Sales of Unregistered Securities In the preceding three years, we have issued the following securities that were not registered
under the Securities Act of 1933, as amended (the Securities Act) (the option, share and price
numbers below give effect, where applicable, to the one-for-two reverse stock split of our common
stock, which was completed prior to the closing of our initial public offering, or IPO): Since our inception in September 2001, we have issued an aggregate of 837,750 shares of common
stock, par value $0.0001 per share. These shares include a total of 712,500 shares of common stock
issued between October 31, 2001 and February 20, 2002, at a purchase price per share of $0.002, for
a total of $1,425 in cash, a total of 110,000 shares of common stock issued between August 1, 2002
and October 24, 2002, at an average purchase price per share of $0.60, for a total of $66,000 in
cash. In addition, we issued a total of 15,250 shares of common stock issued upon the exercise of
outstanding options between February 4, 2004 and the IPO, at an average purchase price per share of
$2.29, for a total of $34,850 in cash. Since our inception, we have also issued an aggregate of 31,921,809 shares of preferred stock,
par value of $0.0001 per share. These shares include 8,333,333 shares of series A convertible
preferred stock issued on May 7, 2002 in exchange for intellectual property, patent applications
and licenses valued at approximately $25,000,000, 7,716,670 and 7,666,666 shares of series B
convertible preferred stock issued on May 3, 2002 and May 7, 2003, respectively, at a purchase
price per share of $3.00, for a total of approximately $46,150,008, and 8,205,140 shares of series
C convertible preferred stock issued on October 23, 2003 at a purchase price per share of $3.90,
for a total of approximately $32,000,046. In connection with our IPO, all shares of preferred
stock were converted into common stock on a 2 shares of preferred for 1 share of common basis. 27




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No underwriters were involved in the foregoing sales of securities. The securities described
in this Item 5 were issued to United States investors in reliance upon the exemption from the
registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities
Act and Rule 506 of Regulation D promulgated thereunder relative to sales by an issuer not
involving any public offering, to the extent an exemption from such registration was required. All
purchasers of shares of our convertible preferred stock described above represented to us in
connection with their purchase that they were accredited investors and were acquiring the shares
for investment and not distribution, that they could bear the risks of the investment and could
hold the securities for an indefinite period of time. The purchasers received written disclosures
that the securities had not been registered under the Securities Act and that any resale must be
made pursuant to a registration or an available exemption from such registration. The issuance of stock options and the common stock issuable upon the exercise of such options
as described in this Item 5 were issued pursuant to written compensatory plans or arrangements with
the Registrants employees, directors and consultants, in reliance on the exemption provided by
Rule 701 promulgated under the Securities Act. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships, to such information. Use of Proceeds from Sales of Registered Securities On May 4, 2004, we closed the sale of 5,000,000 shares of our common stock in our initial
public offering (the Offering). The Registration Statement on Form S-1 (Reg. No. 333-112539)
(the Registration Statement) we filed to register our common stock in the Offering was declared
effective by the Securities and Exchange Commission on April 29, 2004. The Offering commenced as
of April 29, 2004 and did not terminate before any securities were sold. The offering was
completed and all shares were sold at an initial price per share of $15.00. The aggregate purchase
price of the Offering amount registered was $75,000,000. The managing underwriters for the Offering were Morgan Stanley & Co. Incorporated, Banc of
America Securities LLC and J.P. Morgan Securities Inc. We incurred expenses in connection with the
Offering of $7.05 million, which consisted of direct payments of: (i) $1.5 million in legal,
accounting and printing fees; (ii) $5.25 million in underwriters discounts, fees and commissions;
and (iii) $0.3 million in miscellaneous expenses. After deducting expenses of the Offering, we received net offering proceeds of approximately
$68 million. As of December 31, 2004, we held the $68 million proceeds, all of which are invested
in marketable securities. We intend to use these remaining proceeds to advance our product
candidates through preclinical and clinical trials, for commercialization of our products, for
general corporate purposes including acquisition or in-licensing of products or product candidates,
and for working capital. We regularly assess the specific uses and allocations for these funds. 
 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of, each of
our last four 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, 2004, 2003 and 2002 and for the period beginning on our inception and ending on December 31,
2001 have been audited by Ernst & Young LLP, independent certified public accountants. 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. 28




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Period FromSeptember 17,2001(inception) toYear Ended December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2004(in thousands, except share and per share data)Consolidated Statement of Operations Data:Revenues:Contract revenue
    
    $
    100
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100Grant revenue
    
    
    797
    
    
    
    367
    
    
    
    
    
    
    
    
    
    
    
    1,163Total revenues
    
    
    897
    
    
    
    367
    
    
    
    
    
    
    
    
    
    
    
    1,263Operating expenses:Research and development
    
    
    30,905
    
    
    
    17,485
    
    
    
    3,542
    
    
    
    
    
    
    
    51,931Sales and marketing
    
    
    4,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,310General and administrative
    
    
    7,164
    
    
    
    3,730
    
    
    
    1,532
    
    
    
    20
    
    
    
    12,446In-process research and development
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    25,000Total operating expenses
    
    
    42,379
    
    
    
    21,215
    
    
    
    30,074
    
    
    
    20
    
    
    
    93,687Loss from operations
    
    
    (41,482
    )
    
    
    (20,848
    )
    
    
    (30,074
    )
    
    
    (20
    )
    
    
    (92,424
    )Interest income
    
    
    1,409
    
    
    
    419
    
    
    
    275
    
    
    
    
    
    
    
    2,102Interest expense
    
    
    (37
    )
    
    
    (3
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (45
    )Loss before income tax benefit
    
    
    (40,110
    )
    
    
    (20,432
    )
    
    
    (29,804
    )
    
    
    (21
    )
    
    
    (90,367
    )Income tax benefit
    
    
    367
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    584Net loss
    
    
    (39,743
    )
    
    
    (20,215
    )
    
    
    (29,804
    )
    
    
    (21
    )
    
    
    (89,783
    )Preferred stock accretion
    
    
    (4,592
    )
    
    
    (8,432
    )
    
    
    (3,392
    )
    
    
    
    
    
    
    (16,417
    )Net loss attributable to common stockholders
    
    $
    (44,335
    )
    
    $
    (28,647
    )
    
    $
    (33,196
    )
    
    $
    (21
    )
    
    $
    (106,200
    )Basic and diluted net loss per share
    
    $
    (3.02
    )
    
    $
    (83.95
    )
    
    $
    (240.75
    )Weighted average shares used in computing
basic and diluted net loss per share
    
    
    14,677,710
    
    
    
    341,256
    
    
    
    137,889
 December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and marketable securities
    
    $
    89,081
    
    
    $
    53,776
    
    
    $
    18,144
    
    
    $
    89Working capital
    
    
    82,847
    
    
    
    51,682
    
    
    
    17,475
    
    
    
    62Total assets
    
    
    92,784
    
    
    
    56,971
    
    
    
    19,296
    
    
    
    107Deficit accumulated during the development stage
    
    
    (106,200
    )
    
    
    (61,865
    )
    
    
    (33,217
    )
    
    
    (21
    )Total stockholders equity (deficit)
    
    
    83,570
    
    
    
    (61,534
    )
    
    
    (33,198
    )
    
    
    (20
    )
 
 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 prospectus. Some of the information contained in this discussion and analysis or
set forth elsewhere in thisForm 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 section of thisForm 10-Kfor 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 discovery, development and commercialization of
pharmaceutical products in the field of dermatology. Our goal is to develop a portfolio of
innovative products that address major medical needs in the treatment of dermatological diseases
and disorders. We currently market Solagé® in the U.S. for the treatment of solar lentigines, a
common condition also known as age spots or liver spots, and for the broader indication
including related hyperpigmented lesions in Canada. Our product pipeline includes eight product
candidates in various stages of clinical development. Our four most advanced product candidates are
the following:  
    Zimycan: an ointment for the treatment of infants with diaper dermatitis complicated by
candidiasis, an inflammatory disease characterized by diaper rash complicated with an
infection by a yeast called Candida. 29




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
    Sebazole: a 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
chest.
    Hyphanox: an oral therapeutic for the treatment of fungal infections, including vaginal
candidiasis, commonly known as vaginal yeast infection, and onychomycosis, commonly known as
nail fungus.
    Liarozole: an oral therapeutic for the treatment of the group of conditions known as
congenital ichthyosis, a rare genetic disease characterized by dryness and scaling of the
skin. We were incorporated in September 2001 and commenced active operations in May 2002. We have
not generated any revenues from our product candidates. 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 offering in the
first quarter of 2005. Through December 31, 2004 we were a development stage enterprise. We have
incurred significant losses since our inception in 2001, as we have devoted substantially all of
our efforts to research and development activities, including clinical trials. As of December 31,
2004, we had a deficit accumulated during the development stage of $106.2 million. Our deficit
accumulated during the development stage has resulted primarily from our acquisition of the rights
to our product candidates, our research and development activities and preferred stock accretion.
We expect our operating losses to continue to increase as we do not expect to generate significant
revenues in the near future, we expect to continue to increase our research and development costs,
our costs of commercial operations are expected to increase, and we will continue to incur the
costs of being a public company. We expect to continue to spend significant amounts, including clinical trial costs, on the
development of our product candidates. We plan to seek marketing approvals for our products in
various countries throughout the world, particularly in the United States, Canada and Europe. We
expect our costs to increase significantly as we continue to develop and ultimately commercialize
our product candidates and acquired products, such as Solagé® . While we will be focusing on the
clinical development of our later stage product candidates in the near term, we expect to increase
our spending on earlier stage clinical candidates as well. We also plan to identify and develop,
either internally or through collaborative agreements, additional product candidates that address
major needs in dermatology through acquisitions or licenses of marketed dermatological products or
rights to potential new products and product candidates that would fit within our growth strategy.
Accordingly, we will need to generate significant revenues to achieve, and then maintain,
profitability. Drug development in the United States and most countries throughout the world is a process
that includes several steps defined by the FDA and similar regulatory authorities in foreign
countries. In the United States, the FDA approval process for a new drug involves completion of
preclinical studies and the submission of the results of these studies to the FDA, together with
proposed clinical protocols, manufacturing information, analytical data and other information in an
investigational new drug application, which must become effective before human clinical trials may
begin. Clinical development typically involves three phases of study: Phase 1, 2 and 3. The most
significant expenses associated with clinical development are the Phase 3 clinical trials as they
tend to be the longest and largest studies conducted during the drug development process. After
completion of clinical trials, a new drug application, or NDA, may be submitted to the FDA. In
responding to an NDA, the FDA may refuse to file the application, or if accepted for filing, the
FDA may grant marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval. In order to
commence clinical trials or marketing of a product outside the United States, we must obtain
approval of the applicable foreign regulatory authorities. Although governed by the laws and
regulations of the applicable country, clinical trials conducted outside the United States
typically are administered with a similar three-phase sequential process. The successful development of our product candidates is highly uncertain. We cannot reasonably
estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the
development of, or the period in which material net cash inflows are expected to commence from, any
of our product candidates due to the numerous risks and uncertainties associated with developing
drugs, including the uncertainty of:  
    the scope, rate of progress and expense of our clinical trials and other research and development activities;
    future clinical trial results;
    the expense of clinical trials for additional indications; 30




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
    the expense and timing of regulatory approvals;
    the expense of establishing clinical and commercial supplies of our product candidates
and any products that we may develop;
    the effect of competing technological and market developments; and
    the expense of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights. Research and development expenses and purchased in-process research and development expense,
in the aggregate, represented approximately 73% of our total operating expense for the year ended
December 31, 2004, 82% of our total operating expenses for the year ended December 31, 2003 and 95%
of our total operating expenses for the year ended December 31, 2002. Research and development
expenses consist primarily of costs incurred for the conduct of our clinical trials, manufacturing
development costs related to our clinical product candidates, personnel and related costs related
to our research and product development activities and outside professional fees related to
clinical development and regulatory matters. Purchased in-process research and development expense represents costs incurred for the
acquisition of our product candidates. During 2002, we expensed $25.0 million for in-process
research and development solely as a result of our entering into our principal license agreements.
Pursuant to these 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 in many countries throughout the world. This transaction was accounted for
as an acquisition of assets and consisted of several projects at various stages of development as
well as access to the classes of compounds claimed in the patents licensed to us, which we can
screen in our search for new product candidates in the field of dermatology. We acquired these
assets under licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer
Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., in exchange for the issuance of 8,333,333
shares of our series A convertible preferred stock, which were converted into 4,166,666 shares of
our common stock in connection with our initial public offering. During 2004, we incurred sales and marketing costs as we started to prepare for the launch of
our first product, subject to obtaining requisite marketing approvals. Sales and marketing costs
represented approximately 10% of our total operating expenses for the year ended December 31, 2004.
We had no sales and marketing expenses in 2003. We expect these costs to increase as we launch
acquired products and our product candidates which are subject to receiving regulatory approval. As
a result of our acquisition of Solagé® , we expect to incur sales and marketing costs related to
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 these costs to include marketing
expenses to prepare for the launch of our product candidates and acquired products, expenses
related to a sales organization for those regions in which we decide to market our products
ourselves and costs for marketing efforts to support third parties with whom we may collaborate in
the future in regions where we do not market directly. General and administrative expenses consist primarily of salaries and related expenses and
costs of general corporate activities, including legal and accounting fees, insurance and
consulting costs. General and administrative costs represented approximately 17% of our operating
expenses for the year ended December 31 2004, 18% of our total operating expenses for the year
ended December 31, 2003 and 5% of our total operating expenses for the year ended December 31,
2002. 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, if approved, 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 our research and development efforts;
    the timing and extent of our adding new employees and infrastructure; 31




