As filed with the Securities and Exchange Commission on January 17, 2006.

Registration No. 333-123288

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Pre-Effective Amendment No. 5

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

VALERA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


Delaware	2834	13-4119931
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

7 Clarke Drive

Cranbury, New Jersey 08512

(609) 235-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

David S. Tierney, M.D.

President and Chief Executive Officer

Valera Pharmaceuticals, Inc.

7 Clarke Drive

Cranbury, New Jersey 08512

(609) 235-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to:


Robert B. Murphy, Esq. Raymond A. Miller, Esq. Pepper Hamilton LLP 600 Fourteenth Street, N.W. Washington, D.C. 20005-2004 (202) 220-1200 Facsimile: (202) 220-1665		Richard B. Aftanas, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, NY 10036 (212) 735-3000 Facsimile: (212) 735-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE




	Amount	Proposed Maximum	Proposed Maximum	Amount of
Title of Each Class of	to be	Offering Price	Aggregate	Registration
Securities to be Registered	Registered(1)	Per Share(2)	Offering Price(2)	Fee(3)

Common Stock, $0.001 par value per share	4,312,500	$12.00	$51,750,000	$5,537.25



(1)	Includes shares that the underwriters have an option to purchase to cover over-allotments, if any.



(2)	Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.



(3)	In connection with the initial filing of the Registration Statement, $8,798.08 was paid to register $74,750,000 of securities.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.


PRELIMINARY PROSPECTUS	SUBJECT TO COMPLETION, DATED JANUARY 17, 2006

3,750,000 Shares of Common Stock

This is the initial public offering of our common stock. We are selling 3,750,000 shares of common stock. The public offering price of our common stock is expected to be between $10.00 and $12.00.

Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock approved for quotation on The Nasdaq National Market under the symbol, “VLRX.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock under the heading “Risk Factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	Per Share	Total

Public Offering Price	$	$
Underwriting Discounts and Commissions	$	$
Proceeds, Before Expenses, to Us	$	$

The underwriters may also purchase up to an additional 562,500 shares from us at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments.

The underwriters are offering the shares of our common stock as described in “Underwriting.” Delivery of the shares will be made on or about , 2006.


UBS Investment Bank	Banc of America Securities LLC


First Albany Capital	Fortis Securities LLC

TABLE OF CONTENTS


	Page

Prospectus summary		1
Risk factors		8
Forward-looking statements		23
Use of proceeds		24
Dividend policy		25
Capitalization		26
Dilution		28
Selected historical financial data		30
Management’s discussion and analysis of financial condition and results of operations		32
Business		45
Management		69
Principal stockholders		79
Certain relationships and related transactions		81
Description of capital stock		82
Shares eligible for future sale		86
Underwriting		88
Legal matters		91
Experts		91
Available information		91
Index to financial statements		92
EX-1.1: FORM OF UNDERWRITING AGREEMENT
EX-3.2: CERTIFICATE OF AMENDMENT
EX-3.3: AMENDED AND RESTATED CERTIFICATION OF INCORPORATION
EX-3.5: AMENDED AND RESTATED BYLAWS
EX-4.1: SPECIMEN COMMON STOCK CERTIFICATE
EX-5.1: OPINION OF PEPPER HAMILTON LLP
EX-23.1: CONSENT OF ERNST & YOUNG LLP

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares.

“Vantas^®” is our registered trademark. DDAVP^®, Eligard^®, Elmiron^®, Lupron^®, Lupron Depot-PED^®, Sandostatin^®, Sandostatin LAR^®, Somavert^®, Tofranil^®, Valstar,^® Viadur,^® Zoladex^® and Trelstar^® are the registered trademarks of others.


	United Kingdom

This prospectus is directed solely at persons who (i) are outside the United Kingdom or (ii) are specifically identified in a covering letter accompanying this prospectus (“relevant persons”). This prospectus must not be acted on or relied on by anyone who is not a relevant person.


	Ireland

No offer, sale or placement of shares of our Common Stock in, from or otherwise involving Ireland shall occur other than in conformity with the provisions of the Prospectus (Directive 2003/71/ EC) Regulations 2005 of Ireland, EU prospectus law (as such term is defined in section 78 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 of Ireland), and the Investment Intermediaries Act 1995, of Ireland (as amended).

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the “Risk Factors” section beginning on page 8 and our financial statements and related notes and schedule beginning on page F-1 before making an investment decision. References to “we,” “us,” “our” or “Valera” refer to Valera Pharmaceuticals, Inc.

Our Company

Valera is a specialty pharmaceutical company concentrating on the development, acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders, including products that utilize our proprietary technology. Our first product, Vantas, was approved for commercial sale and distribution by the U.S. Food and Drug Administration, or FDA, in October 2004. Vantas is a 12-month implant indicated for the palliative treatment of advanced prostate cancer. Vantas slows prostate tumor growth by delivering histrelin, a luteinizing hormone-releasing hormone agonist, or LHRH agonist. Vantas is the only product indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist available on the market. In November 2004, our sales force began marketing Vantas to urologists in the United States that account for the majority of LHRH agonist product sales.

In addition to Vantas, we are developing a pipeline of product candidates for indications that include central precocious puberty, acromegaly, opioid addiction, interstitial cystitis, nocturnal enuresis and bladder cancer. Some of our product candidates are based on our Hydron Technology, a patented polymer drug delivery technology that forms the Vantas implant.

Product Development

The following table summarizes certain information regarding Vantas and our product candidates.

Therapeutic

Delivery

Next Anticipated

Product

Indication

Area

Method

Status

Milestone

Vantas

Prostate Cancer

Urology

Implant

U.S. Commercial Sales

Commence Mutual Recognition Process in Europe in Second Quarter of 2006

VP002
(Histrelin)

Central Precocious Puberty (early onset of puberty)

Endocrinology

Implant

Phase III

New Drug Application Filing in Second Quarter of 2006

VP003
(Octreotide)

Acromegaly (giantism)

Endocrinology

Implant

Phase I/II

Phase IIb Clinical Trial in First Half of 2006

VP004
(Naltrexone)

Addiction Disorders

Central Nervous System

Implant

Pre-clinical

Phase I/II Clinical Trial in First Half of 2006

VP005
(Anti-inflammatory)

Interstitial Cystitis (bladder inflammation)

Urology

Bladder Instillation

Pre-clinical

Phase I/II Clinical Trial in Second Half of 2006

VP006
(Peptide)

Nocturnal Enuresis (bed-wetting)

Urology

Oral Tablet

Phase I

Clinical Trials in First Half of 2006

Valrubicin

Bladder Cancer

Urology

Bladder Instillation

Acquisition Pending

Closing of Asset Purchase in First Quarter of 2006

Vantas is a soft and flexible implant utilizing our Hydron Technology to deliver histrelin over a 12-month period for the palliative treatment of advanced prostate cancer. The total number of patients with advanced prostate cancer in the U.S. was approximately 666,300 in 2004, and we estimate that approximately 50% of these patients are receiving treatment with LHRH therapy. We estimate the patient population in Europe to be of similar size. Total U.S. sales of LHRH agonist products for advanced prostate cancer were approximately $973 million in 2004 based on IMS Health market data, though we believe that amount declined by approximately 10% in 2005, primarily as a result of lower prices due to changes in Medicare reimbursement. We believe that Vantas is a more comfortable and convenient alternative to competing products because it eliminates the requirement of multiple physician visits and repeated injections and is smaller, softer and more flexible than other implants. Implantation, however, may be less well received by some patients than injection therapy. We have been marketing Vantas in the U.S. since November 2004. We received regulatory approval to commercialize Vantas in Denmark in November 2005. We expect to commence the mutual recognition process for regulatory approval in other European countries in the second quarter of 2006. We filed for regulatory approval in Canada in June 2004. In addition, one of our marketing partners has applied for regulatory approval in Thailand, Singapore, Malaysia, and Taiwan.

VP002 is an implant utilizing Hydron Technology to deliver histrelin over a 12-month period for the treatment of central precocious puberty, or CPP, which is the early onset of puberty in young children. The prevalence of this condition is estimated to be between one in 5,000 to 10,000 children. This yields a potential population of up to 11,700 children who are 14 or younger with this condition in the U.S. One therapy currently approved in the U.S. to treat CPP is Lupron Depot-PED, which consists of monthly intramuscular injections of leuprolide to hormonally suppress these children. We estimate the U.S. CPP market to be approximately $70-$80 million. If approved, VP002 would provide hormonal suppression with histrelin over a 12-month period. We believe VP002 would have a competitive advantage over the existing products because it eliminates multiple injections in children and offers increased convenience and reduced costs. We are currently conducting a single Phase III clinical trial for VP002 with 36 patients and expect to file a new drug application with the FDA in the second quarter of 2006. All patients in the Phase III clinical trial have met their first efficacy endpoint, which is hormone suppression below pubertal levels. There were no serious side effects for any patients and no patient discontinuations from the clinical trial. Monthly assessments of efficacy and safety will be gathered until the end of the study, which is scheduled for April 2006. In November 2005, we received notification from the FDA that VP002 was granted orphan drug designation for the treatment of central precocious puberty. Orphan drug designation provides us with certain economic benefits and tax credits, and exclusivity in the marketplace for a period of seven years.

VP003 is an implant utilizing Hydron Technology to deliver octreotide over a six-month period for the treatment of acromegaly, or giantism, a chronic hormonal disorder that occurs when a pituitary tumor produces excess growth hormone, or GH. We believe that there are approximately 1,000 new acromegalic patients per year and 16,000 total patients in the U.S. We estimate the U.S. acromegalic market to be approximately $200 million annually, consisting primarily of monthly injections of octreotide. Octreotide is used to substantially reduce GH levels and insulin-like growth factor levels in patients. We believe that there is a market for a longer-acting octreotide formulation such as VP003 in order to reduce the number of physician visits for injections. We believe patient compliance would also be significantly improved by a longer-acting treatment with VP003. We plan to initiate a Phase IIb clinical trial in the first half of 2006 to evaluate the efficacy of VP003 as compared to Sandostatin LAR, a monthly injection therapy indicated to treat acromegaly.

We have several other products in pre-clinical development, including VP004, an implant using Hydron Technology to deliver naltrexone for the treatment of addictive disorders, and VP005, a solution instillation for the treatment of symptoms associated with interstitial cystitis, a chronic inflammatory condition of the bladder. In addition, we are developing VP006, an oral peptide to treat nocturnal enuresis, or bed-wetting.

In addition, we have entered into an agreement to acquire certain assets from Anthra Pharmaceuticals, Inc. associated with Anthra’s valrubicin business in the U.S. and Canada. The valrubicin product,

formerly marketed in the U.S. under the trademark Valstar, is a bladder instillation approved to treat bladder cancer that is no longer responsive to conventional treatment such as surgery and/or topical drug application. We believe there is a patient population of approximately 8,200 candidates with this type of cancer, who are generally treated by urologists. This product was previously administered and billed as an office procedure, and predominantly covered under Medicare reimbursement. We believe that it will continue to be administered and billed as an office procedure and that the Medicare reimbursement per course of treatment will be approximately $8,500. Anthra’s valrubicin product, which is not covered by any patents, was withdrawn from the market in 2002 due to a manufacturing problem and a lack of resources to address the problem. We believe that we have identified the cause of the manufacturing problem and that we will be able to correct it. We initiated discussions with the FDA in the fourth quarter of 2005 regarding our plan to reintroduce the product into the U.S. market, and in January 2006, the FDA agreed to our reintroduction plan. Our acquisition of the product and related assets is expected to close during the first quarter of 2006, subject to various conditions, including termination of Anthra’s agreement with the existing distributor of the product in the U.S. If the transaction closes as planned, we will pay $600,000 for the assets, and we may make additional payments based upon net sales and certain milestone payments based upon achieving certain sales levels. Subject to closing the transaction during the first quarter of 2006 and our successful implementation of the reintroduction plan, we anticipate being able to re-launch the product in the fourth quarter of 2006.

Our Drug Delivery System

We believe that implantable drug delivery systems may provide safer and more effective administration of therapy by delivering drugs directly to the bloodstream. All implants, including our implant, are limited by the amount of drug which can be loaded into the implant due to their small size and require a minor surgical procedure to insert and remove them. In addition, our implant is unable to deliver drugs that are water insoluble. Our implant is designed to allow release of drugs continuously, at even, controlled rates for up to a 12-month period. We believe that such predictable release over 12 months has not been achieved by most other drug delivery systems. Further, implants utilizing Hydron Technology eliminate the requirement of multiple physician visits and repeated injections and are smaller, softer and more flexible than other implants. We believe that these characteristics provide Vantas and our implant product candidates with the advantages of reduced costs, better patient comfort and increased patient compliance.

Our Competitive Strengths

We believe that our key competitive strengths that distinguish us from our competitors include:


	•	Technology. Implants using Hydron Technology can be adapted to deliver many different drugs. Currently, we only have FDA approval for Vantas. We will need to obtain approval for each additional product we develop, including products using our Hydron Technology. Further, because we own the manufacturing know-how to develop products utilizing Hydron Technology, we are able to control and maximize its potential commercial uses. In addition, our implants are soft and flexible, enhancing patient comfort.

	•	Development Capability. As demonstrated by Vantas, we have succeeded in developing a product, successfully taking it through the regulatory process to market in the U.S. in less than a year from the submission of a new drug application without utilizing an accelerated approval process. However, we may not be able to obtain FDA approval for our product candidates as quickly as we did for Vantas. Over the past three years, we have advanced two other product candidates into late-stage clinical development.

	•	Manufacturing Ability. We manufacture Vantas and our product candidates utilizing Hydron Technology in a patented process, and because we control the manufacturing process, we can ensure high quality and fully realize any manufacturing cost efficiencies. However, we have previously experienced disruptions in our manufacturing of Vantas due to issues caused by our supply of histrelin, the active ingredient in Vantas. The risks related to manufacturing are highlighted in the “Risk Factors” immediately following this prospectus summary.


	•	Sales and Marketing. We have a highly focused sales force that calls on urologists that account for the majority of LHRH agonist product sales in the U.S. In the future, we plan to leverage our sales force by marketing our approved products to our current physician base and to physicians in additional specialty areas, such as endocrinology. We also believe that the direct physician distribution channel of Vantas may present a barrier to the future entry of competition from generic products as generic drug companies do not typically have field sales forces.

Our Business Strategy

In addition to growing sales of our approved product, Vantas, our goal is to develop, acquire and commercialize products for the treatment of urological and endocrine conditions, diseases and disorders. To achieve this goal, our strategy includes the following key elements:



	•	continue to focus on urological and endocrine conditions, diseases and disorders;



	•	develop proprietary pharmaceutical portfolio;



	•	develop or acquire new drug delivery technologies;



	•	leverage sales and marketing expertise; and



	•	partner outside the U.S. to reach new geographic markets.

Although we intend to develop, in-license or acquire additional urological and endocrine products, to date, we have only commercialized one product, Vantas. If we are unable to maintain or expand sales of Vantas, or if we are unsuccessful in developing and gaining regulatory approval for new product candidates, we may not be able to achieve or sustain profitability. In addition, we may need additional financing to execute our strategy to develop, acquire and commercialize future product candidates.

Risks Affecting Our Business and Business Strategy

Our business is subject to numerous risks that could prevent us from successfully implementing our business strategy. These risks are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. In particular, we are largely dependent on the success of Vantas, which is our sole source of revenues derived from operations. We have incurred significant losses since our inception and as of September 30, 2005, we had an accumulated deficit of approximately $38.2 million. In addition, we may not be able to develop, or obtain regulatory approval to market, any of our product candidates. Further, we have limited sales, marketing and distribution experience and may be unable to successfully commercialize Vantas or any product candidates for which we obtain regulatory approval.

Corporate Information

We were incorporated in the State of Delaware in May 2000 as Hydro Med Sciences, Inc. Prior to that time, we operated as a division of GP Strategies Corporation. We changed our name from Hydro Med Sciences, Inc. to Valera Pharmaceuticals, Inc. in July 2003. Our principal executive offices are located at 7 Clarke Drive, Cranbury, New Jersey 08512, and our telephone number at that address is (609) 235-3000. Our website address is http://www.valerapharma.com. Information contained in our website is not a part of this prospectus.