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
    the timing of any contract, license fee or royalty payments that we may receive or be required to make; and
    the timing and outcome of our applications for regulatory approvals.
    the timing and extent of recognition of product and other revenue.
    the timing and extent of marketing and selling expenses. Recent Developments On February 15, 2005 we completed a follow-on offering of 2,000,000 shares of our common stock
which resulted in net proceeds to the Company of approximately $36 million, after payment of
underwriters discounts, commissions and other fees. In February 2005, we acquired the United States and Canadian rights to Solagé® (mequinol 2%,
tretinoin 0.01%) Topical Solution. Under the terms of the acquisition, Barrier made an initial
cash payment of $3 million and will make future payments totaling up to an additional $2 million,
if certain sales targets are met. We were assigned all U.S. and Canadian marketing authorizations,
patents, and trademarks for the product. The patent rights include U.S. and Canadian patents
covering Solagé® s pharmaceutical composition and methods of use until 2010. 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 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 prospectus, 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 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. Royalties from licensees are based on third-party
sales of licensed products and are recorded in accordance with contract terms when third-party
results are reliably measurable and collectibility is reasonably assured. 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. We use revenue recognition criteria in Staff Accounting Bulletin No. 104, Revenue Recognition
in Financial Statements and Emerging Issues Task Force (EITF) Issue 00-21 Revenue Arrangements
with Multiple Deliverables (EITF 00-21). 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. 32




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Grant revenues are recognized as the Company provides the services stipulated in the
underlying grant based on the time and materials incurred. Amounts received in advance of services
provided are recorded as deferred revenue and amortized as revenue when the services are provided.  In-process Research and Development The amount of any in-process research and development expense is generally determined based on
an analysis using risk-adjusted cash flows expected to be generated by products that may result
from in-process technologies that have been acquired. We review the project rights that we acquire
to determine the stage of their development, the probability of demonstrating in clinical trials
sufficient safety and efficacy for FDA approval and product risk factors inherent in the drug
development process. The product specific risk factors include the type of drug under development,
likelihood of regulatory approval, manufacturing process capability, scientific rationale,
preclinical safety and efficacy data, target product profile and development plans. The valuation
used to estimate in-process research and development expense requires us to use significant
estimates and assumptions that, if changed, may result in a different valuation for in-process
technology. In connection with our license agreements with Janssen Pharmaceutica Products, L.P., Johnson &
Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson
company, we reviewed the project rights that we acquired to determine the stage of their
development, the probability of demonstrating in our clinical trials sufficient safety and efficacy
for FDA approval and the technical milestones needed to be reached before commercialization is
possible. We determined as of the acquisition date that for each project there was significant risk
that our clinical trials may not demonstrate the levels of safety and efficacy needed for FDA
approval and that each project had significant milestones to reach before commercialization. We
also determined that all of the projects had no alternative future uses if they were not
successful. Accordingly, we classified each product as in-process research and development and
expensed their acquisition costs immediately. We valued the assets acquired based on the value of the consideration that Janssen
Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil
Pharmaceutical, Inc. received in the transaction. Concurrent with the transaction, we issued for
cash 15,333,336 shares of our series B convertible preferred stock, with similar characteristics to
our series A convertible preferred stock, to investors not related to us or these companies. Based
on the value of our series B convertible preferred stock, we valued the in-process research and
development at $25.0 million. Stock-based Compensation Stock-based compensation charges represent the difference between the exercise price of
options granted to employees and the fair value of our common stock on the date of grant for
financial statement purposes in accordance with Accounting Principles Board Opinion No. 25 and its
related interpretations. We recognize this compensation charge over the vesting periods of the
shares purchasable upon exercise of options. Should our assumptions of fair value change, the
amount recorded as intrinsic value may increase or decrease in the future. We recorded deferred stock-based compensation of $3.0 million and related amortization of $2.0
million during the year ended December 31, 2004. To date, we have recorded stock-based compensation
of $3.7 million and related amortization expense of $2.2 million. We are applying a graded vesting
amortization policy for our deferred compensation. This accelerated vesting method provides for
vesting of portions of the overall award at interim dates and results in higher compensation
expense in earlier years than straight-line amortization. Had we chosen to apply the straight line
method of amortization of deferred compensation, our stock compensation charge would have been $1.1
million lower for the year ended December 31, 2004. Stock-based compensation charges also include the periodic revaluation of stock options that
we have granted to non-employees, in accordance with the provisions of Statement of Financial
Accounting Standards No. 123 and Emerging Issues Task Force No. 96-18. Pursuant to this accounting
literature, equity instruments, such as options, are required to be recorded at the fair value of
the consideration received, or the fair value of the equity instrument issued, whichever may be
more readily measured. For grants to our non-employees, the fair value of the equity instrument
issued is more readily measured and we assign value to the options using a Black-Scholes
methodology. As required, we revalue these options 33




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over the period when earned in accordance with their respective terms. Should our input assumptions
change, for example, fair value of common stock at the measurement date, the fair value of our
non-employee consultant compensation will change. We recorded stock-based compensation expense totaling $756,000 for the year ended December 31,
2004, $107,000 for the year ended December 31, 2003 and $17,000 for the year ended December 31,
2002 in connection with the grant of stock options to our non-employees. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised 2004) Share-Based Payment,which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123® supersedes Accounting Principal Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows.
Generally, the approach to accounting in Statement 123® requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
as based on their fair values. Currently we account for these payments under the intrinsic value
provisions of APB No. 25. Statement 123® is effective for us beginning July 1, 2005. The
Statement offers several alternatives for implementation. At this time, our management has not made
a decision as to the alternative it may select. We are in the process of determining how the new
method of valuing stock-based compensation as prescribed by Statement 123® will be applied to
valuing stock-based awards granted after the effective date and the impact the recognition of
additional non-cash compensation expense related to such awards will have on our financial
statements. Results of Operations  Years Ended December 31, 2004 and December 31, 2003 Revenue.To date, our revenue has consisted primarily of grant revenue. This represents
income that we received under a grant from a Belgian governmental agency promoting technology in
the Flemish region of Belgium through research grants. Pursuant to the terms of the grant, we will
receive 1.8 million, or approximately $2.0 million, over a three-year period, to fund research on
early-stage, preclinical programs and compound screening. We are recognizing revenue as we perform
qualifying work under this grant. In addition, during the latter half of 2004, we recognized revenue related to a commercial
contract. We expect to continue to recognize revenue from certain contracts during the first half
of 2005. We expect that our revenue will fluctuate from year-to-year and quarter-to-quarter. We recognized grant revenue of $797,000 for the year ended December 31, 2004 and grant revenue
of $367,000 for the year ended December 31, 2003. Additionally, during the year December 31, 2004,
we recognized $100,000 from a collaboration agreement which is being ratably recognized over the
performance period. Research and Development Expenses.Below is a summary of our research and development
expenses for the years December 31, 2004 and 2003. Year endedDecember 312004
    
    
    2003(in thousands)Sebazole
    
    $
    5,750
    
    
    $
    5,016Hyphanox
    
    
    8,391
    
    
    
    4,864Zimycan
    
    
    1,778
    
    
    
    1,774Liarozole
    
    
    1,249
    
    
    
    334Other clinical stage products
    
    
    3,589
    
    
    
    671Research and preclinical stage products costs
    
    
    1,896
    
    
    
    713Internal costs
    
    
    8,251
    
    
    
    4,112Total research and development expenses
    
    $
    30,904
    
    
    $
    17,484
 34




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In the preceding table, research and development expenses are set forth in the following seven
categories:  
    Sebazolethird-party direct project expenses relating to the development of Sebazole and
our former product candidate, Seboride.
    Hyphanoxthird-party direct project expenses relating to the development of Hyphanox.
    Zimycanthird-party direct project expenses relating to the development of Zimycan.
    Liarozolethird-party direct project expenses relating to the development of Liarozole.
    Other clinical stage productsdirect project expenses relating to the development of our
other clinical stage product candidates and products in reformulation.
    Research and preclinical stage product costsdirect expenses relating to the development
of our research and preclinical product candidates and the screening of molecules to
identify new product candidates.
    Internal costscosts related primarily to personnel, as well as consulting, overhead and
other expenses related to our research and development activities. We do not allocate these
costs to specific projects as these costs relate to all research and development activities. Projects may be reclassified from a prior presentation according to its current stage of
development. Total research and development expenses for the year December 31, 2004 compared to the year
December 31, 2003 increased $13.4 million. During the year December 31, 2004 our research and
development costs related to Sebazole were comparatively flat with the two Phase 3 clinical trials
in the United States and Europe in 2003, compared with costs related to a confirmatory Phase 3
clinical trial for Sebazole, which commenced in the second quarter of 2004 and our long-term safety
study which commenced in the third quarter of 2004. Our costs for Hyphanox in the year December 31,
2004 are related to a Phase 3 pivotal clinical trial for the treatment of vaginal candidiasis,
which commenced in January 2004 and costs related to manufacturing. Our costs in the year December
31, 2003 for Hyphanox were primarily for the purchase of raw materials and related manufacturing,
as well as the costs of conducting a pilot bioequivalence study. Our costs related to Zimycan for
the year ended December 31, 2004 increased slightly due to the cost of 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. Our costs for Liarozole in 2004 are related to the cost of the review of clinical
data, clinical supplies and manufacturing of the active ingredient, and in 2003 for the
manufacturing of drug substance for clinical supplies. Internal costs in the year December 31, 2004 increased $4.1 million compared to the year
December 31, 2003. Personnel and related costs totaled $6.2 million for the year December 31, 2004,
an increase of $3.1 million over the corresponding period in 2003. This increase includes
amortization of deferred compensation of $730,000, which was $82,000 at December 31, 2003.
Additionally, headcount grew to 36 employees at December 31, 2004 from 24 employees at December 31,
2003. Other costs, which include consultants, overhead and other expenses, totaled $2.1 million, an
increase of $1.0 million compared to the corresponding period in 2003. We anticipate that research and development expenses will continue to increase as we further
advance our late stage product candidates through clinical development, including the higher cost
of Phase 3 clinical trials, and including long-term safety trials. In addition, we will begin to
incur additional expenses for our mid-stage pipeline as we move toward larger Phase 2 trials and to
devote additional resources to our earlier stage research and preclinical projects. We also expect
our personnel and related expenses for research and development to increase. 35




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Sales and Marketing Expenses.Sales and marketing expenses totaled $4.3 million for the
year December 31, 2004. We recorded no sales and marketing expenses in 2003. These costs include
personnel and related expenses of $1.8 million and marketing and market research expense of $1.1
million for the year December 31, 2004. We expect these costs to continue to increase as we prepare
for the possible launch of our product candidates, subject to obtaining the requisite marketing
approvals, as well as the launch of any acquired products or in-licensed products. We have also
added employees during the fourth quarter of 2004 and early 2005, and expect to add staff during
2005, which will comparatively increase our costs for the full year of 2005. During the latter
half of 2005, we expect to incur costs related to the sales of Solagé® and Zimycan, if and when
approved by the FDA, which may include costs related to our own sales force, utilizing a contract
sales organization, or entering into a co-promotion arrangement. General and Administrative Expenses.General and administrative expenses totaled $7.2 million
for the year December 31, 2004, an increase of $3.4 million over the corresponding period in 2003.
Personnel and related costs totaled $3.4 million for the year December 31, 2004, an increase of
$1.8 million over the corresponding period in 2003. These costs include amortization of deferred
compensation expense of $975,000 in 2004, which was $116,000 for the year December 31, 2003.
Additionally, general and administrative headcount grew to 19 employees at December 31, 2004 from
14 employees at December 31, 2003. General and administrative costs also increased due to increased
stock-based compensation expense related to non-employees of $756,000, an increase of $648,000 over
the corresponding period in 2003, and due to the costs related to our becoming a public company in
the second quarter of 2004. We expect general and administrative costs to continue to increase as we add more personnel
and expand our infrastructure. The costs associated with being a public company will also increase
our general and administrative expenses. Interest income, net of interest expense.Interest income, net of expense totaled $1.4
million for the year December 31, 2004, an increase of $957,000 as compared to the corresponding
period in 2003. The increase was primarily due to our higher balances of cash and cash equivalents
and marketable securities in 2004 compared to 2003 and slightly higher interest rates. Years Ended December 31, 2003 and 2002 and Period From Inception Through December 31, 2001 We began operations in May 2002 following the closing of our sale of our series A and series B
convertible preferred stock. This comparison of results of operations for the years ended December
31, 2003 and December 31, 2002, is therefore a comparison of a full year of operations for 2003 to
the initial eight-month period of our operations in 2002 and to no operations in 2001. Revenue.We did not recognize any revenue in 2002. We recognized grant revenue of $0.4
million in 2003. This represents income that we received under our grant from a Belgian
governmental agency promoting technology in the Flemish region of Belgium through research grants. Research and Development Expenses.Below is a summary of our research and development
expenses for 2002 and 2003. There were no research and development expenses in 2001. 2003
    
    
    2002(in thousands)Sebazole
    
    $
    5,016
    
    
    $
    883Hyphanox
    
    
    4,864
    
    
    
    1,192Zimycan
    
    
    1,774
    
    
    
    345Other clinical stage products
    
    
    997
    
    
    
    Research and preclinical stage product costs
    
    
    721
    
    
    
    49Internal costs
    
    
    4,112
    
    
    
    1,074Total research and development expenses
    
    $
    17,484
    
    
    $
    3,543
 In the preceding table, research and development expenses are set forth in the following six
categories:  
    Sebazolethird-party direct project expenses relating to the development of Sebazole and Seboride.
    Hyphanoxthird-party direct project expenses relating to the development of Hyphanox. 36