The Offering



Common Stock Offered		3,750,000 shares



Common Stock Outstanding After the Offering		14,696,482 shares



Use of Proceeds		We expect to use the net proceeds from this offering to expand our sales and marketing capabilities, fund our research and development activities, expand our manufacturing capabilities, acquire or in-license additional urological and endocrine products, repay amounts outstanding under our line of credit and for general corporate purposes. In addition, we may use a portion of the net proceeds to acquire products or technologies that are complementary to our current or future business and product lines.


Proposed Nasdaq Symbol		“VLRX”

Risk Factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider before deciding to invest in our common stock.

The number of shares of our common stock outstanding after this offering is based on 10,946,482 shares outstanding as of December 31, 2005. Unless otherwise indicated, all information in this prospectus assumes the following:



	•	a 1-for-6 reverse split of our common stock to be completed before the closing of this offering;



	•	the conversion of 40,668,966 outstanding shares of our convertible preferred stock into 9,279,399 shares of our common stock, which will become effective upon the closing of this offering; and



	•	the underwriters do not exercise their option to purchase up to 562,500 shares of our common stock to cover over-allotments.

The number of shares of our common stock to be outstanding immediately after this offering excludes:



	•	1,265,842 shares of our common stock issuable upon exercise of options outstanding as of December 31, 2005, at a weighted average exercise price of $4.26 per share, of which options to purchase 605,005 shares were exercisable as of that date; and



	•	567,075 shares of our common stock available for future grant under the Valera Pharmaceuticals, Inc. Equity Incentive Plan as of December 31, 2005.

SUMMARY FINANCIAL DATA

The following tables set forth our summary financial data for the three years ended December 31, 2004 and as of December 31, 2004, which have been derived from our audited financial statements included elsewhere in this prospectus. In addition, the tables include summary financial data for the nine months ended September 30, 2004 and 2005, and as of September 30, 2005, which have been derived from our unaudited financial statements included elsewhere in this prospectus. It is important that you read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our financial statements and the related notes and schedule to these financial statements beginning on page F-1 of this prospectus. The historical results presented below are not necessarily indicative of results to be expected in any future periods.


		Year Ended December 31,									Nine Months Ended September 30,

		2002			2003			2004			2004			2005

		(Restated)(1)									(Unaudited)
Net product sales		$	15,006		$	7,353		$	5,511,286		$	—		$	21,632,421
Licensing revenue			—			—			134,636			127,984			27,317

Total net revenue			15,006			7,353			5,645,922			127,984			21,659,738
Operating costs and expenses:
	Cost of product sales		—			—			608,150			—			4,782,775
	Research and development		4,319,709			5,229,529			6,375,819			5,281,673			4,411,733
	Selling and marketing		269,633			509,514			5,025,038			1,847,901			8,231,583
	General and administrative		1,324,378			1,838,101			5,897,435			2,132,602			4,128,564

Total operating expenses			5,913,720			7,577,144			17,906,442			9,262,176			21,554,655

(Loss) income from operations			(5,898,714	)		(7,569,791	)		(12,260,520	)		(9,134,192	)		105,083
Interest income (expense), net			15,919			13,134			(6,152	)		5,116			45,526

(Loss) income before income taxes			(5,882,795	)		(7,556,657	)		(12,266,672	)		(9,129,076	)		150,609
Benefit from income taxes			—			—			243,618			—			—

Net (loss) income			(5,882,795	)		(7,556,657	)		(12,023,054	)		(9,129,076	)		150,609
Deemed dividend(1)			—			(1,139,535	)		(5,860,465	)		(5,860,465	)		—

Net (loss) income attributable to common stockholders		$	(5,882,795	)	$	(8,696,192	)	$	(17,883,519	)	$	(14,989,541	)	$	150,609

Basic net (loss) income attributable to common shareholders per share		$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.09

Weighted average shares outstanding — basic			1,666,667			1,666,667			1,666,667			1,666,667			1,666,667

Diluted net (loss) income attributable to common shareholders per share		$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.01

Weighted average shares outstanding — diluted			1,666,667			1,666,667			1,666,667			1,666,667			10,801,555

Unaudited pro forma basic net (loss) income per share(2)								$	(2.24	)				$	0.01

Unaudited pro forma weighted average shares outstanding — basic									7,995,897						10,508,433

Unaudited pro forma diluted net (loss) income per share(2)								$	(2.24	)				$	0.01

Unaudited pro forma weighted average shares outstanding — diluted									7,995,897						10,801,555


				As of September 30, 2005,

	As of December 31, 2004									Pro Forma as
	Actual			Actual			Pro Forma(3)			Adjusted(4)

Balance Sheet Data:
Cash and cash equivalents	$	5,052,643		$	2,569,262		$	2,569,262		$	38,876,762
Working capital		8,306,324			6,090,123			6,090,123			42,397,623
Total assets		13,666,946			16,376,796			16,376,796			52,684,296
Long-term liabilities and convertible preferred stock		39,942,188			40,231,938			306,943			306,943
Accumulated deficit		(38,317,116	)		(38,166,507	)		(38,166,507	)		(38,166,507	)
Total stockholders’ (deficit) equity		(29,886,559	)		(29,719,278	)		10,205,717			46,513,217


(1)	We have determined that in connection with the issuance of our series B convertible preferred stock, certain anti-dilution provisions in our series A convertible preferred stock were activated. Because the shares of series B convertible preferred stock were sold at a price below the price that the shares of series A convertible preferred stock were sold, the conversion price and conversion ratio of the series A convertible preferred stock were adjusted in accordance with the original terms of that issuance when each tranche of series B convertible preferred stock was issued. These adjustments to the conversion price and the resulting conversion ratio resulted in deemed dividends being afforded to the holders of the series A convertible preferred stock. The total deemed dividend was not originally recorded in our 2003 financial statements, but such statements have been restated to reflect this deemed dividend.

(2)	The pro forma net (loss) income per share information is computed using the weighted average number of common shares outstanding, after giving pro forma effect to the automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock effective upon the completion of this offering, as if the conversion had occurred as of the date of the original issuance.


(3)	The pro forma balance sheet information gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 9,097,584 shares of common stock upon the completion of this offering.



(4)	The pro forma as adjusted balance sheet information gives further effect to the sale of 3,750,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses to be paid by us.

RISK FACTORS

You should carefully consider the risk factors described below and all other information contained in this prospectus, including our historical financial statements and related notes and schedule, before you decide to invest in our common stock. If any of the following risk factors actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment.

Risks Related to Our Business


	We are largely dependent on the success of Vantas, our first product to be approved for commercial sale by the FDA, and we cannot be certain that we will be able to successfully commercialize Vantas.

We have invested and will invest a significant portion of our time and resources in the commercialization of Vantas, which was approved for commercial use by the FDA in October 2004. The commercial success of Vantas is dependent on many factors, including building a focused sales force, generating commercial sales, gaining acceptance of Vantas by patients and the medical community, and obtaining reimbursement from third party payors. All of our net product sales to date have been generated solely from sales of Vantas. Until our product candidates are approved for commercial use, our only source of revenue will be sales of Vantas. If we are unable to successfully commercialize Vantas, we may be required to cease or reduce our operations.


	*We have a history of operating losses and may not achieve or sustain profitability.*

The extent of our future operating losses or profits is highly uncertain, and we may not achieve or sustain profitability. Our product development and clinical activities will require significant continuing expenditures. Vantas is our only product that has been approved for commercial use by the FDA and that may generate any significant revenues. From our inception through September 30, 2005 we have primarily incurred operating losses, and as of September 30, 2005, we had an accumulated deficit of approximately $38.2 million. The majority of the deficit is attributable to research and development expenditures of $24.9 million, primarily for Vantas. We may incur additional operating losses, and we anticipate that our expenses will increase in the foreseeable future as we make expenditures to expand our sales of Vantas, continue our product development and clinical research, acquire or in-license other pharmaceutical products and expand our infrastructure. Although we expect our net product sales, together with borrowings under our line of credit, to fund these expenses, we may not generate sufficient revenue from sales of Vantas to meet all of our expenses.

We are dependent on single suppliers for certain services and raw materials, including histrelin, that are necessary for the manufacture of our Hydron implants. If any of these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture Vantas or some of our product candidates, which could delay sales of Vantas and hinder research and development of our product candidates that use Hydron Technology.

We currently rely on single suppliers for histrelin, the active ingredient in Vantas, for our implantation devices and for sterilization services for our implants, including Vantas. We currently have no written agreements with any of these suppliers. Although we have identified alternate sources of these raw materials and services, these raw materials and services may not be immediately available to us. Further, even if these alternative raw materials are immediately available, they must first meet our internal specifications. Consequently, if any of our suppliers are unable or unwilling to supply us with these raw materials in sufficient quantities with the correct specifications, or provide services on commercially acceptable terms, we may not be able to manufacture Vantas or our product candidates in a timely manner or at all, which could delay the production or sale of Vantas and hinder the research and development of some of our product candidates. Our inability to obtain these raw materials and services for the manufacture of our implants may force us to cease or reduce operations.

We have previously experienced disruptions in our manufacturing of Vantas due to issues caused by our supply of histrelin, the active ingredient in Vantas, including a manufacturing disruption during the second and third quarters of 2005 that caused a material decrease in our sales for the third quarter of 2005 and may have an adverse impact on our sales of Vantas in the future. Further interruptions in our manufacturing process for Vantas or our product candidates may have an adverse impact on our sales of Vantas and the development of our product candidates in the future.

We have experienced two separate disruptions in our manufacturing of Vantas due to issues caused by our supply of histrelin, the active ingredient in Vantas. In the fourth quarter of 2004, we experienced difficulties processing histrelin in its raw, powder form. These difficulties delayed the manufacturing of Vantas for several weeks as our supplier reformulated the histrelin. In the second and third quarters of 2005, we experienced an issue with the histrelin used to produce five lots of Vantas. This issue, which was caused by the method by which our supplier formulated the histrelin, ultimately resulted in these five lots not meeting certain quality control specifications and caused a delay in production of approximately six weeks. We have resolved each of these issues and have developed additional specifications with our supplier of histrelin in an effort to ensure a more consistent supply of histrelin that meets our needs. However, the disruption we experienced in the second and third quarters of 2005 directly impacted our supply of Vantas in the third quarter of 2005 by limiting the amount of finished product available for sale in the quarter to three lots, or approximately 2,400 units. Our third quarter sales were 1,747 units, which is less than our sales in the first and second quarters of 2005, in which we sold 2,925 units and 3,974 units, respectively. As a result of this decrease in sales, we had a net loss in the third quarter of 2005.

The interruption in our supply of Vantas in the second and third quarters of 2005 may have an adverse effect on our ability to sell Vantas in the future. The lack of supply during that period may have an adverse impact on our future sales because physicians may have elected to use alternative treatments during this time frame or may, as a result of this interruption, permanently switch to another product. Additionally, in the future, we may experience other disruptions in our manufacturing process for Vantas or our product candidates. Any disruptions we may experience may adversely impact sales of Vantas or the development of our product candidates.


	The successful commercialization of Vantas and any other products we develop will depend on obtaining reimbursement at adequate levels from private health insurers and Medicare/Medicaid for patient use of these products. We expect the reimbursement levels for Vantas to decline, which will have an adverse effect on our net product sales.

Sales of pharmaceutical products largely depend on the reimbursement of patients’ medical expenses by government healthcare programs, such as Medicare and Medicaid, and private health insurers. These third party payors control healthcare costs by limiting both coverage and the level of reimbursement for healthcare products. Third party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services and altering reimbursement levels. The levels at which government authorities and private health insurers reimburse physicians or patients for the price they pay for Vantas and other products we may develop could affect the extent to which we are able to commercialize these products.

Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the first half of 2005 were supported, in part, by favorable reimbursement rates, which decreased at the beginning of the third quarter of 2005. The favorable reimbursement rates we experienced in the first half of 2005 were due to the fact that Vantas was a new product that did not yet have an established average selling price, or ASP. As a result, Vantas was reimbursed at wholesale acquisition cost, which is typically higher than ASP. Vantas received an established ASP effective July 2005, which resulted in a lower reimbursement rate for Vantas.

We expect the reimbursement levels for Vantas to continue to decline, which will have an adverse effect on our net product sales. In some states, where the reimbursement rate for Vantas is based on ASP, the reimbursement levels will continue to decline because the ASP for Vantas will decline as we sell Vantas at prices below the reimbursement rate. In most states, however, the reimbursement rates for Vantas are even

lower because the Medicare carriers in those states now apply the Least Costly Alternative, or LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement for drugs that have been determined by Medicare to be “medically equivalent”. The reimbursement rate for Vantas, as determined by the Medicare carriers, is lower in LCA states than the reimbursement rate in non-LCA states, resulting in a lower sales price in LCA states.

Significant uncertainty generally exists as to the reimbursement status of newly approved healthcare products. Our ability to achieve acceptable levels of reimbursement for product candidates will affect our ability to successfully commercialize, and attract collaborative partners to invest in the development of, our product candidates. Reimbursement may not be available for Vantas or any other products that we develop and reimbursement or coverage levels may reduce the demand for, or the price of, Vantas or any other products that we may develop. If we cannot maintain coverage for Vantas and obtain adequate reimbursement for other products we develop, the market for those products may be limited.

In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals in recent years to change the healthcare system in ways that could impact our ability to profitably sell Vantas and any other products that we develop. These proposals include prescription drug benefit proposals for Medicare beneficiaries and measures that would limit or prohibit payments for certain medical treatments or subject the pricing of drugs to government control. Legislation creating a prescription drug benefit and making certain changes in Medicaid reimbursement has been enacted by Congress and signed by the President. Additionally, Medicare regulations implementing the prescription drug benefit became effective as of January 1, 2006. These and other regulatory and legislative changes or proposals may affect our ability to raise capital, obtain additional collaborators and market Vantas and any other products that we may develop. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subject the price of our products to governmental control, our ability to sell Vantas and other products we develop in commercially acceptable quantities at profitable prices may be harmed.


	As a manufacturer of our products, we are subject to regulatory requirements. If we do not comply with such requirements, the development and sales of our products and our financial performance may be materially harmed.

Pharmaceutical products are required to be manufactured under regulations known as current good manufacturing practice, or cGMP. Before commercializing a new product, manufacturers must demonstrate compliance with the applicable cGMP regulations, which include quality control and quality assurance requirements, as well as the maintenance of extensive records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding foreign and state authorities, including unannounced inspections, and must be licensed before they can be used in commercial manufacturing for products generated through the use of their technology. In addition, cGMP requirements are constantly evolving, and new or different requirements may apply in the future. After regulatory approvals are obtained, the subsequent discovery of previously unknown problems or the failure to maintain compliance with existing or new regulatory requirements may result in restrictions on the marketing of a product, withdrawal of the product from the market, seizures, the shutdown of manufacturing facilities, injunctions, monetary fines and civil or criminal sanctions.

We may also encounter problems with the following:


	•	production yields;

	•	raw materials;

	•	shortages of qualified personnel;

	•	compliance with FDA regulations, including the demonstration of purity and potency;

	•	changes in FDA requirements;


	•	controlling production costs; and

	•	development of advanced manufacturing techniques and process controls.

In addition, we are required to register our manufacturing facilities with the FDA and other regulatory authorities. The facilities are subject to inspections confirming compliance with cGMP or other regulations. If we fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product, or revocation of pre-existing approval for a product, such as Vantas, which would eliminate our sole source of revenue.


	*We may not be able to complete our acquisition of the assets associated with the valrubicin product or realize a return on our investment in this product candidate.*

We have entered into an agreement with Anthra Pharmaceuticals, Inc. to acquire certain assets associated with its valrubicin product for the treatment of bladder cancer, including the right to sell the product in the U.S. and Canada. This product was withdrawn from the market in 2002 due to a manufacturing problem. We may not be able to complete our acquisition of these assets or realize a return on our investment in such assets due to risks related to the lack of intellectual property protection and potential manufacturing difficulties. Our acquisition of the assets is expected to close during the first quarter of 2006, subject to various conditions including termination of Anthra’s agreement with the existing distributor of the product in the U.S. Even though the FDA has agreed to our reintroduction plan, there is no assurance that we will be able to successfully implement the plan. Further, we will not have exclusive rights with respect to the sale of the valrubicin product, because the product is not covered by any patents or orphan drug exclusivity. As a result, competitors may compete with us by, among other things, introducing a generic version of the product or a similar product that contains the active ingredient, valrubicin.

Although we believe that we have identified the cause of the previous manufacturing problem and that we will be able to correct it, there can be no assurance that we will be able to correct the problem or that there will not be manufacturing problems in the future. We plan to contract with third-parties to manufacture the valrubicin as well as the finished product. Even if we establish an acceptable manufacturing protocol, our third-party manufacturers may be unable to manufacture the product in sufficient quantities with the correct specifications or in compliance with cGMP or other applicable regulatory requirements. As a result of these risks, we may be unable to complete our acquisition of this product or realize a return on our investment in this product.


	*We have limited sales, marketing and distribution experience and may be unable to successfully commercialize our products.*

We have limited experience in marketing, selling, and distributing our products in the U.S. and abroad. To achieve commercial success, we must build on our current marketing and sales force or contract with other parties, including collaborators, to perform these services for us. We may not be able to negotiate favorable distribution or marketing arrangements. To the extent that we enter into co-promotion or other arrangements, any revenues we receive will depend upon the efforts of third parties which may not be successful and are only partially within our control. We will be competing with companies that have experienced and well-funded marketing and sales operations. The failure to adequately sell and distribute Vantas or our product candidates, if approved, could impair our net product sales, cash flows from operations and our cash position.


	*We may not be able to obtain additional capital that may be necessary for growth and market penetration or to continue our operations.*

We believe that the net proceeds from this offering, together with our existing cash, cash generated from future sales of Vantas, and our line of credit will be sufficient to meet our projected operating requirements for at least the next 12 months. However, we may need to raise additional funds through public or private debt or equity financings in order to acquire new products or product candidates, significantly expand our sales and marketing capabilities, expand our manufacturing capacity, develop product candidates, obtain FDA approval of our product candidates and continue our commercial growth.

Any additional equity financings may be on terms that are dilutive or potentially dilutive to our stockholders. Any debt financing we enter into may involve incurring significant interest expense and include covenants that restrict our operations. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. Our ability to raise additional funds will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We may not be able to obtain financing on terms acceptable to us or at all. If financing is insufficient or unavailable, we will have to modify our growth and marketing strategies and scale back operations by delaying, reducing the scope of, or eliminating one or more of our planned development, commercialization or expansion activities. This may negatively affect our ability to expand our commercialization of Vantas and develop and bring new products to market, which could have a material adverse effect on our business, financial condition and results of operations.

Our future capital requirements may be significantly greater than we expect and depend on many factors, including:


	•	costs associated with conducting pre-clinical and clinical testing;

	•	costs associated with commercializing Vantas and other products we may develop, including expanding sales and marketing functions; for example, in connection with VP002 (histrelin), we expect to increase our sales force;

	•	costs of establishing arrangements for manufacturing;

	•	costs of acquiring new pharmaceutical products and drug delivery systems;

	•	payments required under our current and any future license agreements and collaborations; for example, we are required to make certain royalty payments, which are tied to sales of Vantas;

	•	costs, timing and outcome of regulatory reviews;

	•	costs of obtaining, maintaining and defending patents on proprietary technology; and

	•	costs of increased general and administrative expenses.

As of September 30, 2005, the cumulative amount of royalty expense incurred by us as a result of sales of Vantas was $1,476,855.

If products utilizing our technology fail to gain market acceptance, we may be unable to generate significant revenue.

Even if clinical trials demonstrate the safety and efficacy of products developed utilizing our technology and all regulatory approvals are obtained, such products may not gain market acceptance among physicians, patients, third party payors or the medical community. The current method of administration for our product candidates in late-stage development is implantation, which may be less well received by some patients than injection therapy. The degree of market acceptance of any product employing our technology will depend on a number of factors, including:


	•	establishment and demonstration of clinical efficacy and safety;

	•	cost-effectiveness;

	•	adequate reimbursement by third parties;

	•	relative convenience and ease of administration;

	•	timing of market introduction of competitive products;

	•	alternative treatment methods, for example, injections and oral formulations; and

	•	marketing and distribution support.

If our products do not achieve significant market acceptance, we may be unable to generate significant revenue, which could have a material adverse effect on our business, cash flows and results of operations.


	*Our failure to recruit, retain, and motivate qualified management and scientific personnel could adversely affect us.*

Our success depends, in part, on our continued ability to attract, retain and motivate highly qualified management, scientific and clinical and sales and marketing personnel. We are substantially dependent on our senior management and key scientific and technical personnel, particularly David S. Tierney, M.D., Matthew L. Rue, III, Pete J. Perron and Petr F. Kuzma, each of whose services are critical to the successful implementation of our development, regulatory and commercialization strategies. We will need to expand our employee base as we continue to commercialize Vantas and develop our product candidates. The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of drug development and other business objectives, and could have a material adverse effect on our business, financial condition and results of operations. We may not be able to recruit and retain qualified personnel in the future due to intense competition for personnel among pharmaceutical businesses, and our failure to do so could delay or curtail our product development efforts, impair our ability to execute our business strategy and adversely affect us. We have entered into an employment agreement with Dr. Tierney. Following July 1, 2006, unless this employment agreement is renewed, Dr. Tierney will become an “at-will” employee. In addition, we have entered into change of control agreements with each of our other executive officers. We have not purchased any key man life insurance for any of our employees.

We also utilize consultants and advisors to assist us with research and development. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us, which could have a material adverse effect on our business, financial condition and results of operations.


	*We face substantial competition and our competitors may discover, develop or commercialize products similar to ours before or more successfully than we do.*

The biotechnology and pharmaceutical industries are very competitive. We compete against all pharmaceutical companies that manufacture or market LHRH agonist products. We also compete against biotechnology companies, universities, government agencies, and other research institutions in the development of urological and endocrine products, technologies and processes that are, or in the future may be, the basis for competitive commercial products.

In particular, we compete against the following LHRH agonist products for the palliative treatment of advanced prostate cancer: TAP Pharmaceutical Products’ Lupron and Sanofi-Aventis’ Eligard, both multiple injection formulations that deliver leuprolide; Watson Pharmaceuticals’ Trelstar, a multiple injection formulation that delivers triptorelin; AstraZeneca’s Zoladex, a biodegradable rod that delivers goserelin for up to three months; and Bayer Pharmaceuticals’ Viadur, a rigid metal implant that releases leuprolide over a 12-month period. With respect to our endocrine pharmaceuticals in late-stage development for the treatment of central precocious puberty and acromegaly, our competitors currently include TAP Pharmaceutical Products’ Lupron Depot-PED, Novartis’ Sandostatin injections and Sandostatin LAR Depots and Pfizer’s Somavert.

Many of our competitors have substantially greater financial and other resources, larger research and development staffs and more experience developing products, obtaining FDA and other regulatory approval and manufacturing and marketing products. Consequently, competition for the development and marketing of urological and endocrine pharmaceutical products is intense and is expected to increase. For example, in the past we have received communications from Bayer Pharmaceuticals regarding our sales and marketing techniques for Vantas. Our practice has been to review these communications with counsel to determine whether any remedial or corrective action needs to be made. These communications have not resulted in any notice of violations or other action by any government authority or agency.

Our competitors may discover, develop or commercialize products similar to ours before or more successfully than we do and may compete with us in establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our

programs or advantageous to our business. In addition, there may be product candidates of which we are not aware at an earlier stage of development that may compete with our product candidates. If any of them are successfully developed and approved, they could compete directly with our product candidates. This could result in reduced sales and pricing pressure on any similar products that we develop, which in turn would reduce our ability to generate revenue and could have a material adverse effect on our net product sales, gross margin and cash flows from operations.


	*Our sales of Vantas and any other products we may develop could suffer from competition by generic products.*

Although we have proprietary protection for Vantas and other products we are developing, we could face competition from generic substitutes of these products if generics are developed by other companies and approved by the FDA. Because generic manufacturers are not exposed to development risks for such generic substitutes, these manufacturers can capture market share by selling generic products at lower prices, which can reduce the market share held by the original product. Competition from the sale of generic products may cause a decrease in revenue, and could have a material adverse effect on our net product sales, gross margin and cash flows from operations.


	*We may encounter difficulties managing our growth, which could adversely affect our results of operations.*

In connection with our commercial launch of Vantas, we may experience rapid and significant growth in the number of our employees and the scope of our operations. As of January 1, 2006, we had approximately 41 employees devoted to sales and marketing, and we expect to hire approximately ten additional employees in this area. Our future financial performance and our ability to commercialize Vantas and any other products that we develop and to compete effectively will depend, in part, on our ability to manage any future growth effectively. This growth and expansion is expected to place a significant demand on our financial, managerial and operational resources.

Our success in managing our growth will also depend on the ability of our executive officers and senior management to continue to implement and improve our operational, management, information and financial control systems and to expand, train and manage our employee base. Our inability to manage growth effectively could cause our operating costs to grow at a faster pace than is currently anticipated and could have a material adverse effect on our business, financial condition and results of operations.


	*We face a risk of product liability claims and may not be able to obtain adequate insurance.*

Our business exposes us to potential liability risks that may arise from the clinical testing of our product candidates and the manufacture and sale of Vantas and other products that we may develop. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Such liability claims may be expensive to defend and may result in large judgments against us. Although we have liability insurance with a coverage limit of $10 million, our insurance may not reimburse us, or this coverage may not be sufficient to cover claims that may be made against us. In addition, if we are no longer able to maintain this coverage or have to obtain additional coverage, we may not be able to obtain liability insurance on acceptable terms or at all. Whether or not we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in:


	•	significant awards against us;

	•	substantial litigation costs;

	•	recall of the product;

	•	injury to our reputation; and

	•	withdrawal of clinical trial participants;

all of which could have a material adverse effect on our business, financial condition and results of operations.

The approved drugs used in Vantas and our product candidates, as well as the implant itself, may cause side effects and we may not be able to achieve an acceptable level of side effect risks, compared to the potential therapeutic benefits, for our product candidates.

The active compound in Vantas and each of our product candidates has been approved by the FDA for the treatment of the conditions, diseases and disorders that we are seeking to treat. Each of these compounds, as well as the implant itself, is associated with certain side effects. Although we have not experienced any difficulties with the side effects profile of Vantas, the implant or our product candidates to date, the side effects of the approved drugs in our product candidates may be acceptable when a drug is used in its approved dosage to achieve a therapeutic benefit for its currently approved indications, but the side effect risk compared to the therapeutic benefit may not be acceptable when used for the intended indications for the product candidate. Side effects of the approved drugs, the implant or the combination of these elements, could prevent successful development and commercialization of some or all of our product candidates.

Further, the development of a product candidate could be adversely affected by safety or efficacy issues that subsequently arise regarding use of the approved drug, similar drugs or the implant. We could be forced to abandon a product candidate or an approved product, such as Vantas, due to adverse side effects from long-term or other use of the implant or the active pharmaceutical ingredients in the product candidate or product.


	Because we have operated as a private company, we have no experience attempting to comply with public company obligations, including recently enacted changes in securities laws and regulations; attempting to comply with these requirements will increase our costs and require additional management resources and we still may fail to comply.

We are a small company with limited resources. We have operated as a private company, not subject to many of the requirements applicable to public companies. The number and qualifications of our finance and accounting staff are consistent with those of a private company. While we plan to expand our staff if we become public, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals.

As a public reporting company, we will need to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded periodic reports, disclosures and accelerated reporting requirements and more complex accounting rules.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. This requirement will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2007. If we are unable to conclude that we have effective internal control over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting as of December 31, 2007 and future year ends as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

Risks Related to Clinical Trials and Other Regulatory Matters


	*If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, we may not be able to commercialize our product candidates.*

We must provide the FDA and similar foreign regulatory authorities with pre-clinical and clinical data to demonstrate that our product candidates are safe and effective for each indication before they can be approved for commercialization. The pre-clinical testing and clinical trials of any product candidates that we develop must comply with the regulations of numerous federal, state and local government authorities in the U.S., principally the FDA, and by similar agencies in other countries. Clinical development is a

long, expensive and uncertain process and is subject to delays. We may encounter delays or rejections for various reasons, including our inability to enroll enough patients to complete our clinical trials.

We have one product candidate currently in Phase I clinical trials and expect to have two product candidates in Phase I/II clinical trials in 2006 and one product candidate in a Phase IIb clinical trial in the first half of 2006. We expect to file a new drug application for VP002 in the second quarter of 2006. It may take several years to complete the testing of a product candidate, and failure can occur at any stage of development, for many reasons, including:


	•	interim results of pre-clinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be seen in later studies;

	•	product candidates that appear promising at early stages of development may ultimately fail because the products may be ineffective, may be less effective than competitors’ products or may cause harmful side effects;

	•	any pre-clinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;

	•	pre-clinical or clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;

	•	negative or inconclusive results from a pre-clinical study or clinical trial or adverse medical events during a clinical trial could cause a pre-clinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;

	•	the FDA can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;

	•	we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we are developing a product candidate or the period required for review of any application for regulatory agency approval;

	•	our clinical trials may not demonstrate the safety and efficacy of any product candidates or result in marketable products;

	•	the FDA may change its approval policies or adopt new regulations that may negatively affect or delay our ability to bring a product candidate to market; and

	•	a product candidate may not be approved for all the indications which we request.

The development and approval process may take many years, require substantial resources and may never lead to the approval of a product. With the exception of Vantas, we do not have, and may never obtain, the regulatory approvals we need to market our product candidates. Our failure to obtain, or delays in obtaining, regulatory approvals would have a material adverse effect on our business, financial condition and results of operations.

Product candidates are subject to extensive and rigorous government regulation by the FDA, other regulatory agencies, and their respective foreign equivalents. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical products. Any of our products marketed abroad will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses.

Government regulation substantially increases the cost of researching, developing, manufacturing and selling pharmaceutical products. The regulatory review and approval process, which includes pre-clinical testing and clinical trials of each product candidate, is lengthy, expensive and uncertain. We must obtain regulatory approval for each product we intend to market, and the manufacturing facilities used for the products must be inspected and meet legal requirements. Securing regulatory approval requires the submission of extensive pre-clinical and clinical data and other supporting information for each proposed therapeutic indication in order to establish the product’s safety, efficacy, potency and purity for each intended use. Moreover, approval policies or regulations may change. We will not be able to commercialize

our product candidates until we obtain FDA approval in the U.S. or approval by comparable authorities in other countries. The development and approval process takes many years, requires substantial resources and may never lead to the approval of a product. We received FDA approval for the commercial sale of Vantas in October 2004. In November 2005, we received approval to market Vantas in Denmark. Approval of any of our product candidates is not anticipated until 2007 and thereafter. Failure to obtain or delays in obtaining, regulatory approvals may:


	•	adversely affect the commercialization of any products that we develop;

	•	impose additional costs on us;

	•	diminish any competitive advantages that we may attain; and

	•	adversely affect our receipt of revenues or royalties.


	*Even if we receive regulatory approval for our product candidates, our approval may be limited and, we will be subject to significant ongoing regulatory obligations and oversight.*

Even if we are able to obtain regulatory approval for a particular product, the approval may limit the indicated uses for the product, may otherwise limit our sales practices and our ability to promote, sell and distribute the product, may require that we conduct costly post-marketing surveillance and may require that we conduct ongoing post-marketing studies. Material changes to an approved product, such as manufacturing changes or revised labeling, may require further regulatory review and approval. Once obtained, any approvals may be withdrawn for a number of reasons, including the later discovery of previously unknown problems with the product. If we or our contract manufacturers fail to comply with applicable regulatory requirements at any stage during the regulatory process, such noncompliance could result in:


	•	refusals or delays in the approval of applications or supplements to approved applications;

	•	refusal of a regulatory authority, including the FDA, to review pending market approval applications or supplements to approved applications;

	•	warning letters;

	•	fines;

	•	import or export restrictions;

	•	product recalls or seizures;

	•	injunctions;

	•	total or partial suspension of clinical trials or production;

	•	civil penalties;

	•	withdrawals of previously approved marketing applications or licenses;

	•	recommendations by the FDA or other regulatory authorities against entering into governmental contracts with us; or

	•	criminal prosecutions.