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
    Zimycanthird-party direct project expenses relating to the development of Zimycan.
    Other clinical stage productsdirect project expenses relating to the development of our
other clinical stage product candidates, the products in reformulation and the screening of
molecules to identify new product candidates.
    Research and preclinical stage product costsdirect expenses relating to the development
of our research and preclinical product candidates.
    Internal costscosts related primarily to personnel, as well as consulting, overhead and
other expenses related to our research and development activities. We do not allocate these
costs to specific projects as these costs relate to all research and development activities. Total research and development expenses in 2003 increased primarily from the conduct and
completion of our two Phase 3 clinical trials for Seboride, which clinical program is focused on
Sebazole, the process development, scale-up, manufacturing and bioequivalence testing of Hyphanox,
which began in the third quarter of 2002 and continued throughout 2003, and the costs related to
our Zimycan Phase 3 clinical trial, which was partially enrolled as of December 31, 2003. We
incurred initial direct program expenses in 2003 on our other clinical stage product candidates,
which include Liarozole, Azoline, Rambazole and Atopik. Included in research and internal costs are expenses incurred in connection with our research
grant and other discovery activities, which increased $0.7 million in 2003. Internal costs include
personnel, consultant, overhead and other expenses. Personnel costs increased $2.3 million in 2003
as we added ten people to our research and development staff in 2003, and we incurred a full year
of payroll and related costs. Other costs which include consultants, overhead and other expenses
increased $0.7 million during 2003. In-process Research and Development Expense.During 2002, we expensed $25.0 million for
in-process research and development solely as a result of our entering into our principal license
agreements. General and Administrative Expenses.General and administrative expenses increased from $1.5
million in 2002 to $3.7 million in 2003. The increase in 2002 resulted primarily from the
commencement of operations and the costs related to doing so, including adding personnel and
incurring professional fees and occupancy and other facility costs. The increase in 2003 resulted
primarily from increased personnel and related expenses of $1.1 million, due to incurring a full
year of expense during 2003 and an increase in the number of our employees. In 2003, we hired nine
additional administrative employees in areas such as finance, business development and information
technology. The increase also reflects increased occupancy costs of $0.3 million and professional
fees of $0.2 million necessary for the expansion of our operations. Sales and Marketing Expenses.We had not incurred any sales and marketing expenses through
2003. Interest Income.Interest income increased from $275,000 in 2002 to $419,000 in 2003. We had
no interest income in 2001. The increase was due to our higher balances of cash and cash
equivalents in 2003 compared to 2002, resulting from the $22.4 million in net cash proceeds that we
received from our issuance of series B convertible preferred stock in May 2002, the $23.0 million
in net cash proceeds that we received from our issuance of series B convertible preferred stock in
May 2003 and the $31.9 million in net cash proceeds that we received from our issuance of series C
convertible preferred stock in October 2003. Liquidity and Capital Resources We have funded our operations principally from issuances of our convertible preferred stock
and convertible promissory notes, the proceeds from our initial public offering and our follow-on
public offering. Since our inception, we raised approximately $36 million from our follow-on public
offering in February 2005, net of expenses, $67.9 million from our initial public offering in May
2004, net of expenses, and we have issued preferred stock for aggregate net cash proceeds of
approximately $77.3 million, $31.9 million of which was raised through our sale of series C
convertible preferred stock in October 2003, $23.0 million of which was raised through our sale of
series B convertible preferred
stock in May 2003 and $22.4 million of which was raised through our sale of series B
convertible preferred stock in May 37




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2002. Issuances of convertible promissory notes resulted in
proceeds of $100,000 in 2001 and $50,000 in 2002. These notes were subsequently converted into
shares of our series B convertible preferred stock in accordance with their terms. All of the
preferred stock that we issued converted to common stock in connection with our initial public
offering. In September 2003, we entered into a $750,000 financing arrangement to fund the purchase of
office furniture, computer equipment and software. The original note for approximately $267,000 had
an interest rate of 6.4% plus a fluctuating mark-up based on market rates that is set at the time
of funding. The fixed portion was reduced to 6.15% in August 2004 in connection with a new note for
approximately $407,000. We entered into an additional promissory note in December 2004 to fund
$148,000 at 9.37%. We expect to enter into additional promissory notes to fund most of our fixed
asset purchases. At December 31, 2004, we had cash, cash equivalents and marketable securities totaling $89.1
million and working capital of $82.8 million. We used cash in operations for the year ended December 31, 2004 of $32.2 million. Cash used in
operations for the year ended December 31, 2003 was $18.8 million. The increase was attributable to
the increased working capital requirements to fund our operations, including our operating losses. Cash used in investing activities for the year ended December 31, 2004 was $35.7 million. We
used cash in investing activities for the year ended December 31, 2003 of $31.0 million and $12.4
million for the year ended December 31, 2002. Our investing activities reflect investments in
marketable securities and purchases of fixed assets necessary for operations. We plan to utilize
third parties to manufacture our products and to conduct laboratory-based research. Therefore, we
do not expect to make significant capital expenditures in 2005. Net cash provided by financing activities was $68.3 million during the year ended December 31,
2004, compared to $55.2 million during the year ended December 31, 2003. The source of cash
provided by financing activities during the year ended December 31, 2004 was related primarily to
proceeds from the sale of common stock in our initial public offering. The source of cash provided
by financing activities for the year ended December 31, 2003 was related primarily from our receipt
of $23.0 million in May 2003 upon the second closing of the series B convertible preferred stock
financing and $31.9 million in October 2003 upon the closing of the series C convertible preferred
stock financing. Cash provided by financing activities for the year ended December 31, 2002 was
$22.4 million, primarily from the receipt of net cash proceeds of $22.4 million in May 2002 through
our first issuance of series B convertible preferred stock. Cash provided by financing activities
for the year ended December 31, 2001 was $100,000 as a result of the issuance of convertible
promissory notes in the fourth quarter of 2001. We expect that our existing cash at December 31, 2004, together with the proceeds to us from
our follow-on public offering, will be sufficient to fund our anticipated operating expenses, debt
obligations and capital requirements through the end of 2006. Our future capital requirements will
depend on many factors, including:  
    the success of our development and commercialization of our product candidates;
    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;
    the costs of commercialization activities, including product marketing, sales and
distribution and related working capital needs;
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual
property-related costs, including any possible litigation costs; and 38




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
    our ability to establish and maintain collaborative and other strategic arrangements. Our capital requirements are likely to increase. As a result, we may require additional funds
and may attempt to raise additional funds through public or private equity offerings or debt
financings, collaborative agreements with corporate partners or from other sources. The following table summarizes our material contractual commitments as of December 31, 2004: Payments Due by PeriodOne to
    
    
    Four toThree
    
    
    Five
    
    
    After FiveContractual Obligation
    
    Total
    
    
    Years
    
    
    Years
    
    
    YearsLease obligations
    
    $
    3,401,000
    
    
    $
    1,733,000
    
    
    $
    1,207,000
    
    
    $
    461,000Other contractual obligations
    
    
    12,200,000
    
    
    
    10,700,000
    
    
    
    1,500,000
    
    
    
    Total
    
    $
    15,601,000
    
    
    $
    12,433,000
    
    
    $
    2,707,000
    
    
    $
    461,000
 The other contractual obligations reflected in the table include obligations to purchase
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. Net Operating Loss Carryforwards We incurred net operating losses for all the periods since inception and consequently did not
pay federal, state or foreign income taxes. As of December 31, 2004, we had federal net operating
loss carryforwards of $58.1 million and state net operating loss carryforwards of $50.1 million.
Pursuant to Section 382 of the Internal Revenue Code of 1986, the annual utilization of a companys
net operating loss carryforwards may be limited if the company experiences a change in ownership of
more than 50% within a three-year period. As a result of our equity offerings, we may have
experienced such an ownership change. However, we have not performed a detailed analysis of any
ownership change. Accordingly, our net operating loss carryforwards available to offset future
federal taxable income arising before such ownership changes may be limited. For financial
reporting purposes, we have recorded a valuation allowance to fully offset the deferred tax asset
related to these carryforwards because realization of the benefit was uncertain. During 2004 and 2003, 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. We received cash proceeds of approximately $367,000 in 2004 and $217,000 in
2003. 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 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. 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. 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. 39




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Risks Related to Our Business 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, 2004, we had a deficit accumulated during the development stage of $106.2 million.
We have not yet completed the development of any of our product candidates, and none are ready for
commercialization, except for Zimycan in Belgium. As a result, prior to our acquisition of Solagé®
which we are marketing in the United States and Canada, 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 substantially in the foreseeable future as we:  
    conduct clinical trials;
    conduct research and development on existing and new product candidates;
    seek regulatory approvals for our product candidates;
    commercialize our product candidates, if approved;
    hire additional clinical, scientific, sales and marketing and management personnel;
    add operational, financial and management information systems; and
    identify and in-license additional compounds or product candidates. We need to generate significant revenue to achieve profitability. Even if we succeed in
developing and commercializing one or more of our product candidates, we may never generate
sufficient sales revenue to achieve and then maintain profitability. We expect to incur operating
losses for the foreseeable future. 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, 2004, we had cash, cash equivalents and marketable securities of $89.1
million. In February 2005, we raised net proceeds of approximately $36 million from the sale of 2
million shares of our common stock. We believe that our existing cash resources and our interest
on these funds will be sufficient to meet our projected operating requirements through the end of
2006. We currently have no additional commitments or arrangements for any additional financing to
fund the research and development and commercial launch of our product candidates. We will require
additional funding in order to continue 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 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;
    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; 40




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
    the costs of commercialization activities, including product marketing, sales and
distribution and related working capital needs;
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property-related costs, including any possible litigation
costs; and
    our ability to establish and maintain collaborative and other strategic arrangements. 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 may 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. 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 are currently not authorized to market any of our product candidates in any jurisdiction.
We can market Solagé® in the United States and Canada and Zimycan in Belgium. We intend to market
our products in the United States and in various other countries, and as a result, we will need to
obtain separate regulatory approvals in most jurisdictions. Before obtaining regulatory approval
for the sale of our product candidates, we must conduct extensive preclinical studies and clinical
trials to demonstrate the safety and efficacy in humans of our product candidates. Preclinical
studies and clinical trials are expensive, can take many years and have uncertain outcomes. In
addition, the regulatory approval procedures vary among countries and additional testing may be
required in some jurisdictions. Our success will depend on the success of our currently ongoing
clinical trials and subsequent clinical trials that have not yet begun. It may take 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. The possibility exists
that:  
    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;
    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; 41




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
    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, in November 2003, we completed two Phase 3 clinical trials that were designed
primarily to analyze the use of one of our proposed product candidates, Seboride, for the treatment
of seborrheic dermatitis. We decided not to seek regulatory approval for Seboride because the
results of these clinical trials did not exhibit the expected therapeutic results for that product
candidate. Similarly, because our preclinical studies of Ecalcidene did not replicate the results
of earlier third-party studies, the development of Ecalcidene is likely to be discontinued.
Furthermore, the costs of our Phase 3 clinical trial for Hyphanox in the treatment of vaginal
candidiasis were higher than expected principally because of the need to recruit additional
patients, to add additional sites and to hire an additional contract research organization to
assist in the management of the trial. With respect to a number of our product candidates, we expect to rely on the results of
clinical trials that were performed by or on behalf of Janssen Pharmaceutica Products, L.P. and its
affiliates prior to our acquisition of these product candidates. It is possible that these trial
results may not be predictive of the results of the clinical trials that we conduct for our product
candidates. In addition, the results of these prior clinical trials may not be acceptable to the
FDA or similar foreign regulatory authorities because the data may be incomplete, outdated or not
otherwise acceptable for inclusion in our submissions for regulatory approval. For example,
although our product candidates ketanserin and oxatomide are marketed by other companies in some
countries outside the United States and Europe, the data used to support the current regulatory
approvals for these products do not meet current regulatory guidelines in the United States and
Europe. As a result, we must repeat most of the clinical work already completed prior to filing for
marketing approval in the United States and Europe for these product candidates. 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 generate any initial revenues or grow
revenues in future periods, which would result in significant harm to our financial position and
adversely impact our stock price. 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 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;
    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;
    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 42




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
    exposure of clinical trial subjects to unexpected and unacceptable health risks or
noncompliance with regulatory requirements, which may result in suspension of the trial. For example, we completed enrollment of our Phase 3 clinical trial for Zimycan later than
expected due to difficulties enrolling infants with proven diaper dermatitis complicated by
candidiasis. In addition, in January 2005, the FDA informed us that we should submit the six-month
data for a total of 300 patients from our ongoing long-term safety study of our Sebazole product
candidate at the time of the initial filing of the NDA. We expect that the request from the FDA to
include this data will delay the filing of our Sebazole NDA until the third quarter of 2005 due to
the time we expect it will take us to analyze data from the required number of patients. In January
2005, the FDA also asked us to perform a study for Sebazole known as a percutaneous absorption
study, which measures the amount of a drugs absorption, if any, into the bloodstream through the
skin. The FDA requested that we submit data from this study at the time of the initial filing of
the NDA. If satisfying either the long-term safety data or percutaneous absorption data
requirements takes longer than we currently expect, the initial filing of our NDA for Sebazole
could be delayed. We believe that our product candidates have significant milestones to reach, including, other
than Zimycan, the successful completion of clinical trials, before commercialization. If we 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. If we are wrong in our assessment of the stages of clinical development of our initial product
candidates, we may need to perform preclinical studies or clinical trials that we did not
anticipate, which would result in additional product development costs for us and delays in filing
for regulatory approval for our product candidates. We acquired the rights to our initial product candidates from Janssen Pharmaceutica Products,
L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a
Johnson & Johnson company. Prior to this acquisition, they had conducted preclinical studies and
clinical trials on several of our product candidates. For our product candidates for which we are
not currently conducting a clinical trial, we have made an assessment as to whether the next
clinical trial that we will perform will be a Phase 1, Phase 2 or Phase 3 clinical trial based on
the results of these preclinical studies and clinical trials. We may be wrong in our assessment of
the stages of clinical development of our initial product candidates for several reasons, including
that the data we obtained from the previous trials may be outdated or otherwise no longer
acceptable for our purposes or to the FDA or similar regulatory authorities in connection with
applications that we may file for regulatory approval. If our current assessments prove to be
inaccurate, we will likely have to perform additional preclinical studies or clinical trials, which
will require us to expend additional resources and may delay filing for regulatory approval for
that product. We may acquire additional products or product candidates 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 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. For example, we recently acquired the United
States and Canadian rights to Solagé®. Solagé® is our first marketed product. As a result, we may
have difficulty integrating it with our existing product candidates as we expand our resources
dedicated to marketing. In addition, we have no experience with a commercial product and cannot
assure you that our marketing efforts we will be successful. 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. 43