	The regulatory approval process outside the U.S. varies depending on foreign regulatory requirements, and failure to obtain regulatory approval in foreign jurisdictions would prevent the marketing of our products in those jurisdictions.

We intend to also market our products outside of the U.S. For example, we have executed agreements to license Vantas in Canada, South Africa, Asia and Argentina. 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. Approval of a product by the comparable regulatory authorities of foreign countries must still be obtained prior to manufacturing or marketing that product in those countries. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the regulatory authorities of any other country, nor does the approval by foreign regulatory authorities in one country ensure approval by

regulatory authorities in other foreign countries or the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market. If we fail to comply with these regulatory requirements or obtain and maintain required approvals, our target market will be reduced and our ability to generate revenue from abroad will be adversely affected.


	We rely on third parties to conduct certain of the clinical trials for our product candidates, and if they do not perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

We design the clinical trials for our product candidates, but we rely on academic institutions, corporate partners, contract research organizations and other third parties to assist us in managing, monitoring and otherwise carrying out these trials. Accordingly, we may have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. We are currently conducting the clinical trials for VP002 (histrelin) for CPP, however, the data management will be contracted to an outside data management firm. We are also conducting certain clinical trials for VP003 (octreotide) in Brazil, however, we have employed a local contract research organization to monitor the trials for us, and we will contract with a third party to handle the data management. Although we rely on these third parties to manage the data from these clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practice, for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements, and we may fail to obtain regulatory approval for our product candidates, if these requirements are not met.

Risks Related to Intellectual Property


	*Our success depends on the protection of our intellectual property rights, and our failure to secure these rights would materially harm our business.*

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We may not be able to obtain patent protection for our pending patent applications, those we may file in the future, or those we may license from third parties. Moreover, patents issued or that may be issued or licensed may not be enforceable or valid or may expire prior to the commercialization of our product candidates. The patent position of a pharmaceutical company involves complex legal and factual questions and, therefore, enforceability or validity cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from third parties may not provide sufficient protection against our competitors. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Further, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S.


	*If we are unable to protect the confidentiality of our proprietary information and know-how, our competitive position would be impaired and our business could be adversely affected.*

In addition to patent protection, we also rely on the protection of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade secrets and proprietary information, we have entered into confidentiality agreements with our employees, consultants and collaborators upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees also provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. However, we may not obtain these agreements in

all circumstances, and individuals with whom we have these agreements may not comply with the terms of these agreements. In the event of unauthorized use or disclosure of their trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection for our trade secrets or other confidential information. Further, to the extent that our employees, consultants or contractors use technology or know-how owned by others in their work for us, disputes may arise as to the rights in related inventions.

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets would impair our competitive position and could harm our business.


	*Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.*

Others may obtain patents that could limit our ability to use, import, manufacture, market or sell products or impair our competitive position. No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide any assurance that the commercialization of our products would not infringe the patent rights of another. In the event our technologies infringe or violate the proprietary rights of third parties, we may be prevented from pursuing the development, manufacturing or commercialization of our products that utilize such technologies. While we know of no actual or threatened claim of infringement that would be material to us, there can be no assurance that such a claim will not be asserted. If such a claim is asserted, the resolution of the claim may not permit us to continue marketing the relevant product, such as Vantas, on commercially reasonable terms, if at all.


	*Protecting our intellectual property is expensive and time consuming and could harm our business.*

Third parties may challenge the validity of our patents and other intellectual property rights, resulting in costly litigation or other time-consuming and expensive proceedings, which could deprive us of valuable rights. If we become involved in any intellectual property litigation, interference or other judicial or administrative proceedings, we will incur substantial expenses and the diversion of financial resources and technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially favorable terms, if at all. Further, if such claims are proven valid, through litigation or otherwise, we may be required to pay substantial financial damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay development, marketing, selling and licensing of the affected products and intellectual property rights. In addition, an adverse determination in a proceeding involving our owned or licensed intellectual property may allow entry of generic substitutes for our products.

Risks Related to This Offering and Our Common Stock


	*There has been no prior market for our common stock, and it may trade at prices below the initial public offering price.*

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which a trading market for our common stock will develop or be sustained after this offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters based on factors that may not be indicative of future performance, and may not bear any relationship to the price at which our common stock will trade upon completion of this offering. You may be unable to sell your shares of common stock at or above the initial public offering price.


	*The trading price of the shares of our common stock could be highly volatile.*

The trading price of the shares could be highly volatile in response to various factors, many of which are beyond our control, including:


	•	developments concerning Vantas or any of our product candidates;

	•	announcements of technological innovations by us or our competitors;


	•	new products introduced or announced by us or our competitors;

	•	changes in reimbursement levels;

	•	changes in financial estimates by securities analysts;

	•	actual or anticipated variations in operating results;

	•	expiration or termination of licenses, research contracts or other collaboration agreements;

	•	conditions or trends in the regulatory climate and the biotechnology and pharmaceutical industries;

	•	intellectual property, product liability or other litigation against us;

	•	changes in the market valuations of similar companies; and

	•	sales of shares of our common stock, particularly sales by our officers, directors and significant stockholders.

In addition, equity markets in general, and the market for biotechnology and life sciences companies in particular, have experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. In addition, changes in economic conditions in the U.S., Europe or globally, could impact upon our ability to grow profitably. Adverse economic changes are outside our control and may result in material adverse impacts on our business or results. These broad market and industry factors may materially affect the market price of the shares, regardless of our development and operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.


	*You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.*

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate and substantial dilution of $7.80 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of shares of our common stock in this offering will have contributed approximately 51% of the aggregate price paid by all purchasers of our stock, but will own only approximately 26% of the shares of our common stock outstanding after this offering based on the number of shares of our common stock outstanding as of September 30, 2005. In the past, we issued options to acquire shares of common stock at prices significantly below the initial public offering price. To the extent these options are ultimately exercised, you will sustain future dilution. We may also acquire or license other technologies or finance strategic alliances by issuing equity, which may result in additional dilution to our stockholders.


	*The ownership interests of our officers, directors and largest stockholders could conflict with the interests of our other stockholders.*

Following completion of this offering, our directors, executive officers and holders of 5% or more of our outstanding common stock will beneficially own approximately 61% of our common stock (after giving effect to the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock, but assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options). As a result, these stockholders, acting together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and approval of mergers or other significant corporate transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders.


	*Our use of the offering proceeds may not yield a favorable return on your investment.*

We expect to use the net proceeds from this offering to expand our sales and marketing capabilities, fund our research and development activities, expand our manufacturing capabilities, repay amounts

outstanding under our line of credit, and for general corporate purposes, including the potential acquisition or in-license additional urological and endocrine products. In addition, we may use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to our current or future business and product lines. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. Pending the use of the proceeds in this offering, we plan to invest them. However, the proceeds may not be invested effectively or in a manner that yields a favorable or any return, and consequently, this could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates.


	Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay and discourage takeover attempts that stockholders may consider favorable.

Certain provisions of our amended and restated certificate of incorporation, or certificate of incorporation, and amended and restated bylaws, or bylaws, and applicable provisions of Delaware corporate law may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions include:


	•	the ability of our board of directors to issue preferred stock with voting or other rights or preferences;

	•	limitations on the ability of stockholders to amend our charter documents, including stockholder supermajority voting requirements;

	•	the inability of stockholders to act by written consent or to call special meetings;

	•	a classified board of directors with staggered three-year terms;

	•	requirements that special meetings of our stockholders may only be called by the chairman of our board of directors, our president, or upon a resolution adopted by, or an affirmative vote of, a majority of our board of directors; and

	•	advance notice procedures our stockholders must comply with in order to nominate candidates for election to our board of directors or to place stockholders’ proposals on the agenda for consideration at meetings of stockholders.

We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval were obtained. See “Description of Capital Stock — Section 203 of the General Corporation Law of the State of Delaware.”

Any delay or prevention of a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.


	*Future sales of our common stock may depress our stock price.*

Persons who were our stockholders prior to the sale of shares in our initial public offering continue to hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. Significant portions of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. Moreover, the holders of approximately 10,946,066 shares of our common stock as of December 31, 2005, including shares issuable upon conversion of our outstanding preferred stock, will have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in registration statements that we may file for ourselves or other stockholders.

The holders of approximately 10,946,066 shares of our outstanding common stock as of December 31, 2005 have agreed with the underwriters of our initial public offering to be bound by a 180-day lock-up agreement that generally prohibits these holders from selling or transferring their stock until the end of the

180-day period, subject to specified exceptions. If we issue an earnings release or material news or if a material event relating to us occurs during the 15 calendar days plus 3 business days before the last day of the lock-up period, or if prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16 days following the last day of the lock-up period, the restrictions provided in the lock-up agreements will continue to apply until 18 days after the issuance of the earnings release or the occurrence of material news or a material event. At any time and without public notice, UBS Securities LLC and Banc of America Securities LLC may in their sole discretion release all or some of the securities from these lock-up agreements. If the restrictions of the lock-up agreements are waived, shares of our common stock will be available for sale into the market, subject only to applicable securities rules and regulations, which may cause our stock price to decline.


	*Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain and, as a result, our stock price may decline.*

Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period. For example, as described above, less favorable reimbursement rates of Vantas became effective at the beginning of the third quarter of 2005, as the basis for determining reimbursement rates switched from wholesale acquisition cost to the typically lower ASP. In addition, as described above, we anticipate that the number of states that provide reimbursement for Vantas under the Medicare program using the LCA methodology will increase in future quarters, leading to a decline in our sales price for Vantas. The level of our revenues and results of operations at any given time will be based primarily on the following factors:


	•	success of the commercialization of Vantas and any other product candidates that may be approved;

	•	changes in our ability to obtain FDA approval for our product candidates;

	•	results of our clinical trials;

	•	timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

	•	regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;

	•	our ability to establish, grow and maintain a productive sales force;

	•	demand and pricing of Vantas and other products we may offer;

	•	physician and patient acceptance of Vantas and other products we may offer;

	•	levels of third-party reimbursement for Vantas and other products we may offer;

	•	interruption in the manufacturing or distribution of Vantas and other products we may offer; and

	•	the effect of competing technological and market developments.

It will be difficult for us to forecast demand for Vantas and our product candidates that may be approved with any degree of certainty, and therefore, our sales prospects are uncertain. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly losses. Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates,” and variations of these words and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed, implied or forecasted in the forward-looking statements. In addition, the forward-looking events discussed in this prospectus might not occur. These risks and uncertainties include, among others, those described in “Risk Factors” and elsewhere in this prospectus. You are cautioned not to place undue reliance on these forward-looking statements. You should read this prospectus, and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part, with the understanding that actual future results and events may be materially different from what we currently expect.

The forward-looking statements included in this prospectus reflect our views and assumptions only as of the date of this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

USE OF PROCEEDS

We will receive approximately $36.3 million in net proceeds from the sale of our common stock in this offering, assuming an initial public offering price of $11.00, which is the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $3.5 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $42.1 million.

We currently expect to use the net proceeds of this offering as follows:



	•	approximately $3.0 million to expand our sales and marketing capabilities;



	•	approximately $5.0 million to fund certain research and development activities, including clinical Phase III trials for VP002, our Histrelin CPP implant, for which we expect to submit an NDA in the second quarter of 2006; clinical trials for VP006, our rapid dissolve peptide, for which we plan to submit an NDA in 2006; as well as Phase IIb trials for VP003, our Octreotide implant, and Phase I/II trials for VP004, our Naltrexone implant;



	•	approximately $5.5 million to expand our manufacturing capabilities;



	•	approximately $1.5 million to repay amounts outstanding under our line of credit; and



	•	approximately $21.3 million for general corporate purposes, including the potential acquisition or in-license of additional urological and endocrine products.

As of January 1, 2006, we had $1,525,000 in outstanding borrowings under our line of credit, which amounts bear interest at 8.1% as of such date. Borrowings under the line of credit mature on October 20, 2007. Amounts repaid under the line of credit will be available for future borrowings.

In addition, we may use a portion of the net proceeds from this offering to acquire products or technologies that are complementary to our current or future business and product lines, but we currently have no commitments, agreements, or understandings relating to any of these types of transactions.

We believe that the net proceeds from this offering, together with our existing cash, cash generated from future sales of Vantas, and our line of credit, will be sufficient to meet our projected operating requirements for at least the next 12 months, including our requirements related to the commercialization of Vantas and further development of our product candidates.

The allocation of the net proceeds of this offering described above represents our best current estimate of our projected operating requirements. However, the exact amount and timing of our expenditures will depend on several factors, including the success of our commercialization activities and the progress of our clinical trials and other development efforts as well as the amount of cash used in our operations. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. We reserve the right to change the use of these proceeds as a result of certain contingencies such as the results of our commercialization activities, competitive developments, opportunities to acquire or in-license products, technologies or businesses and other factors.

Pending the uses described above, we plan to invest the net proceeds of this offering in short- and medium-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have not declared or paid any dividends to date. We currently intend to retain future earnings, if any, to fund the development and expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Under our credit agreement with Merrill Lynch Capital, we agreed to not declare or pay any cash dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in future financing instruments and other factors our board of directors deems relevant.

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2005:


	•	on an actual basis;


	•	on a pro forma basis to give effect to the automatic conversion of all of our outstanding convertible preferred stock into 9,097,584 shares of our common stock immediately prior to the closing of this offering; and



	•	on a pro forma as adjusted basis to give further effect to the sale of a total of 3,750,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes and schedule thereto included elsewhere in this prospectus.


	As of September 30, 2005

							Pro Forma
	Actual			Pro Forma			As Adjusted

Line of credit(1)		—			—			—
Long-term capitalized lease obligations, less current portion	$	6,943		$	6,943		$	6,943
Deferred revenue		300,000			300,000			300,000
Series A 6% Cumulative Convertible Preferred Stock, $0.001 par value; 7,000,000 shares authorized, 7,000,000 shares issued and outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted		13,603,856			—			—
Series B 10% Cumulative Convertible Preferred Stock, $0.001 par value; 24,500,000 shares authorized, 22,068,966 shares issued and outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted		15,082,305			—			—
Series C 6% Cumulative Convertible Preferred Stock, $0.001 par value; 11,600,000 shares authorized, 11,600,000 shares issued and outstanding, actual; no shares outstanding, pro forma and pro forma as adjusted		11,238,834			—			—

Stockholders’ (deficit) equity:
Common Stock, $0.001 par value, 75,000,000 shares authorized, 1,666,667 shares issued and outstanding, actual; 10,764,251 shares issued and outstanding, pro forma; and 14,514,251 shares issued and outstanding, pro forma as adjusted		1,667			10,764			14,514
Additional paid-in capital(2)		8,894,114			48,810,012			85,113,762
Deferred stock-based compensation		(448,552	)		(448,552	)		(448,552	)
Accumulated deficit		(38,166,507	)		(38,166,507	)		(38,166,507	)

Total stockholders’ (deficit) equity(2)		(29,719,278	)		10,205,717			46,513,217

Total capitalization(2)	$	10,512,660		$	10,512,660		$	46,820,160


(1)	In October 2005, we entered into a two year, $7.5 million line of credit with Merrill Lynch Capital. As of January 1, 2006, we had approximately $1.5 million outstanding under our line of credit. We expect to use a portion of the net proceeds of this offering to repay amounts outstanding under our line of credit.

(2)

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) each of additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $3.5 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

DILUTION

If you invest in our common stock your interest will be diluted immediately to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share after this offering.

Our historical net tangible book value at September 30, 2005, before adjustment for this offering, was approximately $(28.5) million, or approximately $(2.85) per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Pro forma net tangible book value as of September 30, 2005 was approximately $8.9 million or $0.83 per share of common stock. Pro forma net tangible book value gives effect to the conversion of all of our outstanding convertible preferred stock into 9,097,584 shares of our common stock, which will occur automatically immediately prior to the closing of this offering and to the reverse stock split. After giving effect to the sale of 3,750,000 shares of common stock in this offering, at an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, and after deducting the estimated offering expenses, our pro forma net tangible book value at September 30, 2005 would have been $46.5 million or $3.20 per share. This represents an increase in net tangible book value of $2.37 per share to our existing stockholders and an immediate dilution (i.e., the difference between the public offering price per share and the pro forma net tangible book value per share adjusted for this offering) at September 30, 2005 of 7.80 per share to purchasers of the common stock offered hereby. The following table illustrates this per share dilution:


Assumed initial public offering price per share					$	11.00
	Historical net tangible book value per share as of September 30, 2005	$	(2.85	)
	Decrease in net tangible book value per share due to reverse stock split	$	(14.23	)
	Increase in net tangible book value per share due to the conversion of all shares of preferred stock	$	17.91
	Pro forma net tangible book value per share before the offering	$	0.83
	Increase in net tangible book value per share attributable to this offering	$	2.37
Pro forma net tangible book value per share after this offering					$	3.20
Dilution per share to new investors					$	7.80

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) our pro forma net tangible book value by approximately $3.5 million, the pro forma net tangible book value per share after this offering by $0.24 per share and the dilution per share to new investors in this offering by $(0.76) per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Assuming the underwriters’ over-allotment option is exercised in full, the pro forma net tangible book value after this offering as of September 30, 2005 would have been $52.3 million, or $3.47 per share, the immediate increase in net tangible book value of shares owned by existing stockholders would have been $2.64 per share, and the immediate dilution to purchasers of common stock in this offering would have been $7.53 per share.

The following table summarizes as of September 30, 2005, after giving effect to this offering and the pro forma adjustments described above, the number of shares of common stock outstanding, the total consideration paid to us for those shares and the average price per share paid by the existing stockholders and by the new investors in this offering.


		Shares Purchased				Total Consideration
										Average Price
		Number		Percent		Amount		Percent		per Share

Existing stockholders			10,764,251		74%	$	39,617,262		49%	$	3.68
New investors			3,750,000		26%		41,250,000		51%		11.00

	Total		14,514,251		100.0%	$	80,867,262		100.0%	$	5.57

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $3,750,000, $3,750,000 and $0.26 respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the following will occur:



	•	the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately 74% of the total number of pro forma as adjusted shares of our common stock outstanding after this offering; and



	•	the pro forma as adjusted number of shares of our common stock held by new public investors will increase to 3,750,000, or approximately 26% of the total pro forma as adjusted number of shares of our common stock outstanding after this offering.

The tables and calculations above are based on shares outstanding as of September 30, 2005 and exclude:



	•	1,250,258 shares of our common stock issuable upon exercise of options outstanding as of September 30, 2005, at a weighted average exercise price of $4.08 per share, of which options to purchase 369,815 shares were exercisable as of that date; and



	•	583,075 shares of our common stock available for future grant under the Valera Pharmaceuticals, Inc. Equity Incentive Plan as of September 30, 2005.

SELECTED HISTORICAL FINANCIAL DATA

The following tables set forth our selected historical financial data as of December 31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004, which have been derived from our audited financial statements, included elsewhere in this prospectus. In addition, the tables include selected financial data for the nine months ended September 30, 2004 and 2005 and as of September 30, 2005, which have been derived from our unaudited financial statements included elsewhere in this prospectus. The selected historical financial data as of December 31, 2000, 2001 and 2002 and for the period from May 30, 2000 to December 31, 2000 and the year ended December 31, 2001 have been derived from our audited financial statements, which are not included in this prospectus. We have also presented financial data while we were a division of GP Strategies Corporation for the period of January 1, 2000 through May 29, 2000. It is important that you read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” and our financial statements and related notes and schedule to these financial statements beginning on page F-1 of this prospectus. The historical results presented below are not necessarily indicative of the results to be expected in any future period.


					For the
		Predecessor			Period
		Five Months			May 30,															Nine Months Ended
		Ended			2000 to			Year Ended December 31,												September 30,
		May 29,			December 31,
		2000			2000			2001			2002			2003			2004			2004			2005

														(Restated)(1)						(unaudited)
Net product sales		$	120,282		$	47,073		$	8,521		$	15,006		$	7,353		$	5,511,286		$	—		$	21,632,421
Licensing revenue			43,183			39,398						—			—			134,636			127,984			27,317

Total net revenue			163,465			86,471			8,521			15,006			7,353			5,645,922			127,984			21,659,738
Operating costs and expenses:
	Cost of product sales		—			—			—			—			—			608,150			—			4,782,775
	Research and development		824,517			1,147,741			2,616,136			4,319,709			5,229,529			6,375,819			5,281,673			4,411,733
	Selling and marketing		—			—			—			269,633			509,514			5,025,038			1,847,901			8,231,583
	General and administrative		1,507,003			609,688			1,521,892			1,324,378			1,838,101			5,897,435			2,132,602			4,128,564

Total operating expenses			2,331,520			1,757,429			4,138,028			5,913,720			7,577,144			17,906,442			9,262,176			21,554,655

(Loss) income from operations			(2,168,055	)		(1,670,958	)		(4,129,507	)		(5,898,714	)		(7,569,791	)		(12,260,520	)		(9,134,192	)		105,083
Interest income (expense), net			(2,747	)		(23,750	)		(30,398	)		15,919			13,134			(6,152	)		5,116			45,526

(Loss) income before income taxes			(2,170,802	)		(1,694,708	)		(4,159,905	)		(5,882,795	)		(7,556,657	)		(12,266,672	)		(9,129,076	)		150,609
Benefit from income taxes			—			—			—			—			—			243,618			—			—

Net (loss) income			(2,170,802	)		(1,694,708	)		(4,159,905	)		(5,882,795	)		(7,556,657	)		(12,023,054	)		(9,129,076	)		150,609
Deemed dividend(1)			—			—			—			—			(1,139,535	)		(5,860,465	)		(5,860,465	)		—

Net (loss) income attributable to common stockholders		$	(2,170,802	)	$	(1,694,708	)	$	(4,159,905	)	$	(5,882,795	)	$	(8,696,192	)	$	(17,883,519	)	$	(14,989,541	)	$	150,609

Basic net (loss) income attributable to common stockholders per share		$	(4.34	)	$	(3.39	)	$	(8.06	)	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.09

Weighted average shares outstanding — basic			500,000			500,000			515,982			1,666,667			1,666,667			1,666,667			1,666,667			1,666,667

Diluted net (loss) income attributable to common stockholders per share		$	(4.34	)	$	(3.39	)	$	(8.06	)	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.01

Weighted average shares outstanding — diluted			500,000			500,000			515,982			1,666,667			1,666,667			1,666,667			1,666,667			10,801,555

Unaudited pro forma basic net (loss) income per share(2)																	$	(2.24	)				$	0.01

For the

Predecessor

Period

Five Months

May 30,

Nine Months Ended

Ended

2000 to

Year Ended December 31,

September 30,

May 29,

December 31,

2000

2001

2002

2003

2004

2005

(Restated)(1)

(unaudited)

Unaudited pro forma weighted average shares outstanding — basic

7,995,897

10,508,433

Unaudited pro forma diluted net (loss) income per shares(2)

(2.24

)

0.01

Unaudited pro forma weighted average shares outstanding — diluted

7,995,897

10,801,555


																As of
	As of December 31,															September 30,

	2000			2001			2002			2003			2004			2005

										(Restated)(1)						(unaudited)
Balance Sheet Data:
Cash and cash equivalents	$	—		$	6,620,869		$	640,577		$	5,241,246		$	5,052,643		$	2,569,262
Working capital		(92,874	)		5,657,823			(403,548	)		4,585,488			8,306,324			6,090,123
Total assets		586,251			7,172,082			1,296,188			6,664,550			13,666,946			16,376,796
Long-term liabilities		200,711			123,887			66,753			32,709			17,193			306,943
Convertible preferred stock		—			6,603,856			6,603,856			20,469,446			39,924,995			39,924,995
Accumulated deficit		(1,694,708	)		(5,854,610	)		(11,737,405	)		(20,433,597	)		(38,317,116	)		(38,166,507	)
Total stockholders’ (deficit) equity		186,081			(582,051	)		(6,464,846	)		(15,158,330	)		(29,886,559	)		(29,719,278	)


(1)	We have determined that in connection with the issuance of our series B convertible preferred stock, certain anti-dilution provisions in our series A convertible preferred stock were activated. Because the shares of series B convertible preferred stock were sold at a price below the price that the shares of series A convertible preferred stock were sold, the conversion price and conversion ratio of the series A convertible preferred stock were adjusted in accordance with the original terms of that issuance when each tranche of series B convertible preferred stock was issued. These adjustments to the conversion price and the resulting conversion ratio resulted in deemed dividends being afforded to the holders of the series A convertible preferred stock. The total deemed dividend was not originally recorded in our 2003 financial statements, but such statements have been restated to reflect this deemed dividend.

(2)	The pro forma net loss per share information is computed using the weighted average number of common shares outstanding, after giving pro forma effect to the automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock effective upon the completion of this offering, as if the conversion had occurred as of the date of original issuance.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and the related notes and schedule thereto appearing elsewhere in this prospectus. This discussion and analysis may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially as a result of various factors, including those set forth under “Risk Factors” or elsewhere in this prospectus.

Overview

We are a specialty pharmaceutical company concentrating on the development, acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders, including products that utilize our proprietary technology. Our first product, Vantas, was approved by the FDA in October 2004. Vantas is a 12-month implant indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, a luteinizing hormone-releasing hormone agonist, or LHRH agonist. We began selling Vantas in November 2004 utilizing our sales force that is currently calling on urologists in the U.S. that account for the majority of LHRH agonist product sales.

Total U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were approximately $973 million in 2004 based on IMS Health Incorporated data, with the leading products being the three- and four-month injection formulations, though we believe that amount declined by 10% in 2005, primarily as a result of lower prices due to changes in medicare reimbursement. We believe that Vantas has a competitive advantage over these products because it delivers an even, controlled dose of LHRH agonist over a 12-month period, and is the only product indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist available.

In addition to Vantas, a hydrogel implant based on our patented Hydron Technology, we are developing a pipeline of proprietary product candidates for indications that include central precocious puberty, acromegaly, opioid addiction, interstitial cystitis, nocturnal enuresis and bladder cancer. Several of our product candidates also utilize our Hydron Technology delivery system. We intend to leverage our existing specialized sales force to market certain of our product candidates, if approved, since the indications of these product candidates are treated by many of the same physicians we are calling on for Vantas.

We expect to continue to spend significant amounts, including for 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. 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 aim to build our urological and endocrine product portfolio and opportunistically acquire or in-license later-stage urological and endocrine products that are currently on the market or require minimal development expenditures, or have some patent protection or potential for market exclusivity or product differentiation. Further, we intend to collaborate with major and specialty pharmaceutical companies to develop and commercialize products that are outside of our core urology and endocrinology focus. Accordingly, we will need to generate significant revenues to achieve or maintain profitability.

Drug development in the United States and most countries throughout the world is a multi-stage process 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 pre-clinical 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 I, II and III. The most significant expenses associated with clinical development are the Phase III clinical trials as they tend to be the longest and largest studies conducted during the

drug development stage. In responding to a new drug application, the FDA may refuse to accept 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 in 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;

	•	the terms and timing of any collaborative, licensing and other arrangements that we may establish;

	•	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 in the aggregate, represented approximately 20% of our total operating expenses for the nine months ended September 30, 2005, approximately 36% of our total operating expenses for the year ended December 31, 2004 and approximately 69% of our total operating expenses for the year ended December 31, 2003. Research and development expenses consist primarily of costs incurred for clinical trials and 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.

We expect our research and development expenses to continue to decline, when measured as a percentage of total operating expenses, due to the fact we will be selling product and growing our infrastructure. We do not disclose estimated research and development costs for product candidates that are not yet in Phase III clinical trials. We estimate that we will incur approximately $1.5 million to $2.0 million of expenses, in addition to costs previously incurred, in order to complete Phase III trials for our VP002 histrelin implant and to complete the regulatory process in the U.S. These estimates assume the completion of a single Phase III trial which is currently underway.

Basis of Presentation


	*Product Sales and Costs*

We generate revenues from sales of Vantas, our lead product. We began commercial sales of Vantas in November 2004. Currently, all sales are in the U.S. We distribute Vantas directly to physicians, or through Besse Medical Distribution Company, or Besse Medical, which is a subsidiary of AmerisourceBergen Corporation. Approximately 10% of our sales went through Besse Medical in 2004. Our business may be affected by physician utilization, pricing pressure and Medicare or third party reimbursement, as well as other factors which may cause variances in our revenue.

We sold 2,925, 3,974 and 1,747 units of Vantas during the first, second and third quarters of 2005, respectively. The third quarter number of units sold was affected by a manufacturing disruption due to

issues caused by our supply of histrelin, which issues were resolved in June 2005. We sold 2,868 units in the fourth quarter of 2005.

Our sales of Vantas from launch in November 2004 through June 30, 2005 were supported, in part, by favorable reimbursement rates, which decreased beginning in the third quarter of 2005. Our initial favorable reimbursement rates were due to the fact that Vantas was a new product that did not yet have an established ASP in connection with Medicare reimbursement. As a result, Vantas was reimbursed at wholesale acquisition cost, which is typically higher than ASP. Vantas received an established ASP effective July 2005, which resulted in lower reimbursement rates and a corresponding lower sales price to our customers. Our net average selling price to our customers was $2,604 for the six months ended June 30, 2005 and it declined to $2,099 during the three months ended September 30, 2005. We expect our net average selling price to decline to a range of approximately $1,750 to $1,800 per unit in the fourth quarter of 2005.

We expect future reimbursement levels to continue to decline, which will have an adverse effect on our net product sales. In some states, where the reimbursement rate for Vantas is based on ASP, the reimbursement levels will continue to decline because the ASP for Vantas will decline as we sell Vantas at prices below the reimbursement rate. In most states, however, the reimbursement rates for Vantas are even lower because the Medicare carriers in those states now apply the LCA methodology to Vantas. The reimbursement rate for Vantas, as determined by Medicare carriers, is lower in LCA states than the reimbursement rate in non-LCA states, resulting in a lower sales price in LCA states. We describe the factors affecting reimbursement in more detail in the section entitled “Business — Reimbursement” in this prospectus.

In prior years, we received all of our revenue from the sale of certain polymer products. We discontinued manufacturing these polymers in 1996, as they were no longer profitable, so that we could concentrate all of our efforts on developing pharmaceutical products.

Our cost of product sales are all related to the production of Vantas and represent the cost of materials, overhead associated with the manufacture of Vantas, direct labor, distribution charges and royalties. Prior to approval of Vantas in October 2004, we expensed all of our manufacturing costs as research and development. Aggregate royalty costs were $307,258 or 5.4% of net revenue for the year ended December 31, 2004 and $1,169,597 or 5.4% of net revenue for the nine months ended September 30, 2005. No royalties were due in prior years. For a more complete description of our royalty arrangements, see “Business — Material Agreements.”


	*Research and Development Expenses*

Our research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These expenses consist primarily of direct and research-related allocated overhead expenses such as facilities costs, salaries and benefits and material supply costs. We do not track or report our research and development expenses on a project basis as we do not have the internal resources or systems to do so. To date, the vast majority of our research and development resources have been devoted to the development of Vantas.


	*Selling and Marketing Expenses*

Selling and marketing expenses consist primarily of sales and marketing personnel compensation, sales force incentive compensation, travel, tradeshows, promotional materials and programs, advertising and healthcare provider education materials and events.


	*General and Administrative Expenses*

Our general and administrative expenses consist primarily of personnel expenses for accounting, human resources, outside consulting, information technology and corporate administration functions. Other costs include administrative facility costs, regulatory fees, and professional fees for legal and accounting services.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our 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 judgments, 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 revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, the expected course of development, historical experience and 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.

The list below is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, or GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Our audited financial statements and the related notes and schedule thereto included elsewhere in the prospectus contain accounting policies and other disclosures required by GAAP.