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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 will 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 product candidates that we use in our clinical trials. We expect to
continue to rely on third parties to manufacture any products that we commercialize. 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.
    With the exception of Hyphanox, each of our product candidates can 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. For instance, for Zimycan, we have used one contract manufacturer
in connection with the marketing authorization application that we filed in Europe and we
intend to use a separate contract manufacturer for commercial supply of the product in the
United States. If we decide to have our United States manufacturer supply us with Zimycan
for sale in Europe, it is likely that many of the applicable foreign regulatory agencies
will need to approve our United States manufacturer prior to making that transition.
    Our contract manufacturers are subject to ongoing periodic, unannounced inspection by the
FDA and corresponding state and foreign agencies or their designees to ensure strict
compliance with current Good Manufacturing Practices, or cGMPs, and other governmental
regulations and corresponding foreign standards. 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 us to comply with applicable regulations could result in
sanctions being imposed on us, including fines, injunctions, civil penalties, failure of
regulatory authorities to grant marketing approval of our product candidates, delays,
suspension or withdrawal of approvals, seizures or recalls of product candidates, operating
restrictions and criminal prosecutions, any of which could significantly and adversely
affect our business.
    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. 44




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We may compete with other drug developers for access to manufacturing facilities for our
current and future product candidates. 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 and compete
effectively. 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. 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. We also depend on third parties to perform services related to our adverse event
reporting requirements. 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 or terminated,
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;
    our distributors may experience financial difficulties; 45




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
    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 products. 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 2 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 product candidates that may affect our
ability to exclude third parties from competing against us if we receive approval to market these
product candidates. The patent rights that we own or have licensed relating to our product candidates are limited
in ways that may affect our ability to exclude third parties from competing against us if we
receive regulatory approval to market these product candidates. In particular:  
    We do not hold composition of matter patents covering the active pharmaceutical
ingredients of three of our later stage product candidates. 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 of most of these product candidates 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. Examples include Solagé®, Zimycan,
Sebazole and Hyphanox, for which the active pharmaceutical ingredients, mequinol,
trentinoin, miconazole, ketoconazole and itraconazole, are all off patent. The United States
patent covering the active ingredient in Liarozole expires in 2006.
    We do not hold composition of matter patents covering the formulations of some of our
later stage product candidates. Composition of matter patents on formulations can provide
protection for pharmaceutical products to the extent that the specifically covered
formulations are important. For our product candidates for which we do not hold composition
of matter patents covering the formulation, competitors who obtain the requisite regulatory
approval can offer products with the same formulations as our products so long as the
competitors do not infringe any active pharmaceutical ingredient or method of use patents
that we may hold. The United States patent covering the formulation of miconazole and zinc
oxide in Zimycan expires in 2007. The United States patent covering the composition of
Solagé® expires in 2010.
    For some of our product candidates, the principal patent protection that covers, or that
we expect will cover, our product candidate is a method of use patent. This type of patent
only protects the product when used or sold for the specified method. However, this type of
patent does not limit a competitor from making and marketing a product that is identical to
our product for an indication that is outside of the patented method. Moreover, physicians
may prescribe such a competitive identical product for off-label indications that are
covered by the applicable patents. Although such off-label prescriptions may infringe or
contribute to the infringement of method of use patents, the practice is common and such
infringement is difficult to prevent or prosecute. 46




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
    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, with some exceptions, Johnson & Johnson, its affiliates or its
licensees could manufacture and market products similar to our products outside of this
field. This also could result in off-label use of these competitive products for
dermatological indications. 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 eight 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. Under the license agreements, Janssen has an exclusive option to acquire the right to
commercialize Hyphanox on a geographic region-by-region basis. Janssen has 90 days to exercise this
option from the date that we provide notice that we are able to manufacture Hyphanox batches that
are reproducible and bioequivalent to Janssens Sporanox product or a similar itraconazole product
previously developed by Janssen. We also must provide this notice if we can demonstrate clinical
efficacy in a Phase 3 clinical trial performed by us. We expect Janssens right to exercise this
option will be triggered if the results of our ongoing Phase 3 clinical trial of Hyphanox in
vaginal candidiasis are positive. Depending on whether or not Janssen exercises its option and the
regions for which it chooses to exercise its option, our business may be either favorably or
adversely affected. 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 Sebazole and Zimycan product candidates. If we are required to undertake these
activities for any additional product candidates, our operating costs will increase. 47




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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. We have not been granted the right to sell
oxatomide in Japan, Italy, Mexico and much of Central America or to sell ketanserin in Mexico,
Central America and the Caribbean. Our right to sell the following products in the following
countries is semi-exclusive with the Johnson & Johnson companies:  
    Zimycan in Argentina, Australia, Belgium, Denmark, Germany, Indonesia, Luxembourg,
Mexico, New Zealand, Peru and Venezuela; and
    Ketanserin in South America. This field of use and geographic restrictions limit our ability to market our products
worldwide 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. 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. 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. Moreover, 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. In addition, because of the size of our patent portfolio,
we may not be able to prevent infringement or unauthorized use of all of our patents due to the
associated expense and time commitment of monitoring these activities. If there is an 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
ground that our patents do not cover its technology. Interference proceedings brought in the United
States Patent and Trademark Office may be necessary to determine whether our patent applications or
those of our collaborators are entitled to priority of invention relative to third parties.
Litigation, interference or opposition proceedings may result in adverse rulings and, even if
successful, may result in substantial costs and be a distraction to our management. We may not be
able to prevent misappropriation of our
respective proprietary rights, particularly in countries where the laws may not protect our
rights as fully as in the United States. 48




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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 and consultants. We also have
confidentiality and invention or patent assignment agreements with our employees and our
consultants. If our employees or consultants 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. 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, our product candidates 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 stop 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. 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. All of our product candidates are in various
stages of development, and we are currently not authorized to market any of our product candidates.
We believe that our product candidates have significant milestones to reach, including the receipt
of regulatory approvals, before commercialization. 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. 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, including our recently filed Zimycan NDA amendment and our Sebazole NDA that
we expect to file during the third quarter of 2005. 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. 49




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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 biopharmaceutical 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, the FDA has previously issued three not approvable letters for
Zimycan in 1986, 1999 and 2000. 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 may result 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 our clinical trial data,
which also could cause delays of an approval or the rejection of an application. The FDA may also
determine that there is no substantial benefit over the products currently marketed to justify
approval. The approval process may take many years to complete and may involve ongoing
requirements for post-marketing studies. For example, in January 2005, the FDA informed us that we
should submit the six-month data on all 300 patients from our ongoing long-term safety study of our
Sebazole product candidate at the time of the initial filing of the NDA. We expect that the FDAs
request to include this data will delay the filing of our Sebazole NDA until the third quarter of
2005. Any FDA or other regulatory approval of our product candidates, once obtained, may be
withdrawn, including for failure to comply with regulatory requirements 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. 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. We may not be able to obtain or maintain orphan drug exclusivity for our product candidates
for the treatment of rare dermatological diseases, and our competitors may obtain orphan drug
exclusivity prior to us, which could significantly harm our business. Some jurisdictions, including Europe and the United States, may designate drugs for relatively
small patient populations as orphan drugs. The Commission for the European Community and the FDA
have granted Liarozole orphan drug status for its use in the treatment of congenital ichthyosis.
Orphan drug designation must be requested before submitting an application for marketing
authorization. Orphan drug designation does not convey any advantage in, or shorten the duration
of, the regulatory review and approval process, but does make the product eligible for orphan drug
exclusivity and specific tax credits in the United States. Generally, if a product with an orphan
drug designation subsequently receives the first marketing approval for the indication for which it
has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity
means that another application to market the same drug for the same indication may not be approved,
except in limited circumstances, for a period of up to ten years in Europe and for a period of
seven years in the United States. Obtaining orphan drug designations and orphan drug exclusivity
for our product candidates for the treatment of rare dermatological diseases may be critical to the
success of these product candidates. Our competitors may obtain orphan drug exclusivity for
products competitive with our product candidates before we do, in which case we would be excluded
from that market. Even if we obtain orphan drug exclusivity for any of our product candidates, we
may not be able to maintain it. For example, if a competitive product is shown to be clinically
superior to our product, any orphan drug exclusivity we have obtained will not block the approval
of such competitive product. If we fail to comply with regulatory requirements, regulatory agencies may take action against us,
which could significantly harm our business. 50




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Any products for which we obtain marketing approval including our marketed product
Solagé®, along with the manufacturing processes, post-approval clinical data, labeling, advertising
and promotional activities for these products, will be subject to continual requirements and review
by the FDA and other regulatory bodies. Even if regulatory approval of a product 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. In addition, regulatory authorities subject a marketed product, its manufacturer and the
manufacturing facilities to continual review and periodic inspections. We will be subject to
ongoing FDA requirements, including required submissions of safety and other post-market
information and reports, registration requirements, cGMP regulations, requirements regarding the
distribution of samples to physicians and recordkeeping requirements. The cGMP regulations include
requirements relating to quality control and quality assurance, as well as the corresponding
maintenance of records and documentation. If we engage contract manufacturers, we will rely on
their compliance with cGMP regulations and other regulatory requirements relating to the
manufacture of products, if any. We also will be subject to state laws and registration
requirements covering the distribution of our products. Regulatory agencies may change existing
requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to
adapt to these changes or new requirements. Because many of our products contain ingredients that
also are marketed in over-the-counter drug products, there is a risk that the FDA or an outside
third party at some point would propose that our products be distributed over-the-counter rather
than by prescription potentially affecting third-party and government reimbursement for our
products. Later discovery of previously unknown problems with our products, manufacturing processes or
failure to comply with regulatory requirements, 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;
    suspension or termination of any of our ongoing clinical trials;
    refusal to permit the import or export of our products;
    refusal to approve pending applications or supplements to approved applications that we submit;
    product seizure; and
    injunctions or the imposition of civil or criminal penalties. We have only limited experience in regulatory affairs, which may affect our ability or the time we
require to obtain necessary regulatory approvals. We have only limited experience in filing the applications necessary to gain regulatory
approvals. Moreover, some of the products that are likely to result from our product development,
licensing and acquisition programs may be based on new technologies 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
regulatory process in connection with obtaining regulatory approvals of any products that we
develop, license or acquire. 51




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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 the FDA does
not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by
one foreign regulatory authority does not ensure approval by regulatory authorities in other
foreign countries or jurisdictions or by the FDA. 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. Risks Related to Commercialization If any of our 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 product candidates for which we obtain marketing approval from
the FDA or other regulatory authorities will depend upon the acceptance of these products by the
medical community and reimbursement of them by third-party payors, including government payors.
Safety, efficacy, convenience and cost-effectiveness, particularly as compared to competitive
products, are the primary factors that affect market acceptance. Even if a potential 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. Our efforts to educate the medical community
and third-party payors on the benefits of our product candidates may require significant resources
and may never be successful. If we are unable to establish a domestic sales and marketing infrastructure or enter into
agreements with third parties to perform these functions in territories outside the United States
and Canada, we will not be able to commercialize our product candidates. We currently have only limited internal sales, distribution and marketing capabilities. In
order to commercialize any of our product candidates, we must either acquire or internally develop
sales, marketing and distribution capabilities, or make arrangements with third parties to perform
these services for us. In the United States and Canada, we plan to build our own sales force to market our products
directly to dermatologists and other target physicians. The acquisition or development of a sales
and distribution infrastructure for our domestic operations will require substantial resources,
which may divert the attention of our management and key personnel and negatively impact our
product development efforts. Moreover, we may not be able to hire a sales force that is sufficient
in size or adequate in expertise. Risks Related to Employees and Growth 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, in particular, our Chief
Executive Officer, Dr. Geert Cauwenbergh, our Chief Operating Officer, Charles Nomides and our
Chief Commercial Officer, Alfred Altomari, for our business success. Dr. Cauwenbergh and Mr.
Nomides have a long history and association with our current product candidates and intellectual
property. Our employment agreements with these and our other executive officers are terminable on
short notice or no notice. The loss of any one of these individuals would 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 development and approval of our product candidates.
We do not carry key man life insurance on the lives of any of our personnel. 52