	*Revenue Recognition*

Our revenue recognition policies are in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, or SAB No. 104, Revenue Recognition in Financial Statements, which provides guidance on revenue recognition in financial statements, and is based on the interpretations and practices developed by the Securities and Exchange Commission. SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on our management’s judgments regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Should changes in conditions cause our management to determine that these criteria are not met for certain future transactions, revenue recognition for those transactions will be delayed and our revenues could be adversely affected. Allowances have been recorded for any potential returns or adjustments in accordance with our policy.


	*Pre-clinical Study and Clinical Trial Expenses*

Research and development expenditures are charged to operations as incurred. Our expenses related to clinical trials are based on actual and estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. Expenses related to clinical trials generally are accrued based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates accordingly on a prospective basis.


	*Stock-based Compensation*

In December 2002, Statement of Financial Accounting Standards, or SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123 was issued. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by Accounting Principles Board, or APB, Opinion No. 25, Accounting for

Stock Issued to Employees, or APB No. 25. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock Based Compensation. We adopted the disclosure requirements of SFAS No. 148 effective December 31, 2002. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting prescribed in APB No. 25 and, accordingly, do not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the estimated fair value of the stock at the date of grant. Deferred compensation is recognized and amortized on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, over the vesting period of the related options.

We account for options issued to non-employees under SFAS No. 123 and Emerging Issues Task Force, or 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. As such, the value of such options is periodically remeasured and income or expense is recognized during their vesting terms. The amount of stock-based compensation expense to be recorded in future periods may decrease if unvested options, for which deferred stock compensation has been recorded, are subsequently canceled.

Results of Operations


	*Comparison of Nine Months Ended September 30, 2004 and 2005*

Net Product Sales. There were no product sales for the nine months ended September 30, 2004, due to the fact we launched Vantas, our lead product in November 2004. Net product sales for the nine months ended September 30, 2005 were $21,632,421, during which period we sold 8,646 units of Vantas at a net average selling price per unit of $2,502. We also expect additional declines in our net average selling price in future periods as a result of an expected decrease in Medicare reimbursement rates for Vantas. The expected decrease in our net average selling price will negatively impact our net product sales, gross margins, our cash flows from operations. However, we are unable to quantify the extent of such declines beyond the fourth quarter of 2005. Please refer to “Basis of Presentation — Product Sales and Costs”.

In the second and third quarters of 2005, we experienced a disruption in our manufacturing of Vantas due to issues caused by our supply of histrelin as described in “Risk Factors — Risks Related to Our Business”. This manufacturing disruption which occurred in May and June of 2005 limited the amount of finished product available for sale in the third quarter of 2005 to three lots, or approximately 2,400 units. The issue was resolved in June and we released approved finished product in August. Our third quarter sales of 1,747 units were less than our sales in the first and second quarters of 2005, in which we sold 2,925 units and 3,974 units, respectively. As a result of this decrease in sales, we had a net loss in the third quarter of 2005. We expect our production of Vantas in the fourth quarter of 2005 to exceed all prior quarters’ sales levels and to be sufficient to meet demand as well as to continue to build quantities of finished goods inventory.

Licensing Revenue. During the nine months ended September 30, 2005, we recorded $27,317 from Hydron Technologies under a licensing arrangement. In addition, in January 2005 we received $300,000 from BioPro, our distribution partner for certain countries in Asia. The BioPro payment is reflected as deferred revenue on the September 30, 2005 balance sheet. We will recognize this payment ratably over a ten-year period once Vantas is approved in the licensed territory.

Cost of Product Sales. Our cost of product sales for the nine months ended September 30, 2005 was $4,782,775 resulting in a gross margin of 78%. The gross margin includes the benefit of the sale of units that were partially manufactured prior to FDA approval and, as such, were previously partially expensed. The gross margin is lower than the quarter ended December 31, 2004 due to the increased proportion of units sold during the nine months ended September 30, 2005 that were not previously partially expensed. In addition, during the second quarter of 2005, due to an issue regarding our supply of histrelin, the active ingredient in Vantas, several lots of Vantas that we produced did not meet our quality control specifications. Specifically, we acquired a supply of histrelin in January 2005 from our single-source supplier. We used that histrelin during February, March and April in the production of Vantas and in May and June of 2005 we discovered that the histrelin had lower than normal solubility. This caused the lots

made with that histrelin to fail to meet our quality control specifications and, as a result, those lots were not available for sale. This resulted in the write-off of five lots of Vantas in May and June of 2005 which had an unfavorable impact of approximately $1 million. The issue was resolved in June and we released approved finished product in August. We expect the gross margin percentage to decrease in future periods as we expect our net average selling price of Vantas to decrease as a result of declining reimbursement rates.

The cost of product sales calculation includes royalty expense of $1,169,597 for the nine months ended September 30, 2005. There were no sales for the nine months ended September 30, 2004 that were subject to a royalty.

Research and Development Expenses. Research and development expense for the nine months ended September 30, 2004 and 2005 were $5,281,673 and $4,411,733, respectively. Expenses related to clinical trials pursuant to contracts with research institutions and clinical research organizations represented 15% of our total research and development expenses for the nine months ended September 30, 2004 and 26% of our research and development expense for the nine months ended September 30, 2005.

Selling and Marketing Expenses. Selling and marketing expense for the nine months ended September 30, 2004 and 2005 were $1,847,901 and $8,231,583, respectively. The increase in the 2005 period over the 2004 period is predominantly the result of an increase in payroll and the related expenses of adding employees to our sales force as well as the related advertising costs for Vantas. Our commercial organization consisted of 36 individuals at September 30, 2005. We expect our selling and marketing expenses to increase in future periods as we continue to grow our commercial organization and marketing activities in support of our lead product, Vantas.

General and Administrative Expenses. General and administrative expenses were $2,132,602 for the nine months ended September 30, 2004, and $4,128,564 for the nine months ended September 30, 2005. The increase from the 2004 period to the 2005 period was primarily attributable to the hiring of additional personnel, increased regulatory fees, increased legal fees associated with pursuing and maintaining patent protection for our product candidates and other corporate matters, increased accounting fees relative to the increased size of our business and the scope of the audit, and other professional services required to support the hiring of personnel. For the nine months ended September 30, 2004 and 2005 general and administrative expense included a stock-based compensation charge of $372,061 and $(157,703) respectively.

Stock-Based Compensation. We recorded non-cash compensation charges of $34,531 and $72,309 for the nine months ended September 30, 2004 and 2005, respectively, relative to stock options granted to non-employees. In December 2003 the exercise price of all options issued prior to that date were amended to $0.50, the estimated fair market value at that date. In connection with this re-pricing of grants and in accordance with FASB Interpretation (“FIN”) No. 44, the re-priced options will be accounted for as variable from the date of the modification to the date the options are exercised, forfeited, or expire. As a result, we recorded stock-based compensation of $525,909 and $16,673 for the nine months ended September 30, 2004 and 2005, respectively.

The nine months ended September 30, 2004 and 2005 stock-based compensation charge also includes stock-based compensation of $0 and $431,793, respectively, for stock options granted in 2004 and 2005 at prices below the deemed fair value on the option grant dates.

Total stock-based compensation is included in the following line items in the statement of operations:


	Nine Months Ended
	September 30,

	2004		2005

General and administrative	$	372,061	$	(157,703	)
Sales and marketing		104,542		148,430
Research and development		49,306		(8,470	)
Manufacturing		—		17,476

Net Interest Income (Expense). Net interest income was $5,116 for the nine months ended September 30, 2004 and $45,526 for the nine months ended September 30, 2005. The variance is primarily attributable to slightly greater cash balances, improved cash management and less borrowing under capital leases.

Income Taxes. We have incurred net operating losses since inception and, consequently, have not recorded any federal or state income tax provision.


	*Comparison of Years Ended December 31, 2003 and 2004*

Net Product Sales. After receiving FDA approval in October 2004 for our lead product Vantas, we commenced commercial sales in November 2004. Net sales for the year ended December 31, 2004 were $5,511,286. We sold 2,187 units of Vantas at an average net selling price of $2,520. Net sales for the year ended December 31, 2003 were $7,353 and were completely derived from the sale of certain polymer products.

Licensing Revenue. During the year ended December 31, 2003 through September 2004 we did not recognize any licensing revenue, as we were attempting to eliminate the cross licensing arrangement we have with Hydron Technologies. During this time, no licensing fees were paid to us. In 2004, back fees of $134,636 were paid, as an agreement with Hydron Technologies to terminate the cross licensing agreement could not be reached. We estimate that we will receive royalties of approximately $35,000 annually in the future under this arrangement.

Cost of Product Sales. Our cost of product sales for the year ended December 31, 2004 was $608,150 resulting in a gross margin of 89%. Such gross margin includes the benefit of the sale of units that were partially manufactured prior to FDA approval and, as such, were previously partially expensed. In the future, we expect our gross margin to be lower as we sell through product at fully burdened manufacturing cost. The cost of product sales calculation includes an accrued royalty expense of $307,258 for the year ended December 31, 2004. Through October 2004, all manufacturing costs were included in research and developments costs. There were no sales for the year ended December 31, 2003 that were subject to a royalty. For the year ended December 31, 2003, there was not a cost of product sales, as the value of the polymer products were written off in prior years.

Research and Development Expenses. Research and development expense for the years ended December 31, 2003 and 2004 were $5,229,529 and $6,375,819, respectively. The 21.9% increase from 2003 to 2004 was primarily attributable to manufacturing costs of Vantas through October 2004, and a stock-based compensation charge of $297,314.

Expenses related to clinical trials pursuant to contracts with research institutions and clinical research organizations represented 55% of our total research and development expenses in 2003 and 24% of our research and development expenses in 2004.

Selling and Marketing Expenses. Selling and marketing expense for the years ended December 31, 2003 and 2004 were $509,514 and $5,025,038, respectively. The increase in 2004 over 2003 was primarily the result of expenses related to the launch of our lead product Vantas in November 2004. We hired a national sales force consisting of approximately thirty experienced individuals. In addition, marketing

expense was increased due to the promotion of Vantas and a stock-based compensation charge of $579,884.

General and Administrative Expenses. General and administrative expenses were $1,838,101 for 2003, and $5,897,435 for 2004. The increase from 2003 to 2004 was primarily attributable to a stock-based compensation charge of $2,278,091, the hiring of additional personnel, increased legal fees associated with pursuing and maintaining patent protection for our product candidates and other corporate matters, accounting fees relative to our expanding business, and other professional services required to support the hiring of personnel.

Stock-Based Compensation. We recorded non-cash compensation charges of $2,708 and $51,104 in 2003 and 2004, respectively, relative to non-employee stock options. In December 2003, the exercise price of all options issued prior to that date were amended to $0.50, the estimated fair market value at that date. In connection with the grant of stock options to employees, we recorded stock-based compensation of $3,031,119 in 2004 which is related to a repricing of grants made in 2002. In accordance with FIN No. 44, the re-priced options will be accounted for as variable from the date of the modification to the date the accruals are exercised, forfeited, or expire. The 2004 stock-based compensation charge also includes stock-based compensation of $73,067 for stock options granted in 2004 at prices below the deemed fair value on the option grant dates. The stock-based compensation is included in the following line items in the statement of operations:


General and administration	$	2,278,091
Sales and marketing		579,884
Research and development		297,314

Net Interest Income (Expense). Net interest income was $13,134 in 2003 and $(6,152) in 2004. The variances are primarily attributable to fluctuations in our average cash balances and lower interest rates.

Income Taxes. We have incurred net operating losses since inception and, consequently, have not recorded any federal or state income tax benefit. In 2004, the New Jersey Economic Development Authority approved our application to sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program. During the fourth quarter of 2004, we recognized $243,618 from the sale of State of New Jersey income tax benefits. The program requires that we maintain certain employment levels in New Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey.

Our deferred tax assets primarily consist of net operating loss carryforwards and research and development tax credits. We have recorded a valuation allowance for the full amount of our deferred tax asset, as the realization of the deferred tax asset is uncertain. As of December 31, 2004, we had federal and state tax net operating loss carryforwards of approximately $20.0 million and $17.0 million, respectively. These federal and state tax loss carryforwards will begin expiring in 2022 for federal purposes and 2011 for state purposes. Annual limitations may result in the expiration of net operating loss and credit carryforwards before they are used. Under the provisions of the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.


	*Comparison of Years Ended December 31, 2002 and 2003*

Net Product Sales. Product sales for the years ended December 31, 2002 and 2003 were derived from the sale of certain polymer products. There was no cost of product sales as the value of the polymer products were written off in prior years. Net product sales for 2002 and 2003 were $15,006 and $7,353 respectively.

Licensing Revenue. For the years ended December 31, 2002 and 2003 no licensing fees were paid to us as we were attempting to eliminate the cross licensing arrangement we have with Hydron Technologies.

Research and Development Expenses. Research and development expense for the years ended December 31, 2002 and 2003 were $4,319,709 and $5,229,529, respectively. The 21.1% increase from 2002 to 2003 was primarily attributable to the hiring of additional consultants and increased clinical trial activities associated with the completion of our Phase III clinical trials of our lead product Vantas.

Expenses related to clinical trials pursuant to contracts with research institutions and clinical research organizations represented 58% of our total research and development expenses in 2002 and 55% of our total research and development expenses in 2003.

Selling and Marketing Expenses. Selling and marketing expense for the years ended December 31, 2002 and 2003 were $269,633 and $509,514 respectively. The 89.0% increase in 2003 over 2002 was predominantly due to additional market research costs and related materials, attending urological conferences and business development.

General and Administrative Expenses. General and administrative expenses were $1,324,378 for 2002 and $1,838,101 for 2003. The 38.8% increase from 2002 to 2003 was largely due to additional legal and consulting fees required to complete the new drug application filed in December 2003 for Vantas.

Stock-Based Compensation. We recorded non-cash compensation charges of $2,708 in 2003 relative to non-employee stock options. There were no options granted to non-employees in 2002. The exercise price of all options issued prior to 2003 was amended in October 2003 to $0.50, the fair market value at that time.

Net Interest Income (Expense). Net interest income was $15,919 in 2002 and $13,134 in 2003. The variance is primarily attributable to fluctuations in our average cash balances and lower interest rates.

Liquidity and Capital Resources

Since our inception, we financed our operations primarily through the net proceeds from private placements of our equity securities. As of September 30, 2005, we had received net proceeds of approximately $33 million from the issuance of our series A, B, and C convertible preferred stock.

As of September 30, 2005, cash and cash equivalents were $2,569,262, compared to $5,052,643 as of December 31, 2004.

Net cash provided by operating activities was $507,934 for the nine months ended September 30, 2005. Operating activities in the nine months ended September 30, 2005 primarily consisted of the profits of selling Vantas and an increase in accrued expenses, offset by the increase in accounts receivable, resulting from the increase in sales, and the building of inventory for the nine months ended September 30, 2005.

Net cash used in investing activities was $1,721,439 for the nine months ended September 30, 2005. The primary investing activities for the nine months ended September 30, 2005 were related to a construction project to increase our capacity, plus equipment for the increase in production demand.

Net cash used in financing activities was $1,269,876 for the nine months ended September 30, 2005. Cash used in financing activities for the nine months ended September 30, 2005 primarily related to costs that were incurred in connection with our planned initial public offering.

In October 2005, we entered into a two year, $7,500,000 line of credit with Merrill Lynch Capital. Under the line of credit, the amount we may borrow at any given time is dependent upon our accounts receivable balance and related aging of such accounts. Borrowings under the line of credit bear an initial interest rate at the sum of the one-month LIBOR rate plus 3.75%. We are subject to certain covenants under the credit agreement. These covenants restrict our ability to incur additional debt, grant liens, carry out mergers, acquisitions and asset sales, make investments and place limitations on our ability to pay dividends or make other restricted distributions. In addition, we will be required to maintain a minimum fixed charge coverage ratio. In connection with the credit agreement, we have pledged all of our assets, with the exception of intellectual property, to Merrill Lynch. In November 2005, we drew down $1,500,000 under the line of credit.