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We will need to hire additional employees as we grow. Any inability to manage future growth could
harm our ability to commercialize our product candidates, increase our costs and adversely impact
our ability to compete effectively. Our growth will require us to hire a significant number of qualified scientific, commercial
and administrative personnel. There is intense competition for human resources, including
management in the technical fields in which we operate, and we may not be able to attract and
retain qualified personnel necessary for the successful development and commercialization of our
product candidates. The inability to attract new employees when needed and retain existing
employees as we grow could severely harm our business. Future growth will impose significant added responsibilities on members of our management,
including the need to identify, recruit, retain and integrate additional employees. Our future
financial performance and our ability to commercialize our product candidates and compete
effectively will depend, in part, on our ability to manage any future growth effectively. Changes in the expensing of stock options could result in unfavorable accounting charges or
require us to change our compensation practices. We rely heavily on stock options to compensate existing employees and attract new employees.
We currently are not required to record stock-based compensation charges if the employees stock
option exercise price equals or exceeds the fair value of our common stock at the date of grant.
On December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised
2004) which requires all share-based payment to employees to be recognized in the statement of
operations based on their fair values. During 2005 we will change our accounting policy to record
expense for the fair value of the stock options granted, therefore our operating expenses will
increase. We will continue to include stock options in our compensation arrangements. Risk Related to Our Industry If third-party payors do not reimburse customers for any of our product candidates that are
approved for marketing, they might not be used or purchased, and our revenues and profits will not
develop or grow. Our revenues and profits depend heavily upon the availability of reimbursement for the use of
our product candidates that are approved for marketing from third-party health care and government
payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may
depend upon a number of factors, including the third-party payors determination that use of a
product is:  
    safe, effective and medically necessary;
    appropriate for the specific patient;
    cost-effective; and
    neither experimental nor investigational. Since reimbursement approval for a product is required from each third-party and government
payor individually, seeking this approval is a time-consuming and costly process. Third-party
payors may require cost-benefit analysis data from us in order to demonstrate the
cost-effectiveness of any product we might bring to market. We may not be able to provide data
sufficient to gain acceptance with respect to reimbursement. There also exists substantial
uncertainty concerning third-party reimbursement for the use of any drug product incorporating new
technology. In addition, as a result of actions by these third-party payors, the health care
industry is experiencing a trend toward containing or reducing costs through various means,
including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced
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New federal legislation will increase the pressure to reduce the price of pharmaceutical
products paid for by Medicare, which will adversely affect our revenues, if any. The Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way
Medicare will cover and reimburse for pharmaceutical products. The legislation expands Medicare
coverage for drug purchases by the elderly and eventually will introduce a new reimbursement
methodology based on average sales prices for drugs. In addition, the new legislation provides
authority for limiting the number of drugs that will be covered in any therapeutic class. As a
result of the new legislation and the expansion of federal coverage of drug products, we expect
that there will be additional pressure to contain and reduce costs. These costs initiatives and
other provisions of this legislation could decrease the coverage and price that we receive for our
products and could seriously harm our business. Foreign governments tend to impose strict price controls, which may adversely affect our revenues,
if any. In some foreign countries, particularly the countries of the European Union, 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. 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 that expose us
to the risk of product liability claims. 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 obtained limited product liability insurance coverage for our clinical trials
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. We intend to expand our insurance coverage to include the sale of
commercial products if we obtain marketing approval for our product candidates in development, but
we may be unable to obtain commercially reasonable product liability insurance for any products
approved for marketing. 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 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 54




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
    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. Our recently acquired Solagé® product faces competition in the treatment of solar lentigeness
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. 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 product candidates are:  
    For Zimycan, in the treatment of diaper dermatitis complicated by candidiasis, 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.
    For Sebazole, in the treatment of seborrheic dermatitis, Nizoral from Janssen,
ketoconazole creams from generic manufacturers, Desowen from Galderma S.A. and Loprox from
Medicis Pharmaceutical Corporation.
    For Hyphanox, in the treatment of vaginal candidiasis, Diflucan from Pfizer Inc., generic
fluconazole tablets, Sporanox from Janssen and generic itraconazole capsules. For Hyphanox,
in the treatment of onychomycosis, Sporanox from Janssen, Lamisil from Novartis AG and
Penlac from Dermik Laboratories.
    For Liarozole, in the treatment of congenital ichthyosis, Soriatane from Hoffmann-La
Roche Inc. and Connetics and over-the-counter topical moisturizers and emollients.
    For oral Rambazole, in the treatment of acne, Accutane from Hoffman-La Roche and generic
manufacturers. For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La
Roche and Connetics, biologic agents such as Amevive from Biogen Idec Inc. and Raptiva from
Genentech, Inc. and methotrexate from generic manufacturers. We also believe that many of the competitive products for our later stage product candidates
and Rambazole will similarly compete with our earlier stage product candidates because of the
indications for which we are developing these product candidates. 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;
    whether or not Janssen exercises its option to commercialize Hyphanox;
    failure of any of our product candidates, if approved, to achieve commercial success;
    developments concerning our competitors and their products;
    success of competitive products and technologies; 55




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
    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;
    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. 56




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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 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 of approximately one year, which we believe are subject to limited credit
risk. We currently do not hedge 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. 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 us 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. 
 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 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, under the supervision and 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, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are functioning effectively to
provide reasonable assurance that the information required to be disclosed by us in reports filed
under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding disclosure. We believe that a controls system
cannot provide absolute assurance, however, 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. Changes in Internal Control over Financial Reporting No change in our internal control over financial reporting occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 57




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ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The information concerning our directors required by Item 10 is incorporated by reference to
the information contained under the heading Election of Directors in our definitive proxy
statement for the 2005 annual meeting of stockholders. Our Executive Officers The information concerning our executive officers required by Item 10 included herein at the
end of Part 1 under the heading Our Executive Officers. Audit Committee Financial Expert The information concerning our audit committee financial expert required by Item 10 is
incorporated by reference to the information contained under the heading Meetings and Committees
of the Board of Directors in our definitive proxy statement for the 2005 annual meeting of
stockholders. Identification of the Audit Committee The information concerning our audit committee required by Item 10 is incorporated by
reference to the information contained under the heading Meetings and Committees of the Board of
Directors in our definitive proxy statement for the 2005 annual meeting of stockholders. Compliance with Section 16(a) of the Exchange Act The information concerning our compliance with Section 16(a) of the Exchange Act by our
directors and executive officers required by Item 10 is incorporated by reference to the
information contained under the heading Section 16(a) Beneficial Ownership Reporting Compliance
in our definitive proxy statement for the 2005 annual meeting of stockholders. Code of Ethics The information concerning our code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller required by Item 10 is
incorporated by reference to the information contained under the heading Corporate Governance in
our definitive proxy statement for the 2005 annual meeting of stockholders. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference to the information contained
under the headings Executive Compensation and Director Compensation in our definitive proxy
statement for the 2005 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 contained
under the headings Ownership of Common Stock and Equity Compensation Plan Information in our
definitive proxy statement for the 2005 annual meeting of stockholders. 58




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference to the information contained
under the headings Executive Compensation in our definitive proxy statement for the 2005 annual
meeting of stockholders. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 is incorporated by reference to the information contained
under the heading Independent Public Auditor in our definitive proxy statement for the 2005
annual meeting of stockholders. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 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 Auditors.Consolidated Balance Sheets as of December 31, 2004 and 2003.Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and
2002.Consolidated Statements of Stockholders Equity (Deficiency) for the years ended
December 31, 2004, 2003 and 2002.Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002.Notes to Consolidated Financial Statements. 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.
    
    Description3.1
    
    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
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Exhibit No.
    
    DescriptionRegistrant 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, 200410.4(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, 200410.6
    
    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)*10.9
    
    Employment Agreement, effective as of April 1, 2004, by and between
the Registrant and Alfred Altomari*10.10
    
    Employment Agreement, effective as of April 1, 2004, by and between
the Registrant and Albert Bristow10.11
    
    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)
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Exhibit No.
    
    Description10.14
    
    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, 2004.10.26(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, 200410.27
    
    Finished Product Supply Agreement, dated July 14, 2004, between
Janssen Pharmaceutica, NV and the Registrant
 61




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##### Table of Contents



Exhibit No.
    
    Description10.28
    
    Product Acquisition Agreement, dated as of February 5, 2005, by and
between the Registrant and Moreland Enterprises Limited*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.
    
    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. 
 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 25, 2005
    BARRIER THERAPEUTICS, INC.
(Registrant)By:
    GEERT CAUWENBERGHGeert Cauwenbergh, Ph.D.Chairman and Chief Executive Officer
(Principal executive officer) By:
    ANNE M. VANLENTAnne M. VanLentExecutive Vice President, Chief Financial Officer &
Treasurer
(Principal financial officer) 62




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##### Table of Contents



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
    
    DateGEERT CAUWENBERGHGeert Cauwenbergh, Ph.D.
    
    Chairman and Chief Executive Officer
    
    March 25, 2005(Principal executive officer)ANNE M. VANLENTAnne M. VanLent
    
    Executive Vice President, Chief
    
    March 25, 2005Financial Officer and Treasurer(Principal financial officer)SRINIVAS AKKARAJUSrinivas Akkaraju, M.D., Ph.D.
    
    Director
    
    March 25, 2005ROBERT CAMPBELLRobert Campbell
    
    Director
    
    March 25, 2005CARL EHMANNCarl Ehmann, M.D.
    
    Director
    
    March 25, 2005PETER ERNSTERPeter Ernster
    
    Director
    
    March 25, 2005CHARLES F. JACEY, JR.Charles F. Jacey, Jr.
    
    Director
    
    March 25, 2005ANDREW N. SCHIFFAndrew N. Schiff, M.D.
    
    Director
    
    March 25, 2005NICHOLAS SIMONNicholas Simon
    
    Director
    
    March 25, 2005
 63




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    F-3Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2004, and the period from September 17,
2001 (inception) to December 31, 2004
    
    F-4Consolidated Statements of Stockholders Equity (Deficiency) for the
period from September 17, 2001 (inception) to December 31, 2004
    
    F-5Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2004 and for the period from September
17, 2001 (inception) to December 31, 2004
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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##### Table of Contents



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. and
Subsidiary (a development stage company) as of December 31, 2004 and 2003, 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, 2004 and for the period from September 17, 2001
(inception) to December 31, 2004. 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. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Barrier Therapeutics, Inc. at December 31, 2004
and 2003 and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, and for the period from September 17, 2001
(inception) to December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ ERNST & YOUNG LLP MetroPark, New Jersey
February 24, 2005 F-2




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) 
 CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,907,632
    
    
    $
    11,471,652Marketable securities
    
    
    77,173,505
    
    
    
    42,304,660Interest receivable
    
    
    925,643
    
    
    
    716,226Prepaid expenses and other current assets
    
    
    1,610,427
    
    
    
    1,239,712Total current assets
    
    
    91,617,207
    
    
    
    55,732,250Property and equipment, net
    
    
    1,124,291
    
    
    
    844,741Security deposits
    
    
    42,290
    
    
    
    38,579Deferred financing costs
    
    
    
    
    
    
    355,000Total assets
    
    $
    92,783,788
    
    
    $
    56,970,570Liabilities, redeemable preferred stock and
stockholders equity (deficiency)Current liabilities:Notes payable, current portion
    
    $
    261,131
    
    
    $
    253,541Accounts payable
    
    
    3,147,628
    
    
    
    1,358,576Accrued expenses
    
    
    4,687,054
    
    
    
    1,952,065Deferred revenue
    
    
    650,000
    
    
    
    453,482Other current liabilities
    
    
    24,889
    
    
    
    32,543Total current liabilities
    
    
    8,770,702
    
    
    
    4,050,207Notes payable, long-term portion
    
    
    443,315
    
    
    
    193,379Commitments and ContingenciesSeries A redeemable convertible preferred
stock, $.0001 par value; 4,166,666 shares
authorized, 0 shares issued and outstanding
at December 31, 2004, 4,166,666 shares,
issued and outstanding at December 31, 2003
    
    
    
    
    
    
    29,689,482Series B redeemable convertible preferred
stock, $.0001 par value; 7,691,667 shares
authorized, 0 shares issued and outstanding
at December 31, 2004, 7,691,667 shares
issued and outstanding at December 31, 2003
    
    
    
    
    
    
    51,832,740Series C redeemable convertible preferred
stock $.0001 par value; 4,102,565 shares
authorized, 0 shares issued and outstanding
at December 31, 2004, 4,102,565 issued and
outstanding at December 31, 2003
    
    
    
    
    
    
    32,738,346Stockholders deficiency:Common stock, $.0001 par value;
80,000,000 authorized, 21,894,830 issued
and outstanding at December 31, 2004; and
40,000,000 shares authorized; 822,500
issued and outstanding at December 31,
2003
    
    
    2,190
    
    
    
    83Additional paid-in capital
    
    
    191,567,857
    
    
    
    887,268Deficit accumulated during development stage
    
    
    (106,199,976
    )
    
    
    (61,864,753
    )Deferred compensation
    
    
    (1,510,114
    )
    
    
    (527,652
    )Accumulated other comprehensive loss
    
    
    (290,186
    )
    
    
    (28,530
    )Total stockholders equity (deficiency)
    
    
    83,569,771
    
    
    
    (61,533,584
    )Total liabilities and stockholders equity
    
    $
    92,783,788
    
    
    $
    56,970,570
 See accompanying notes. F-3




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) 
 CONSOLIDATED STATEMENTS OF OPERATIONS Period fromSeptember 17,2001(inception) toYear Ended December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004Revenues:Contract
    
    $
    100,000
    
    
    $
    
    
    
    $
    
    
    
    $
    100,000Grant
    
    
    796,593
    
    
    
    366,751
    
    
    
    
    
    
    
    1,163,344Total revenues
    
    
    896,593
    
    
    
    366,751
    
    
    
    
    
    
    
    1,263,344Operating expenses:Research and development
    
    
    30,904,344
    
    
    
    17,484,410
    
    
    
    3,542,638
    
    
    
    51,931,392Sales and marketing
    
    
    4,309,745
    
    
    
    
    
    
    
    
    
    
    
    4,309,745General and administrative
    
    
    7,164,493
    
    
    
    3,730,258
    
    
    
    1,531,347
    
    
    
    12,446,195In-process research and development
    
    
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    25,000,000Total operating expenses
    
    
    42,378,582
    
    
    
    21,214,668
    
    
    
    30,073,985
    
    
    
    93,687,332Loss from operations
    
    
    (41,481,989
    )
    
    
    (20,847,917
    )
    
    
    (30,073,985
    )
    
    
    (92,423,988
    )Interest income
    
    
    1,408,634
    
    
    
    418,906
    
    
    
    274,636
    
    
    
    2,102,191Interest expense
    
    
    (36,313
    )
    
    
    (3,289
    )
    
    
    (4,586
    )
    
    
    (45,373
    )Loss before income tax benefit
    
    
    (40,109,668
    )
    
    
    (20,432,300
    )
    
    
    (29,803,935
    )
    
    
    (90,367,170
    )Income tax benefit
    
    
    366,789
    
    
    
    217,027
    
    
    
    
    
    
    
    583,816Net loss
    
    
    (39,742,879
    )
    
    
    (20,215,273
    )
    
    
    (29,803,935
    )
    
    
    (89,783,354
    )Preferred stock accretion
    
    
    (4,592,344
    )
    
    
    (8,432,174
    )
    
    
    (3,392,104
    )
    
    
    (16,416,622
    )Net loss attributable to common stockholders
    
    $
    (44,335,223
    )
    
    $
    (28,647,447
    )
    
    $
    (33,196,039
    )
    
    $
    (106,199,976
    )Basic and diluted net loss attributable to
common stockholders per share
    
    $
    (3.02
    )
    
    $
    (83.95
    )
    
    $
    (240.75
    )Weighted-average shares outstandingbasic
and diluted
    
    
    14,677,710
    
    
    
    341,256
    
    
    
    137,889
 See accompanying notes. F-4




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY) Period from September 17, 2001 (inception) to December 31, 2001,
and the years ended December 31, 2002, 2003, and 2004 Deficit
    
    
    
    
    
    
    
    
    
    
    AccumulatedAccumulated
    
    
    Notes
    
    
    
    
    
    
    Other
    
    
    TotalAdditional
    
    
    During
    
    
    Receivable
    
    
    
    
    
    
    Comprehensive
    
    
    Stockholders'Common Stock
    
    
    Paid-in
    
    
    Development
    
    
    From
    
    
    Deferred
    
    
    Income
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    Officer
    
    
    Compensation
    
    
    (Loss)
    
    
    (Deficiency)Initial incorporation on
September 17, 2001 (inception)
    
    
    637,500
    
    
    $
    64
    
    
    $
    1,212
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,276Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,267
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,267
    )Balance at December 31, 2001
    
    
    637,500
    
    
    
    64
    
    
    
    1,212
    
    
    
    (21,267
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,991
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,803,935
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,803,935
    )Unrealized gain on available
for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,992
    
    
    
    30,992Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,147
    
    
    
    9,147Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,763,796
    )Issuance of common stock
    
    
    185,000
    
    
    
    19
    
    
    
    20,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,899Compensation expense related
to options issued to
non-employees
    
    
    
    
    
    
    
    
    
    
    17,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,467Loan to officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,980
    )
    
    
    
    
    
    
    
    
    
    
    (59,980
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,392,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,392,104
    )Balance at December 31, 2002
    
    
    822,500
    
    
    
    83
    
    
    
    39,559
    
    
    
    (33,217,306
    )
    
    
    (59,980
    )
    
    
    
    
    
    
    40,139
    
    
    
    (33,197,505
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,215,273
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,215,273
    )Unrealized loss on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,816
    )
    
    
    (42,816
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,853
    )
    
    
    (25,853
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,283,942
    )Compensation expense related
to options issued to
non-employees
    
    
    
    
    
    
    
    
    
    
    107,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,448Restricted stock no longer
subject to repurchase
    
    
    
    
    
    
    
    
    
    
    14,511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,511Deferred compensation
relating to stock options
    
    
    
    
    
    
    
    
    
    
    725,750
    
    
    
    
    
    
    
    
    
    
    
    (725,750
    )
    
    
    
    
    
    
    Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,098
    
    
    
    
    
    
    
    198,098Repayment of notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,980
    
    
    
    
    
    
    
    
    
    
    
    59,980Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,432,174
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,432,174
    )Balance at December 31, 2003
    
    
    822,500
    
    
    
    83
    
    
    
    887,268
    
    
    
    (61,864,753
    )
    
    
    
    
    
    
    (527,652
    )
    
    
    (28,530
    )
    
    
    (61,533,584
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,742,879
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,742,879
    )Unrealized loss on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179,383
    )
    
    
    (179,383
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,273
    )
    
    
    (82,273
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,004,535
    )Conversion of preferred
stock to common stock
    
    
    15,960,898
    
    
    
    1,596
    
    
    
    118,835,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,836,723Issuance of common stock
    
    
    5,000,000
    
    
    
    500
    
    
    
    67,940,862
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,941,362Stock issued upon exercise
of stock options
    
    
    107,382
    
    
    
    11
    
    
    
    116,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,975Stock issued under employee
stock purchase plan
    
    
    4,050
    
    
    
    
    
    
    
    36,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,215Compensation expense
related to options issued
to non-employees
    
    
    
    
    
    
    
    
    
    
    755,909
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755,909Restricted stock no longer
subject to repurchase
    
    
    
    
    
    
    
    
    
    
    11,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,702Deferred compensation
relating to stock options
    
    
    
    
    
    
    
    
    
    
    2,994,626
    
    
    
    
    
    
    
    
    
    
    
    (2,994,626
    )
    
    
    
    
    
    
    Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,001,348
    
    
    
    
    
    
    
    2,001,348Reversal of deferred
compensation due to
employee terminations
    
    
    
    
    
    
    
    
    
    
    (10,816
    )
    
    
    
    
    
    
    
    
    
    
    10,816
    
    
    
    
    
    
    
    Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,592,344
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,592,344
    )Balance at December 31, 2004
    
    
    21,894,830
    
    
    $
    2,190
    
    
    $
    191,567,857
    
    
    $
    (106,199,976
    )
    
    $
    
    
    
    $
    (1,510,114
    )
    
    $
    (290,186
    )
    
    $
    83,569,771
 See accompanying notes. F-5




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Period fromSeptember 17,2001(inception) toYear Ended December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002
    
    
    2004Operating activitiesNet loss
    
    $
    (39,742,879
    )
    
    $
    (20,215,273
    )
    
    $
    (29,803,935
    )
    
    $
    (89,783,354
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    380,555
    
    
    
    143,779
    
    
    
    38,462
    
    
    
    562,796Amortization of deferred compensation
    
    
    2,001,348
    
    
    
    198,098
    
    
    
    
    
    
    
    2,199,446Purchased in-process research and development
    
    
    
    
    
    
    
    
    
    
    25,000,000
    
    
    
    25,000,000Non-cash compensation expense related to the issuance of
options to non-employees
    
    
    755,909
    
    
    
    107,448
    
    
    
    17,467
    
    
    
    880,824Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (370,715
    )
    
    
    (384,450
    )
    
    
    (669,668
    )
    
    
    (1,424,833
    )Interest receivable
    
    
    (209,417
    )
    
    
    (472,206
    )
    
    
    (244,020
    )
    
    
    (925,643
    )Accounts payable and accrued expenses
    
    
    4,879,041
    
    
    
    1,419,682
    
    
    
    1,528,340
    
    
    
    7,834,682Deferred revenue
    
    
    196,518
    
    
    
    453,482
    
    
    
    
    
    
    
    650,000Other, net
    
    
    (78,821
    )
    
    
    (29,831
    )
    
    
    1,009
    
    
    
    (77,019
    )Net cash used in operating activities
    
    
    (32,188,461
    )
    
    
    (18,779,271
    )
    
    
    (4,132,345
    )
    
    
    (55,083,101
    )Investing activitiesPurchase of fixed assets
    
    
    (660,105
    )
    
    
    (751,039
    )
    
    
    (275,943
    )
    
    
    (1,687,087
    )Security deposits
    
    
    (3,711
    )
    
    
    (38,579
    )
    
    
    
    
    
    
    (42,290
    )Purchase of marketable securities
    
    
    (104,323,663
    )
    
    
    (52,592,578
    )
    
    
    (13,034,384
    )
    
    
    (169,950,625
    )Maturities of marketable securities
    
    
    69,275,435
    
    
    
    22,354,667
    
    
    
    955,811
    
    
    
    92,585,912Net cash used in investing activities
    
    
    (35,712,044
    )
    
    
    (31,027,529
    )
    
    
    (12,354,516
    )
    
    
    (79,094,090
    )Financing activitiesIssuance of convertible promissory notes
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    150,000Repayment of loan to officer
    
    
    
    
    
    
    59,980
    
    
    
    
    
    
    
    59,980Borrowings under notes payable
    
    
    555,193
    
    
    
    267,851
    
    
    
    
    
    
    
    823,044Repayment of notes payable
    
    
    (297,667
    )
    
    
    (6,525
    )
    
    
    
    
    
    
    (304,192
    )Proceeds from issuance of preferred stock
    
    
    (16,189
    )
    
    
    54,918,631
    
    
    
    22,367,659
    
    
    
    77,270,101Proceeds from issuance of common stock, net
    
    
    67,941,362
    
    
    
    
    
    
    
    171
    
    
    
    67,942,809Proceeds from exercise of stock options and other benefit plans
    
    
    153,190
    
    
    
    
    
    
    
    6,000
    
    
    
    159,190Net cash provided by financing activities
    
    
    68,335,889
    
    
    
    55,239,937
    
    
    
    22,423,830
    
    
    
    146,100,932Effect of exchange rate on cash and cash equivalents
    
    
    596
    
    
    
    3,585
    
    
    
    9,147
    
    
    
    (16,110
    )Net increase in cash and cash equivalents
    
    
    435,980
    
    
    
    5,436,723
    
    
    
    5,946,116
    
    
    
    11,907,632Cash and cash equivalents, beginning of period
    
    
    11,471,652
    
    
    
    6,034,929
    
    
    
    88,813
    
    
    
    Cash and cash equivalents, end of period
    
    $
    11,907,632
    
    
    $
    11,471,652
    
    
    $
    6,034,929
    
    
    $
    11,907,632Supplemental disclosures of cash flow informationCash paid during the period for interest
    
    $
    36,313
    
    
    $
    3,289
    
    
    $
    5,671
    
    
    $
    45,273Non-cash investing and financing activitiesIssuance of common stock in exchange for notes payable
    
    $
    
    
    
    $
    
    
    
    $
    59,980
    
    
    $
    59,980Preferred stock issued for convertible promissory note
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000Release of formerly restricted stock
    
    $
    11,702
    
    
    $
    14,511
    
    
    $
    
    
    
    $
    26,213Issuance of note payable in exchange for prepaid insurance
    
    $
    
    
    
    $
    185,594
    
    
    $
    
    
    
    $
    185,594Issuance of Series A redeemable convertible preferred stock in
exchange for purchased in-process research and development
    
    $
    
    
    
    $
    
    
    
    $
    25,000,000
    
    
    $
    25,000,000Conversion of preferred stock
    
    $
    118,836,723
    
    
    $
    
    
    
    $
    
    
    
    $
    118,836,723Initial public offering expenses reclassified to Additional
Paid-in Capital
    
    $
    1,808,638
    
    
    $
    
    
    
    $
    
    
    
    $
    1,808,638
 See accompanying notes. F-6




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##### Table of Contents



BARRIER THERAPEUTICS, INC.
(a development stage company) 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 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
but commenced active operations in May 2002. The Company was formed to develop and market products
that address medical needs in the treatment of dermatological diseases and disorders initially
based on intellectual property in-licensed from Janssen Pharmaceutica Products, L.P., Johnson &
Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson
company. The Companys activities since inception have consisted principally of raising capital,
performing research and development, hiring personnel and establishing facilities. Accordingly, the
Company is considered to be in the development stage. The Company has offices in Princeton, New
Jersey 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 offering in February 2005. The Company believes that its existing resources should be
sufficient to meet its capital and liquidity requirements through at least the end of 2006.
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 one or more of its product candidates, it may never
achieve 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. Initial Public Offering 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. Reverse Stock Split On April 28, 2004, the Company completed a one-for-two reverse stock split of its common stock
pursuant to which every two shares of the Companys common stock were replaced with one share of
the Companys common stock and the conversion ratio of each share of preferred stock was adjusted
accordingly to reflect the reverse stock split. As a result, in connection with the IPO, on April
28, 2004, the 31,921,809 outstanding shares of the Companys redeemable convertible preferred stock
converted into 15,960,898 shares of the Companys common stock. All references to common stock, common shares outstanding, average number of common shares
outstanding and per share amounts in these consolidated financial statements and condensed notes to
consolidated financial statements prior to the effective date of the reverse stock split have been
restated to reflect the one-for-two reverse stock split on a retroactive basis. F-7




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##### Table of Contents



Redeemable Convertible Preferred Stock The carrying value of redeemable preferred stock was increased by periodic accretions through
the date of its conversion at the IPO. These increases were effected through charges to deficit
accumulated during the development stage. Consolidation The financial statements include the accounts of Barrier Therapeutics, Inc. and its
wholly-owned subsidiary, Barrier Therapeutics, NV. Intercompany 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. 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, 2004, 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. 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. Fixed Assets Fixed assets include furniture and fixtures, computer and office equipment and software. Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets, generally three to seven 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 The Company reviews long-lived assets, including fixed assets, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the assets may not be
fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows. Through December 31,
2004, no impairment F-8