As of December 31, 2004, cash and cash equivalents were $5,052,643, compared to $5,241,246 as of December 31, 2003.

Net cash used in operating activities was $12,141,622 for 2004. The primary use of cash was to fund net losses for the period, primarily resulting from research and development expenses mostly related to clinical trials for Vantas, sales and marketing expenses relating to the creation of our sales force to launch Vantas and general and administrative expenses relating to the building of our corporate infrastructure. These losses were adjusted for non-cash expenses including $257,495 for depreciation and amortization and $3,155,290 in stock-based compensation expense. In addition, working capital increased and cash decreased by $3,780,836 as a result of the commercialization of Vantas and the related increase in accounts receivable due to sales in the fourth quarter of 2004 and inventory level increases to support our production needs.

Net cash used in investing activities was $1,610,378 for 2004. These activities consisted of purchases of manufacturing equipment and leasehold improvements to our facilities, primarily for the production of Vantas.

Net cash provided by financing activities was $13,563,397 in 2004. This activity consisted primarily of the private sales of convertible preferred stock, which was offset in part by ongoing payment of capitalized lease obligations. The principal balance of our capitalized lease obligations was $35,066 at December 31, 2004.

In November 2004, we launched Vantas, and net sales for the year ended December 31, 2004 were $5,511,286. We anticipate that cash flows from sales of Vantas will reduce our need for additional financing. We expect our cash requirements to continue to increase in the foreseeable future as we continue to sponsor additional clinical trials, seek regulatory approvals of, and develop, manufacture and market our current product candidates. As we continue to expand our commercial organization to include the development of our field sales force, expand our research and development efforts and pursue additional opportunities, we anticipate significant cash requirements for hiring of personnel, capital expenditures and investment in additional internal systems and infrastructure.

The amount and timing of cash requirements will depend on market acceptance of our lead product, Vantas, and regulatory as well as market acceptance of our product candidates, if any, and the resources we devote to researching, developing, formulating, manufacturing, commercializing and supporting our product candidates, and our ability to enter into third-party collaborations.

We believe that our existing cash, cash generated from future sales of Vantas, and our line of credit, together with the proceeds from this offering, will be sufficient to fund our operations for at least the next 12 months. Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities. In addition, we may receive revenue from our sublicense agreements with Paladin Labs Inc., Key Oncologics (Pty) Ltd., BioPro Pharmaceutical, Inc. and Teva-Tuteur.

We may finance future cash needs through strategic collaboration agreements, the sale of other equity securities or debt financing. In fact, we established a line of credit in the October 2005 to partially fund the expansion of our manufacturing facility. We may not be successful in obtaining collaboration agreements or additional debt financing or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that in the future our existing cash resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or delay the launch of our product candidates.

Intrinsic Value of Stock Options in the Twelve Months Prior to September 30, 2005

The fair value of our common stock for options granted from January 1, 2004 through December 31, 2004 and, subsequently, through September 30, 2005, was originally estimated by our board of directors, with input from management. We did not obtain contemporaneous valuations by an unrelated valuation specialist. However, to the extent available, we used third party indications of our enterprise value, such as the price at which we sold shares of our series C convertible preferred stock to unrelated parties.

In determining the fair value of our common stock at each grant date, our board of directors has drawn on the knowledge of its directors who have experience as venture capitalists specializing in early-stage life sciences companies and its directors who have experience with pharmaceutical and other life sciences companies. Factors considered by the directors in establishing the fair value of our common stock at the various grant dates have included the following: (i) the lack of a public market for our common stock and the considerable uncertainty of such a market developing; (ii) the uncertainty of our capital requirements prior to achieving product approvals, generating revenue and ultimately achieving profitability; (iii) the significant risks associated with our early stage of development, economic viability and market acceptance of our product candidates; (iv) our available cash, financial condition and results of operations; (v) the most recent sales of our convertible preferred stock to unaffiliated third parties; (vi) the preferential rights of the outstanding convertible preferred stock with respect to liquidation preferences, voting control and anti-dilution rights; and (vii) market conditions for life science company stocks in general.

As disclosed more fully in Note 9 to the financial statements included elsewhere in this prospectus, we granted stock options with an exercise price of $3.00 during the twelve months ended December 31, 2004. During the three months ended March 31, 2005 we granted stock options at $6.00 per share. During the six months ended September 30, 2005 we granted stock options at $12.00 per share. Also as disclosed, we determined that the fair value of our common stock increased from $3.00 to $12.00 per share during that period. The reasons for the difference between the $3.00, $6.00, and $12.00 grant prices, the fair market values, and an estimated initial public offering price of $11.00 per share are as follows:


	•	During the quarter ended September 30, 2004, we raised $11.6 million through the issuance of our series C convertible preferred stock. Approximately 43% of the funds were received from outside, unrelated investors and as such the prices of the series C convertible preferred stock issued was used to determine our fair market value.

	•	During the quarter ended December 31, 2004, our new drug application was approved by the FDA. In addition, we continued hiring a sales force and commenced sales of Vantas in the U.S. Initial sales of the product in November and December 2004 exceeded $5.0 million, which were above our expectations. We also engaged investment bankers in January 2005 to explore the possibilities of an initial public offering.

	•	During the nine months ended September 30, 2005, we recorded total net revenue of $21.7 million, primarily from the sales of Vantas. In addition, we realized net income of $0.2 million. Finally, we filed a S-1 Registration Statement as part of our proposed initial public offering.

Based on an estimated initial public offering price of $11.00 the intrinsic value of the in the money options outstanding at September 30, 2005, was $8.8 million, of which $2.9 million related to vested options and $5.9 million related to unvested options.

Contractual Obligations and Commitments

The following table summarizes our long-term annual contractual obligations as of December 31, 2004:


	Payments Due in

Contractual Obligations	Total		2005		2006		2007		2008		2009		After 2009

Operating leases(1)	$	14,398,156	$	1,105,857	$	1,277,627	$	1,277,627	$	1,277,627	$	1,360,857	$	8,098,561
Capital lease obligations		41,039		22,316		18,723		—		—		—		—
Accrued royalties(2)		307,258		307,258		—		—		—		—		—

	$	14,746,453	$	1,435,431	$	1,296,350	$	1,277,627	$	1,277,627	$	1,360,857	$	8,098,561


(1)	On March 8, 2005, we entered into an additional building lease of approximately 21,300 square feet for our office and research and development needs. The lease will be co-terminus with our existing building lease. From inception through June 30, 2005, the base rent will be $43,044 per month. From July 1, 2005 until June 30, 2010, the annual base rent will be $537,808. Commencing July 1, 2010 and through March 31, 2015, the annual base rent will be $707,999.

(2)	Royalty payments have only been determined for 2005 based upon 2004 sales. Future royalties have not been estimated as they are based on future sales levels.

In October 2005, we entered into a two year, $7,500,000 line of credit with Merrill Lynch Capital. Under the line of credit, the amount we may borrow at any given time is dependent upon its accounts receivable balance and related aging of such accounts. Borrowings under the line of credit bear an initial interest rate at the sum of the one-month LIBOR rate plus 3.75%. We are subject to certain covenants under the credit agreement. These covenants restrict our ability to incur additional debt, grant liens, carry out mergers, acquisitions and asset sales, make investments and place limitations on our ability to pay dividends or make other restricted distributions. In addition, we will be required to maintain a minimum fixed charge coverage ratio. In connection with the credit agreement, we have pledged all of our assets, with the exception of intellectual property, to Merrill Lynch. In November 2005, we drew down $1,500,000 under the line of credit.

Off-balance Sheet Arrangements

As of September 30, 2005, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Quantitative and Qualitative Disclosures About Market Risk

To date, all of our sales have been denominated in U.S. dollars, although we do conduct some clinical and safety studies with vendors located outside the U.S. All of these expenses are paid in U.S. dollars. 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. Accordingly, we believe that there is no material exposure to risk from changes in foreign currency exchange rates.

We hold no derivative financial instruments and do not currently engage in hedging activities.

Our exposure to interest rate risk at September 30, 2005 is related to the investment of our excess cash into highly liquid financial investments with original maturities of three months or less. We invest in money market funds in accordance with our investment policy. The primary objectives of our investment

policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments. Due to the short term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

Recent Accounting Pronouncements

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

SFAS 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not been issued. We adopted SFAS 123(R) on January 1, 2006.

BUSINESS

We are a specialty pharmaceutical company concentrating on the development, acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders, including products that utilize our proprietary technology. Our first product, Vantas, was approved by the FDA in October 2004. Vantas is a 12-month implant indicated for the palliative treatment of advanced prostate cancer. Vantas slows prostate tumor growth by delivering histrelin, a luteinizing hormone-releasing hormone agonist, or LHRH agonist. We began marketing Vantas in November 2004 utilizing our sales force that is currently calling on urologists in the U.S. that account for the majority of LHRH agonist product sales. In addition to Vantas, we are developing a pipeline of proprietary product candidates for indications that include central precocious puberty, acromegaly, opioid addiction, interstitial cystitis, nocturnal enuresis and bladder cancer.

Total U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were approximately $973 million in 2004 based on IMS Health Incorporated data, with the leading products being three- and four-month injection formulations, though we believe that amount declined by approximately 10% in 2005, primarily as a result of lower prices due to changes in Medicare reimbursement. We believe that Vantas has a competitive advantage over these products because it delivers an even, controlled dose of LHRH agonist over a 12-month period, and is the only product indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist available on the market.

Vantas is a hydrogel implant based on our patented Hydron Technology. Hydron Technology is a drug delivery system that allows us to control the amount and timing of the release of drugs into the body for up to 12 months. Several of our product candidates utilize our Hydron Technology delivery system. We intend to leverage our specialized sales force to market certain of our product candidates, if approved, since the indications of these product candidates are treated by many of the same physicians we are calling on for Vantas.

Our Competitive Strengths

We believe that our key competitive strengths that distinguish us from our competitors include:


	•	Technology. We believe that Hydron Technology offers significant advantages over existing drug delivery systems. Implants using Hydron Technology can be adapted to deliver many kinds of drugs over an extended period of time. Currently, we only have FDA approval for Vantas. We will have to obtain approval for each product we develop, including products using Hydron Technology. In addition, our implants are soft and flexible, enhancing patient comfort. Further, because we own the manufacturing know-how to develop products utilizing Hydron Technology, we are able to control and maximize the potential commercial uses of this technology.

	•	Development Capability. As demonstrated by Vantas, we have succeeded in developing a product, successfully taking it through the regulatory process to market in the U.S. in less than a year from the submission of a new drug application without utilizing an accelerated approval process. However, we may not be able to obtain FDA approval for our product candidates as quickly as we did for Vantas. Over the past three years, we have advanced two other product candidates into late-stage clinical development. We expect to continue to utilize this capability to efficiently develop future products.

	•	Manufacturing Ability. We manufacture Vantas and our product candidates utilizing Hydron Technology using a patented process. In addition, we have developed proprietary equipment and scalable manufacturing methods to achieve cost-effective commercial production. Further, because we control the manufacture of Vantas and our product candidates that use Hydron Technology, we can ensure high quality and fully realize any manufacturing cost efficiencies.

	•	Sales and Marketing. We are currently calling on urologists that account for the majority of LHRH agonist product sales in the U.S. By adjusting our current sales force structure slightly, we


		will be able to call on physicians in additional specialty areas, such as endocrinology. These therapeutic areas are attractive because a small, focused sales force can effectively target them. We also believe that the direct physician distribution channel of Vantas may present a barrier to the future entry of competition from generic products because generic drug companies do not typically have field sales forces. Outside the U.S., we intend to partner with companies with a local presence and proven distribution channels in the urology market for distribution of Vantas.

Product Development

The following table summarizes certain information regarding Vantas and our product candidates:

Therapeutic

Delivery

Next Anticipated

Indication

Area

Method

Status

Milestone

Product

Vantas

Prostate Cancer

Urology

Implant

U.S. Commercial Sales

Commence Mutual Recognition Process in Europe in Second Quarter of 2006

VP002
(Histrelin)

Central Precocious Puberty (early onset of puberty)

Endocrinology

Implant

Phase III

New Drug Application Filing in Second Quarter of 2006

VP003
(Octreotide)

Acromegaly (giantism)

Endocrinology

Implant

Phase I/II

Phase IIb Clinical Trial in First Half of 2006

VP004
(Naltrexone)

Addiction Disorders

Central Nervous System

Implant

Pre-clinical

Phase I/II Clinical Trial in First Half of 2006

VP005
(Anti-inflammatory)

Interstitial Cystitis (bladder inflammation)

Urology

Bladder Instillation

Pre-clinical

Phase I/II Clinical Trial in Second Half of 2006

VP006
(Peptide)

Nocturnal Enuresis (bed-wetting)

Urology

Oral Tablet

Phase I

Clinical Trials in First Half of 2006

Valrubicin

Bladder Cancer

Urology

Bladder Instillation

Acquisition Pending

Closing of Asset Purchase in First Quarter of 2006

Vantas

Vantas is a soft and flexible implant utilizing Hydron Technology to deliver histrelin over a 12-month period for the palliative treatment of advanced prostate cancer. The total number of patients with advanced prostate cancer in the U.S. was 666,300 in 2004, and we estimate that approximately 50% of these patients are receiving treatment with LHRH therapy. We estimate the patient population to be similar in Europe. We received regulatory approval to commercialize Vantas in Denmark in November 2005, and we expect to commence the mutual recognition process for regulatory approval in other European countries in the second quarter of 2006. We filed for regulatory approval in Canada in June 2004. In addition, one of our marketing partners has applied for regulatory approval in Thailand, Singapore, Malaysia, and Taiwan. The current standard of care for the palliative treatment of prostate cancer is LHRH agonist therapy. An agonist is a chemical substance capable of activating a receptor to induce a full or partial pharmacological response. LHRH agonist therapies for advanced prostate cancer are designed to suppress the production of testosterone because testosterone promotes and accelerates the growth of tumors associated with prostate cancer. Histrelin, a powerful inhibitor of testosterone production, is the most potent LHRH agonist available.

Total U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were approximately $973 million in 2004 based on IMS Health market data, though we believe that amount declined by approximately 10% in 2005, primarily as a result of lower prices due to changes in Medicare reimbursement. The most common dosage forms for the administration of LHRH agonists for this indication involve three- and four-month injection formulations such as Lupron and Eligard, which deliver leuprolide, Trelstar, which delivers triptorelin, and Zoladex, a biodegradable rod, which delivers goserelin. Another product is Viadur, a rigid metal implant that releases leuprolide over a 12-month period. We believe that Vantas is a more comfortable and convenient alternative to competing products because it eliminates the requirement of multiple physician visits and repeated injections and is smaller, softer and more flexible than other implants. Implantation, however, may be less well-received by some patients than injection therapy. In addition, in our Phase III clinical trial for Vantas, 100% of the evaluable patients achieved chemical castration at week four and testosterone suppression was maintained throughout the 52-week study period for 99% of the patients. Based on these data, we believe Vantas is a highly effective product for the palliative treatment of advanced prostate cancer. During the Phase III clinical trial, side effects included hot flashes, fatigue and implant site reactions, such as swelling and redness.

Prostate cancer is the most common cancer for men and the second leading cause of cancer death in men. According to the American Cancer Society, every year approximately 200,000 men are diagnosed with prostate cancer and 30,000 die from this disease. The National Cancer Institute’s SEER Program and the National Oncology Database each project that this patient group will grow at an annual rate of 2% to 3% per year through 2008 and beyond.

We are currently selling and marketing Vantas through our sales force to the urologists that account for the majority of LHRH agonist product sales in the U.S. Our product specialists utilize various promotional materials when making clinical presentations, including instructional videos on proper implantation technique. In remote areas where our product specialists cannot make personal visits, we conduct direct mail programs and telemarketing campaigns to selected physicians. We also supply physicians, health plan administrators and specialty pharmacies with a pharmaco-economic model to demonstrate the cost effectiveness of Vantas compared to other LHRH agonist products due to decreased utilization of staff time for repeated injections and a single reimbursement claim per year as opposed to three or four. Additionally, we support our sales efforts by employing a wide range of marketing programs to promote Vantas, including journal advertising, industry publications, medical educational conferences and internet initiatives.