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##### Table of Contents



has occurred. Revenue Recognition The Company uses revenue recognition criteria in Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements and Emerging Issues Task Force (EITF) Issue 00-21 Revenue
Arrangements with Multiple Deliverables (EITF 00-21). Accordingly, revenues from licensing
agreements are recognized based on the performance requirements of the agreement. Non-refundable
up-front fees, where the Company has an ongoing involvement or performance obligation, are
generally recorded as deferred revenue in the balance sheet and amortized into license fees in the
statement of operations over the terms of the performance obligation. Contract revenues include license fees and other payments associated with collaborations with
third parties. Revenue from non-refundable, upfront license fees where the Company has continuing
involvement is recognized ratably over the performance period. Royalties from licensees are based
on third-party sales of licensed products and will be recorded in accordance with contract terms
when third-party results are reliably measurable and collectibility is reasonably assured. Grant revenues are recognized as the Company provides the services stipulated in the
underlying grant based on the time and materials incurred. 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. 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. 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 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 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. Comprehensive Loss F-9




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##### Table of Contents



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. Stock-Based Compensation As allowed by SFAS 123, the Company had elected to continue to apply the intrinsic value-based
method of accounting prescribed in APB Opinion 25 and, accordingly, does 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. Had compensation cost for the Companys outstanding employee stock options been determined
based on the fair value at the grant dates for those options consistent with SFAS 123, the
Companys net loss and basic and diluted net loss per share, would have been changed to the
following pro forma amounts: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net loss attributable to common stockholders
    
    $
    (44,335,223
    )
    
    $
    (28,647,447
    )
    
    $
    (33,196,039
    )Add noncash employee compensation as reported
    
    
    2,001,348
    
    
    
    198,098Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards
    
    
    (3,618,458
    )
    
    
    (600,483
    )
    
    
    (69,156
    )SFAS 123 pro forma net loss
    
    $
    (45,952,333
    )
    
    $
    (29,049,832
    )
    
    $
    (33,265,195
    )Basic and diluted loss attributable per common share
    
    $
    (3.02
    )
    
    $
    (83.95
    )
    
    $
    (240.75
    )Basic and diluted loss attributable to common
stockholders per share, SFAS 123 pro forma
    
    $
    (3.13
    )
    
    $
    (85.13
    )
    
    $
    (241.25
    )
 SFAS 123 pro forma information regarding net loss is required by SFAS 123, and has 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 was estimated using the
Black-Scholes pricing model with the following assumptions: Year Ended December 31,2004
    
    2003
    
    2002Risk-free interest rate
    
    3.0%
    
    2.8-3%
    
    4.0-4.5%Dividend yield
    
    0%
    
    0%
    
    0%Expected life
    
    8.5 years
    
    9.0 years
    
    9.5 yearsVolatility
    
    65%
    
    75%
    
    75%
 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. Stock option grants are expensed over their respective vesting periods. The Company accounts for options issued to nonemployees under SFAS 123 and EITF Issue 96-18,
Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services(EITF 96-18). As such, the value of such options is
periodically remeasured during their vesting terms. Deferred Stock Compensation F-10




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##### Table of Contents



During the year ended December 31, 2004, in connection with the grant of stock options to
employees and directors, the Company recorded deferred stock compensation totaling $2,994,626,
representing the difference between the fair value of common stock on the date such options were
granted, determined in accordance with GAAP, and the exercise price. These amounts are included as
a reduction of stockholders equity and are 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. During the year ended December 31,
2004, the Company recorded amortization of deferred stock compensation of $2,001,348. 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 31,2004
    
    
    2003
    
    
    2002Net loss attributable to common stockholders
    
    $
    (44,335,223
    )
    
    $
    (28,647,447
    )
    
    $
    (33,196,039
    )Basic and diluted:Weighted-average shares of common stock outstanding
    
    
    14,988,799
    
    
    
    822,500
    
    
    
    735,288Less: weighted-average shares subject to repurchase
    
    
    (311,089
    )
    
    
    (481,244
    )
    
    
    (597,399
    )Shares used in computing basic and diluted net
loss per common share
    
    
    14,677,710
    
    
    
    341,256
    
    
    
    137,889Basic and diluted net loss per common share
    
    $
    (3.02
    )
    
    $
    (83.95
    )
    
    $
    (240.75
    )
 Recently Issued Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised 2004) Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123® supersedes Accounting Principal Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows.
Generally, the approach to accounting in Statement 123® is similar to the approach described in
Statement 123. However, Statement 123® requiresall share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. Currently the Company accounts for these payments under the intrinsic value provisions of APB
No. 25. Statement 123® must be adopted no later than July 1, 2005. The Statement offers several
alternatives for implementation. At this time, the Companys management has not made a decision as
to the alternative it may select. The Company is in the process of determining how the new method
of valuing stock-based compensation as prescribed by Statement 123® will be applied to valuing
stock-based awards granted after the effective date and the impact the recognition of additional
non-cash compensation expense related to such awards will have on its financial statements. F-11




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##### Table of Contents



2. Available for Sale Investments The following is a summary of available for sale investments as of December 31, 2004 and
December 31, 2003: Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003Maturities within one year:Corporate notes
    
    $
    32,063,659
    
    
    $
    
    
    
    $
    (26,919
    )
    
    $
    32,036,740Maturities between one to five years:Corporate notes
    
    
    10,252,825
    
    
    
    15,095
    
    
    
    
    
    
    
    10,267,920Total
    
    $
    42,316,484
    
    
    $
    15,095
    
    
    $
    (26,919
    )
    
    $
    42,304,660December 31, 2004Maturities within one year:Corporate notes
    
    $
    56,244,826
    
    
    $
    
    
    
    $
    (172,622
    )
    
    $
    56,072,204Federal agency notes
    
    
    16,431,651
    
    
    
    
    
    
    
    (12,287
    )
    
    
    16,419,364Asset-backed securities
    
    
    4,688,235
    
    
    
    
    
    
    
    (6,298
    )
    
    
    4,681,937Total
    
    $
    77,364,712
    
    
    $
    
    
    
    $
    (191,207
    )
    
    $
    77,173,505
 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 and cost has
approximated fair value at the maturity dates. Unrealized losses in the Companys portfolio relate primarily to fixed income debt securities
and the majority 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 not other-than-temporary and the Company has the ability to hold the securities to
maturity or a planned forecasted recovery. 3. Fixed Assets Fixed assets consist of the following: December 31,2004
    
    
    2003Furniture and fixtures
    
    $
    470,832
    
    
    $
    298,151Computer, laboratory and office equipment
    
    
    702,999
    
    
    
    426,605Computer software
    
    
    468,277
    
    
    
    279,721Leasehold improvements
    
    
    44,979
    
    
    
    22,5051,687,087
    
    
    
    1,026,982Less accumulated depreciation
    
    
    (562,796
    )
    
    
    (182,241
    )$
    1,124,291
    
    
    $
    844,741
 Depreciation expense was $380,555 and $143,779 for the years ended December 31, 2004 and 2003,
respectively. 4. Balance Sheet Detail F-12




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##### Table of Contents



Accrued liabilities consist of the following as of December 31: December 31,2004
    
    
    2003Accrued product costs
    
    $
    2,316,224
    
    
    $
    906,112Accrued compensation and benefits
    
    
    1,697,883
    
    
    
    411,507Accrued other
    
    
    672,947
    
    
    
    634,446$
    4,687,054
    
    
    $
    1,952,065
 5. 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 3 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 Company entered into a promissory note for $148,014,
payable in 35 monthly installments of $4,732, including interest at 9.37%. In December 2003, the Company financed $185,593 of its clinical trial insurance, to an
unrelated third party. The balance due was paid in full in October 2004. Commitments under notes payable are as follows: 2005
    
    $
    261,1312006
    
    
    277,0852007
    
    
    166,230$
    704,446
 6. Income Taxes There is no tax provision for federal income taxes as the Company has incurred operating
losses since inception. At December 31, 2004, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $58,109,000, which begin to expire in 2021. The
Company has research tax credit carryovers for federal income tax purposes at December 31, 2004 of
approximately $2,161,000, which begin to expire in 2021. During 2004 and 2003, 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 $367,000 and $217,000, net of fees of
$49,317 and $35,330, respectively, were received by the Company resulting in the recognition of a
tax benefit. The benefit for income taxes is as follows: F-13




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##### Table of Contents



Year Ended December 31,2004
    
    
    2003
    
    
    2002Federal income taxes:Current expense
    
    $
    
    
    
    $
    
    
    
    $
    Deferred expense
    
    
    
    
    
    
    
    
    
    
    State income taxes:Current benefit
    
    
    (366,789
    )
    
    
    (217,027
    )
    
    
    Deferred expense
    
    
    
    
    
    
    
    
    
    
    Foreign income taxes:Current expense
    
    
    
    
    
    
    
    
    
    
    Deferred expense
    
    
    
    
    
    
    
    
    
    
    Income tax benefit
    
    $
    (366,789
    )
    
    $
    (217,027
    )
    
    $
    
 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 Companys deferred tax assets relate primarily to its net operating loss
carryforwards. At December 31, 2004 and December 31, 2003, 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, 2004 and 2003 was approximately $17,835,000 and $8,034,000, respectively. Significant
components of the Companys deferred tax assets at December 31, 2004 and 2003 are as follows: Year Ended December 31,2004
    
    
    2003Deferred tax assets:Net operating loss carryforwards
    
    $
    22,760,000
    
    
    $
    9,675,000Stock-based compensation
    
    
    1,232,000
    
    
    
    129,000Research tax credits
    
    
    3,242,000
    
    
    
    180,000Deferred revenue
    
    
    260,000
    
    
    
    Other
    
    
    407,000
    
    
    
    42,000Total deferred tax asset
    
    
    27,901,000
    
    
    
    10,026,000Deferred tax liabilities:Depreciation
    
    
    (102,000
    )
    
    
    (62,000
    )Total gross deferred tax liabilities
    
    
    (102,000
    )
    
    
    (62,000
    )Less valuation allowance
    
    
    (27,799,000
    )
    
    
    (9,964,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 A reconciliation of the statutory tax rates and the effective tax rates for the years ended
December 31, 2004 and 2003 is as follows: F-14




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##### Table of Contents



Year Ended December 31,2004
    
    
    2003Statutory rate
    
    
    (34
    )%
    
    
    (34
    )%State income tax
    
    
    (7
    )%
    
    
    (6
    )%Research tax credits
    
    
    (5
    )%
    
    
    Change in valuation allowance
    
    
    45
    
    
    
    39Benefit for income tax
    
    
    (1
    )%
    
    
    (1
    )%
 7. Stockholders Equity and Capital Structure Redeemable Convertible Preferred Stock On April 28, 2004, in connection with the IPO and as a result of the adjustment to the
conversion ratio effected by the one-for-two reverse stock split of the Companys common stock
every two shares of the Companys Series A, Series B, and Series C redeemable convertible preferred
stock were converted into one share of common stock. Fractional shares were redeemed for cash. Series A Redeemable Convertible Preferred Stock Series A redeemable convertible preferred stock (Series A) was issued in exchange for
licenses, intellectual property, patents and patent applications valued at $25,000,000 during 2002.
The holders of Series A were Janssen Pharmaceutica Products L.P. and Johnson & Johnson Consumer
Companies, Inc. A total of 8,333,333 shares were converted and exchanged into 4,166,666 shares of common
stock. Series B Redeemable Convertible Preferred Stock The Company received an aggregate of $46,150,008 in exchange for the issuance of the Series B
redeemable convertible preferred stock (Series B)at $3.00 per share. As a result of the initial
closing of 7,716,670 shares during May 2002, the Company received $23,000,010 cash, and $150,000 of
debt was converted to Series B during 2002. On May 7, 2003 (the second closing), the Company issued
7,666,666 shares for an aggregate purchase price of $22,999,998. Offering costs of approximately
$632,000 were netted against gross proceeds. A total of 15,383,336 shares were converted and exchanged into 7,691,667 shares of common
stock. Series C Redeemable Convertible Preferred Stock The Company received an aggregate of $32,000,046 in exchange for the issuance of the Series C
redeemable convertible preferred stock (Series C) during 2003. Offering costs of approximately
$97,000 were netted against gross proceeds. A total of 8,205,140 shares were converted and exchanged into 4,102,565 shares of common
stock. Series A Redeemable
    
    
    Series B Redeemable
    
    
    Series C RedeemableConvertible
    
    
    Convertible
    
    
    ConvertiblePreferred Stock
    
    
    Preferred Stock
    
    
    Preferred StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at January 1, 2003
    
    
    4,166,666
    
    
    
    26,750,330
    
    
    
    3,858,335
    
    
    
    24,159,433
    
    
    
    
    
    
    
    Issuance of Series BRedeemable Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    3,833,332
    
    
    
    22,999,998
    
    
    
    
    
    
    
    Accretion to redemption value
    
    
    
    
    
    
    2,939,152
    
    
    
    
    
    
    
    4,673,309
    
    
    
    
    
    
    
    Issuance of Series C
 F-15




---



##### Table of Contents



Series A Redeemable
    
    
    Series B Redeemable
    
    
    Series C RedeemableConvertible
    
    
    Convertible
    
    
    ConvertiblePreferred Stock
    
    
    Preferred Stock
    
    
    Preferred StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountRedeemable Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,102,565
    
    
    
    31,918,633Accretion to redemption price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    819,713Balance at December 31, 2003
    
    
    4,166,666
    
    
    
    29,689,482
    
    
    
    7,691,667
    
    
    
    51,832,740
    
    
    
    4,102,565
    
    
    
    32,738,346Accretion to redemption value
    
    
    
    
    
    
    1,052,130
    
    
    
    
    
    
    
    2,035,630
    
    
    
    
    
    
    
    1,504,584Financing expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,189
    )Conversion into common stock
    
    
    (4,166,666
    )
    
    
    (30,741,612
    )
    
    
    (7,691,667
    )
    
    
    (53,868,370
    )
    
    
    (4,102,565
    )
    
    
    (34,226,741
    )Balance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 Preferred Stock 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. Restricted Stock Purchase Agreements On October 31, 2001, the Company entered into restricted stock purchase agreements with three
individuals who were founders of the Company, for an aggregate of 637,500 shares at a price of
$.002 per share. Additionally, in February 2002, 75,000 shares were issued to another individual
considered to be a founder of the Company, under a restricted stock purchase agreement. On August
1, 2002, the Company issued 100,000 shares of common stock under a restricted stock purchase
agreement to one of the officers of the Company for $20 cash and a full-recourse note for $59,980.
The note and accrued interest were repaid in full during 2003. The restricted shares generally vest as follows: (a) 25% on the common stock shall vest on the
date each founder commences employment with the Company, (b) 18.75% shall vest on the first
anniversary of the date of employment, (c) the remaining 56.25% shall vest in equal installments
over a three year period beginning the month following the first anniversary. 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 ESPP became effective on April 28, 2004
in connection with the Companys initial public offering. 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. 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, F-16




---



##### Table of Contents



not to exceed 150,000 shares. There is a 1,500 share purchase limitation per participant and
7,500 aggregate purchase limitation per purchase date. As of December 31, 2004, a total of 4,050 shares of common stock were purchased at $8.94
per share. Stock Options 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 Equity Compensation Plan (the 2004 Plan).
The 2004 Plan became effective concurrent with the initial public offering. On that date, the
outstanding options under the 2002 Plan were transferred to the 2004 Plan, and 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 2002 Plan have substantially the same terms
as the options granted under the 2004 Plan. The 2004 Plan provides for the granting of options to purchase shares of the Companys common
stock to key employees, advisors and consultants at a price not less than the fair market value at
the date of grant, or stock appreciation rights tied to the value of such common stock. 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 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. The following table summarizes information about stock options outstanding at December
31, 2004: Options OutstandingShares
    
    
    
    
    
    
    Option
    
    
    Weighted-Available
    
    
    Number
    
    
    Price
    
    
    Averagefor
    
    
    of
    
    
    Per Share
    
    
    ExerciseGrant
    
    
    Shares
    
    
    Range
    
    
    PriceBalance at December 31, 2001
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Shares authorized
    
    
    1,037,500
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (367,500
    )
    
    
    367,500
    
    
    
    .60
    
    
    
    .60Options exercised
    
    
    
    
    
    
    (10,000
    )
    
    
    .60
    
    
    
    .60Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares granted
    
    
    (100,000
    )
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    570,000
    
    
    
    357,500
    
    
    
    .60
    
    
    
    .60Shares authorized
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (521,083
    )
    
    
    521,083
    
    
    
    .80-3.00
    
    
    
    .88Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    548,917
    
    
    
    878,583
    
    
    
    .60-3.00
    
    
    
    .88Shares authorized
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (691,050
    )
    
    
    691,050
    
    
    
    3.50-17.70
    
    
    
    8.50Options exercised
    
    
    
    
    
    
    (107,382
    )
    
    
    .60-4.00
    
    
    
    1.09Options forfeited
    
    
    23,314
    
    
    
    (23,314
    )
    
    
    .60-3.50
    
    
    
    .94Balance at December 31, 2004
    
    
    381,181
    
    
    
    1,438,937
    
    
    $
    .60-17.70
    
    
    $
    4.52
 F-17




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##### Table of Contents



The following table summarizes information about vested stock options outstanding: December 31,2004
    
    
    2003Vested stock options
    
    
    383,586
    
    
    
    159,404Weighted-average exercise price
    
    $
    1.09
    
    
    $
    .68
 The following table summarizes information about stock options outstanding at December 31,
2004: Weighted-AverageOptions
    
    
    Options
    
    
    RemainingExercise Price
    
    Outstanding
    
    
    Vested
    
    
    Contractual Life$    .60
 $    1.50
    
    
    758,473
    
    
    
    345,647
    
    
    8.13.00
       4.00
    
    
    190,864
    
    
    
    37,939
    
    
    9.18.00
     10.00
    
    
    220,000
    
    
    
    
    
    
    9.210.00
     14.00
    
    
    243,000
    
    
    
    
    
    
    9.614.00
     18.00
    
    
    26,600
    
    
    
    
    
    
    9.91,438,937
    
    
    
    383,586
    
    
    8.7
 The weighted-average fair value of options issued during 2004 was $10.70. Compensation expense of $755,909 and $107,448 has been recognized in 2004 and 2003,
respectively, for non-employee options granted. 8. In-Process Research and Development In 2002, the Company licensed its initial portfolio of product candidates, other than
Ecalcidene, 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 for use in the
field of dermatology. Under the license agreements, the Company also has access to the classes of
compounds claimed in the patents licensed to the Company under the license agreements, which the
Company can screen in its search for new product candidates in the field of dermatology. This
transaction was accounted for as an acquisition of assets. The status of the most advanced of these product candidates at the time of acquisition are
described below: Seboride, a once-a-day dose topical gel based on the combination of ketoconazole and
desonide for the treatment of seborrheic dermatitis that combines the long-lasting effect of the
antifungal agent with the fast-acting, mid-potency steroid. As of the date acquired, Phase 2
clinical trials were completed for Seboride, and two Phase 3 clinical trials needed to be
initiated and successfully completed prior to a new drug application filing. Zimycan, an ointment with an active ingredient of 0.25% miconazole, an antifungal agent in
a zinc oxide and petrolatum base for the treatment of infants with Candida-associated diaper
dermatitis. When acquired, the Company needed to design, initiate and successfully complete an
additional Phase 3 clinical trial in Candida-associated diaper dermatitis and file an amendment
to the Companys new drug application that was assigned to the Company under the license
agreements. F-18




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##### Table of Contents



Hyphanox, formerly referred to by the Company as Sporamelt, an oral formulation of
itraconazole, an antifungal agent, that the Company is developing for the treatment of various
fungal infections. Bioequivalence studies and two Phase 3 clinical trials with an initial melt
extrusion formulation of the drug were performed prior to the Companys acquisition of rights to
the product candidate. As part of the license agreements, Janssen Pharmaceutica Products, L.P.,
retained an exclusive option to acquire the right to commercialize Hyphanox on a geographic
region-by-region basis. Liarozole, the Companys first product candidate based on a class of molecules known as
retinoic acid metabolism blocking agents, or RAMBAs. The Company is developing Liarozole as an
oral treatment for congenital ichthyosis. As of the acquisition date, topical Liarozole had
undergone initial Phase 2 and Phase 3 clinical trials for ichthyosis. The project rights were reviewed to determine the stage of their development, the achievement
of technological feasibility and the technical milestones needed to be reached before
commercialization is possible. It was determined as of the acquisition date that each project had
significant technical risk associated with achieving the technological feasibility needed for FDA
approval and each project had significant milestones to reach before commercialization. It was also
determined that all of the projects had no alternative future uses if they were not successful.
Accordingly, each product was classified as in-process research and development and expensed
immediately. The Company valued the assets acquired based on the value of the consideration that Janssen
Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc., and Ortho-McNeil
Pharmaceutical, Inc. received in the transaction. Concurrent with the transaction the Company
issued for cash 15,333,336 shares of its series B redeemable convertible preferred stock, with
similar characteristics to its series A redeemable convertible preferred stock, to investors not
related to the Company or Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer
Companies, Inc., or Ortho-McNeil Pharmaceutical, Inc.. Based on the value of the Companys series B
redeemable convertible preferred stock, the Company valued the in-process research and development
at $25,000,000. 9. Loss Per Share The following table set forth the computation of basic and diluted net loss attributed to
common stockholders per share: Year Ended December 31,2004
    
    
    2003
    
    
    2002NumeratorNet loss
    
    $
    (39,742,879
    )
    
    $
    (20,215,273
    )
    
    $
    (29,803,935
    )Preferred stock accretion
    
    
    (4,592,344
    )
    
    
    (8,432,174
    )
    
    
    (3,392,104
    )Numerator for basic and
diluted net loss
attributable to common
stockholders per
sharenet loss
attributable to common
stockholders
    
    $
    (44,335,223
    )
    
    $
    (28,647,447
    )
    
    $
    (33,196,039
    )DenominatorDenominator for basic
and diluted net loss
attributable to common
stockholders per
shareweighted-average
shares
    
    
    14,677,710
    
    
    
    341,256
    
    
    
    137,889Basic and diluted net
loss attributable to
common stockholders per
share
    
    $
    (3.02
    )
    
    $
    (83.95
    )
    
    $
    (240.75
    )
 The following table shows dilutive common share equivalents outstanding, which are not
included in F-19




---



##### Table of Contents



the above historical calculation, as the effect of their inclusion is anti-dilutive during
each period. Year Ended December 31,2004
    
    
    2003
    
    
    2002Preferred stock
    
    
    
    
    
    
    31,921,809
    
    
    
    16,050,003Options
    
    
    1,438,937
    
    
    
    878,583
    
    
    
    357,500
 10. Commitments and
Contingencies 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 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, (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 not
effectuated directly by the Company or through contract sales organizations on a
territory-by-territory basis, and (c) as to the itraconazole melt extrusion only, Janssen Pharmaceutica Products, L.P.,
Johnson & Johnson Consumer Companies, Inc., and Ortho-McNeil Pharmaceutical, Inc., has an option
to acquire the marketing and sales rights on a territory-by-territory basis subject to payment
to the Company of: fees as specified in the contract; all of the Companys development costs on
such project; and a royalty on sales, as stated in the contract, depending on the duration from
the date of delivery of materials until the Companys first major market filing for drug
approval (NDA or equivalent). Other Significant Agreements The Company enters into agreements for clinical trials management, contract manufacturing and
testing of its compounds. At December 31, 2004, the Company has aggregate commitments of
approximately $12.2 million under such contracts. Additionally, the Company has entered into one development and supply agreement which provides
for a future royalty payment equal to a stated percentage of the weighted average market price of
sales of certain finished products which incorporate the product developed under the same contract. 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 2006. The Company expensed $20,788 and $1,607,209 for the purchase of raw materials and clinical
supplies from a company related to a preferred stockholder during 2004 and 2003, respectively. F-20




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##### Table of Contents



The Company accrued interest of $4,586 to a preferred stockholder on the convertible
promissory notes during 2002. During 2002, the Company entered into an agreement with an officer to loan $59,980 for the
purchase of 100,000 shares of restricted stock. At December 31, 2002, interest of $1,150 was
accrued and included in interest receivable. During 2003, the principal amount of $59,980 and
$3,024 of interest was paid in full. 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 $17,000. Future minimum lease commitments, net of
sublease income, are as follows: 2005
    
    $
    594,4432006
    
    
    553,8812007
    
    
    584,4162008
    
    
    592,0412009
    
    
    614,917Thereafter
    
    
    461,188$
    3,400,886
 Total rent expense was $425,068 in 2004, $282,662 in 2003, and $115,757 in 2002. 13. Benefit Plan In July 2002, the Company established a 401(k) plan (the Plan) covering all eligible
employees. As of December 31, 2004, the Company has not elected to match any of the employees
contributions to the Plan. 14. Selected Quarterly Financial Data (Unaudited) Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003Net loss
    
    $
    (4,104,126
    )
    
    $
    (4,604,222
    )
    
    $
    (4,633,692
    )
    
    $
    (6,873,233
    )Net loss attributable to common stockholders
    
    
    (5,474,186
    )
    
    
    (6,435,977
    )
    
    
    (6,808,201
    )
    
    
    (9,929,083
    )Basic and diluted net loss per common
share(1)
    
    $
    (24.60
    )
    
    $
    (20.94
    )
    
    $
    (17.33
    )
    
    $
    (22.45
    )2004Net loss
    
    $
    (7,523,698
    )
    
    $
    (8,756,113
    )
    
    $
    (10,150,160
    )
    
    $
    (13,312,908
    )Net loss attributable to common stockholders
    
    
    (10,942,050
    )
    
    
    (9,930,105
    )
    
    
    (10,150,160
    )
    
    
    (13,312,908
    )Basic and diluted net loss per common
share(1)
    
    $
    (22.62
    )
    
    $
    (0.66
    )
    
    $
    (0.47
    )
    
    $
    (0.62
    )
   (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. F-21




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##### Table of Contents



Diluted EPS is identical to Basic EPS since common equivalent shares are excluded from the
calculation, as their effect is anti-dilutive. 15. Subsequent Events (Unaudited) On February 10, 2005 the Company sold 2,000,000 shares of common stock in a follow-on public
offering. The Company raised approximately $36 million, net of offering costs. On February 7, 2005, the Company acquired all U.S. and Canadian marketing rights for a
dermatology product and is purchasing all existing inventory, in exchange for an initial cash
payment of approximately $3.1 million and up to $2 million in additional payments if certain sales
targets are met. The acquisition will be accounted for under the purchase method of accounting as
an asset acquistion, and total purchase price will be allocated to identifiable intangible assets
and inventory during the first quarter of 2005. F-22




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INDEX OF EXHIBITS Exhibit No.
    
    Description3.1
    
    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 October
23, 2003, 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, 200410.4(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, 200410.6
    
    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)*10.9
    
    Employment Agreement, effective as of April 1, 2004, by and between
the Registrant and Alfred Altomari*10.10
    
    Employment Agreement, effective as of April 1, 2004, by and between
the Registrant and Albert Bristow




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Exhibit No.
    
    Description10.11
    
    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)




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Exhibit No.
    
    Description10.25
    
    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*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.
    
    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.