VP002 (Histrelin)

VP002 is an implant utilizing Hydron Technology to deliver histrelin over a 12-month period for the treatment of central precocious puberty, or CPP. The prevalence of this condition is estimated to be between one in 5,000 to 10,000 children. This yields a potential population of up to 11,700 children with this condition who are 14 or younger in the U.S. CPP is the early onset of puberty in young children, resulting in the development of secondary sexual characteristics and short stature, if left untreated. The development of these secondary sexual characteristics is due to an increase in the secretion of sex hormones, the cause of which is unknown. The standard of care of CPP involves the use of LHRH agonists to suppress the secretion of sex hormones in order to delay the onset of puberty.

One therapy currently marketed to treat CPP is Lupron Depot-PED, which is manufactured and marketed by TAP Pharmaceutical Products, Inc. According to IMS Health market data, sales of Lupron Depot-PED generated revenues in excess of $71 million in the U.S. in 2004. The monthly cost of Lupron Depot-PED is in excess of $1,000 per month. CPP treatment using Lupron Depot-PED consists of monthly intramuscular injections of leuprolide to hormonally suppress these children. Our research indicates that, in many cases, hormonal suppression may not be achieved by a monthly injection schedule, and leuprolide needs to be administered more frequently. VP002 delivers histrelin, which has ten times the relative potency of leuprolide, and which has been previously approved for this condition as a daily injection for children. VP002 is formulated to release a higher daily dose of histrelin than Vantas because children with CPP need higher doses of LHRH agonist to achieve hormonal suppression. If approved,

VP002 would provide hormonal suppression over a 12-month period. We believe VP002 would have a competitive advantage over Lupron Depot-PED because it eliminates the monthly injections given to these children and offers increased convenience and reduced costs by eliminating the need for monthly physician visits. Depending on the age of diagnosis, typical therapy may last three to five years.

In a survey conducted by D2 Market Research on our behalf at the 2004 Pediatric Academic Society conference, over 50% of the pediatric endocrinologists who completed a self-administered questionnaire indicated they would be likely to use a one-year implant like VP002. There are approximately 700 pediatric endocrinologists in the U.S., and most of them are located in the same major metropolitan areas as the urologists we are calling on for Vantas. We intend to market VP002, if approved, by leveraging our existing sales force and hiring only a small number of additional product specialists.

Results from our Phase II clinical trial of VP002 showed that all patients achieved clinically relevant levels of hormonal suppression, which is less than 4 mlU/ml, for the entire 12-month period. As demonstrated by blood tests, the primary efficacy endpoints of our Phase II clinical trial were the suppression of testosterone in boys and estradiol in girls. During the Phase II clinical trial, side effects included implant site reactions. Based on the successful outcome of our Phase II clinical trial, we are currently conducting a single Phase III clinical trial with 36 patients and plan on filing a new drug application with the FDA in the second quarter of 2006. Because the patient population for CPP is small, clinical studies with smaller sample sizes are permitted by the FDA. The endpoints of this clinical trial, as agreed with the FDA, will be the suppression of luteinizing hormone upon a gonadotropin releasing hormone challenge. All patients in the Phase III clinical trial have met their first efficacy endpoint, which is hormone suppression below pubertal levels. This was true for both patient groups; those who were being treated with a competitive therapy as well as those who had not started therapy prior to the clinical trial. There were no serious side effects for any patients and no patient discontinuations from the clinical trial. Monthly assessments of efficacy and safety will be gathered until the end of the study, which is scheduled for April 2006. In November 2005, we received notification from the FDA that VP002 was granted orphan drug designation for the treatment of central precocious puberty. Orphan drug designation provides us with certain economic benefits and tax credits, and exclusivity in the marketplace for a period of seven years.

VP003 (Octreotide)

VP003 is an implant utilizing Hydron Technology to deliver octreotide over a six-month period for the treatment of acromegaly, or giantism. We believe there are approximately 1,000 new acromegalic patients per year and 16,000 total patients in the U.S. Acromegaly is a chronic hormonal disorder that occurs when a pituitary tumor produces excess growth hormone, or GH. It most commonly affects middle-aged adults, and if untreated, causes enlargement of certain bones, cartilage, muscles, organs and other tissue, leading to serious illness and potential premature death.

Octreotide is a treatment used to substantially reduce GH levels and insulin-like growth factor levels, or IGF-1 levels, in patients with acromegaly. Octreotide is also approved to treat the symptoms associated with metastatic carcinoid tumors and vasoactive intestinal peptide secreting adenomas, which are gastrointestinal tumors. Octreotide is currently being marketed by Novartis as Sandostatin injections in several strengths in both daily and monthly formulations.

Worldwide sales of Sandostatin generated revenues in excess of $827 million in 2004 according to Scrip World Pharmaceuticals News. We estimate the U.S. acromegalic market to be approximately $200 million annually, consisting mostly of monthly injections of octreotide. We believe there is a market for a longer-acting octreotide formulation such as VP003 in order to reduce the number of physician visits for injections of octreotide. In addition, since there are a limited number of endocrinologists dispensing octreotide and patients are dispersed throughout the country, we believe patient compliance would also be significantly improved by longer-acting treatment with VP003.

Research conducted by Verispan Market Research on our behalf shows that a longer-acting octreotide product would be favorably received in the endocrinology market. The endocrinologists interviewed by Verispan cited the poor compliance of acromegalics who are required to visit a doctor every month to get

injections for a disease in which patients rarely notice the changes being caused by the condition. Another reason cited for poor compliance was the long distances many patients have to travel for treatment because of the limited number of physicians willing to administer the monthly formulation of Sandostatin due to the complexity of the technique involved.

There are about 4,400 endocrinologists practicing in the U.S., and most of them are located in the same metropolitan areas where we are marketing Vantas to urologists. We intend to market VP003 by leveraging our existing sales force and hiring only a small number of additional product specialists. Furthermore, we may already have a presence with endocrinologists to market VP003, if approved, as a result of the potential marketing of VP002, our histrelin implant to treat CPP.

In 2004, we initiated and completed a Phase I/ II pharmacokinetic clinical trial with 11 acromegalic patients to evaluate the release characteristics of VP003 and examine safety and efficacy parameters. The endpoints achieved in this clinical trial were the reductions in GH and IGF-1 levels in the blood in these patients. During the Phase I/II clinical trial, side effects included diarrhea, low blood sugar and implant site reactions. We plan to initiate a Phase IIb clinical trial in the first half of 2006 to evaluate the efficacy of VP003 as compared to the monthly formulation of Sandostatin. This study will be conducted in both the U.S. and Brazil and the goal is to enroll 45 patients for at least six months. The endpoints of our Phase IIb clinical trial will be the reductions in GH and IGF-1 levels in the blood in these patients, which were the endpoints in the Phase III clinical trial of Sandostatin.

VP004 (Naltrexone)

VP004 is an implant utilizing Hydron Technology to deliver naltrexone for the treatment of opioid addiction over a six-month period. The National Institute for Drug Addiction estimates that there are approximately one million heroin addicts in the U.S. of which only 25% seek treatment. Naltrexone is an opiate antagonist currently approved as an oral daily formulation in the U.S. for the treatment of opiate dependence. Naltrexone competitively binds at the opiate receptor sites in the brain, thereby blocking the euphoric effects of opiates such as heroin.

Although naltrexone is effective, the addict population is typically non-compliant. We believe that this creates an attractive opportunity for VP004 because it provides controlled release of naltrexone over a six-month period. There are 214 registered addiction medicine specialists practicing in the U.S. Further, a significant number of primary care providers treat opioid addicts. In addition to opioid addiction, naltrexone is also currently approved in the U.S. for the treatment of alcoholism.

VP004 has completed animal testing for evaluation of safety and pharmacokinetics. We intend to file an investigational new drug application and initiate a pilot Phase I/ II clinical trial among an opioid addict population in the first half of 2006. The purpose of the study is to evaluate the extent of opiate blockade following a morphine challenge. While we are currently developing VP004 for the treatment of opioid addiction, we may decide in the future to pursue an indication for the treatment of alcoholism as well. We plan to license the rights to use VP004 to an addiction specialty firm prior to conducting Phase III clinical trials.

VP005 (Anti-inflammatory)

VP005 is a proprietary polymer solution instillation for the treatment of symptoms associated with interstitial cystitis, a chronic inflammatory condition of the bladder. Interstitial cystitis, or IC, affects approximately one million people in the U.S. IC is characterized by frequent urination and pain above the pubic region. The cause of IC is unknown but is believed to involve inflammation of the lining of the bladder.

We believe that IC is a disease that has been poorly served by the pharmaceutical industry. Elmiron is the only product currently approved for the relief of bladder pain or discomfort associated with IC. Elmiron is manufactured and marketed by Ortho-McNeil Pharmaceutical, Inc. and is an oral formulation containing 100 milligrams of pentosan polysulfate sodium, a semi-synthetic molecule that is taken three

times a day. According to IMS Health market data, sales of Elmiron generated revenues in excess of $100 million in the U.S. in 2004. Our discussions with urologists indicate that Elmiron is only occasionally effective and that many patients require instillation therapy, a more invasive form of treatment utilizing a catheter to fill up the bladder with various solutions. Instillation therapy has been shown to abate the symptoms of IC in some patients. VP005 is an instillation therapy that forms a temporary coating on the internal lining of the bladder and facilitates the slow, controlled release of the drug in VP005 into the bladder. We intend to license the drug delivery technology used in VP005 and intend to apply for patent protection for this application of that technology.

VP005 has been successful in animal models in treating what we believe to be the major contributing factor in producing the painful symptoms of IC. We have drafted a Phase I/II protocol to evaluate VP005 in humans. In March 2005, we met with a panel of IC experts from the U.S. to help refine the protocol. We expect to file an investigational new drug application with the FDA and initiate a Phase I/II clinical trial in the second half of 2006.

VP006 (Peptide)

VP006 is a proprietary modified release oral formulation of a peptide for the treatment of nocturnal enuresis, commonly referred to as bed-wetting. Nocturnal enuresis affects approximately five to seven million children in the U.S.

We believe that nocturnal enuresis has been poorly served by the pharmaceutical industry. DDAVP and Tofranil are the only products currently approved for the management of nocturnal enuresis. The most common pharmaceutical treatment is DDAVP, which is manufactured and marketed by Sanofi-Aventis.

According to IMS, sales of DDAVP for 2004 were approximately $220 million. It is available as an oral tablet or a nasal spray containing 0.1-0.2 milligrams of desmopressin acetate, an antidiuretic hormone affecting renal water conservation. We believe that the rapidly dissolving formulation of the VP006 peptide would be preferred by children and their parents because young children can have difficulty swallowing solid tablets.

VP006 is currently in Phase I clinical trials. Depending on the results of these studies and the regulatory pathway, we anticipate entering further clinical trials in the first half of 2006, followed by a regulatory filing in the second half of 2006.


	*Valrubicin*

We have entered into an agreement to acquire certain assets from Anthra Pharmaceuticals, Inc. associated with Anthra’s valrubicin business in the U.S. and Canada. The valrubicin product, formerly marketed in the U.S. under the trademark Valstar, is a bladder instillation approved to treat bladder cancer that is no longer responsive to conventional treatment such as surgery and/or topical drug application. This product was previously administered and billed as an office procedure, and predominantly covered under Medicare reimbursement. We believe that it will continue to be administered and billed as an office procedure and that the Medicare reimbursement per course of treatment will be approximately $8,500. The product is not covered by any patents and its orphan drug status has expired. If the transaction closes as planned, we will pay $600,000 for the assets and may make additional payments based upon net sales and certain milestone payments based upon achieving certain sales levels.

According to the National Institutes of Health data, bladder cancer has an incidence of 499,000 patients in the U.S. Market research conducted by Verispan on our behalf and performed at the May 2002 American Urology Association meeting found that approximately 31% of bladder cancer patients are treated with BCG (Bacillus Calmette-Guerin), the most common form of topical treatment. The research further shows that about 17% of the BCG patients become unresponsive, or refractory, to treatment each year and must now either have a cystectomy, the medical term for bladder removal, or stand the chance of disease progression. Urologists surveyed in the study further stated that 69% of these

refractory patients go on to have their bladder removed, resulting in a patient population of approximately 8,200 with this type of cancer who could be candidates for valrubicin.

Anthra’s product was withdrawn from the market in 2002 due to a manufacturing problem and a lack of resources to address the problem. We believe that we have identified the cause of the manufacturing problem and that we will be able to correct it. We initiated discussions with the FDA in the fourth quarter of 2005 regarding our plan to reintroduce the product in the U.S. market, and in January 2006, the FDA agreed to our plan. Our acquisition of the product and related assets is expected to close during the first quarter of 2006, subject to various conditions, including termination of Anthra’s agreement with the existing distributor in the U.S. Subject to closing occurring in the first quarter of 2006 and our successful implementation of the reintroduction plan, we anticipate being able to re-launch the product in the U.S. in the fourth quarter of 2006. We expect to address reintroduction of the product in Canada following reintroduction in the U.S. and expect distribution to be handled by Paladin Labs, the existing Canadian distributor.

Our Drug Delivery System

Human implantable drug delivery is a relatively new therapeutic drug delivery approach in which drugs are administered directly into the circulatory system through a biocompatible, non-toxic device. We believe this type of drug delivery is suitable for certain drugs that are not amenable to oral delivery, such as therapeutic peptides that are destroyed in the gastrointestinal tract, or GI tract, or drugs poorly absorbed by the GI tract or destroyed in the liver. In such cases, increasing the dosage of these drugs to increase absorption may result in harmful side effects. As a result, we believe that implantable drug delivery systems may provide safer and more effective administration of therapy by delivering the drug directly to the bloodstream at even, controlled rates.

Hydron Technology, our proprietary drug delivery technology, is the basis of our patented hydrogel implant, which is inserted under a patient’s skin. This technology, which evolved from similar technology used in soft contact lenses, is flexible and can be adapted to deliver many types of drugs. Currently, we only have FDA approval for Vantas. We will need to obtain approval for each product we develop, including products using Hydron Technology. Our implant is designed to allow release of drugs continuously, at even, controlled rates for up to a 12-month period. We believe that such predictable release over a period of 12 months has not been achieved by most other drug delivery systems, including sustained release injections, bioerodible implants and transdermal devices. In addition, implants utilizing Hydron Technology are smaller, softer and more flexible than other implants and eliminate the requirement of multiple physician visits and repeated injections. Utilizing Hydron Technology, we are able to manufacture implants to the exact chemical and physical specifications required by the particular drugs to be released. By modifying the geometric characteristics (wall thickness, diameter and length) and the polymer make-up of the implants, we can vary the release rates of a broad spectrum of drugs according to the therapeutic levels required for a particular indication. Once filled with an active ingredient, sealed and sterilized, the implant is inserted into a patient in a minor outpatient procedure generally performed in a physician’s office. The procedure to insert the implant takes approximately 7 to 10 minutes. First, the insertion site is swabbed with an antiseptic. Next, the physician injects an anesthetic immediately under the skin in the upper arm along the path where the implant is to be inserted. Then the physician makes a small incision and inserts the implant using an insertion tool. The tool is then retracted, leaving the implant under the skin. The incision is then closed with adhesive tape and a bandage is applied for one day. Lastly, the patient is given home care instructions and sent home. If necessary, the physician can easily remove the implant from the body in a similar procedure. We believe that advantages of our Hydron Technology include:


	•	Increased Patient Compliance. Hydron Technology releases drugs for up to a 12-month period. As a result, the need for multiple physician visits and the inconvenience associated with frequent injections are eliminated, reducing the risk that a patient will miss a treatment.


	•	Adaptability. Hydron Technology can be adapted to deliver many types of drugs. In addition, it provides a controlled and even drug release over a period of time that can result in increased efficacy and safety. Currently, we only have FDA approval for Vantas. We will need to obtain approval for each additional product we develop including products using our Hydron Technology.

	•	Decreased Cost. As a result of the reduced number of patient visits to doctors’ offices, the overall costs associated with such visits, including scheduling, office visit and reimbursement claim costs, are significantly lowered. In addition, use of Hydron Technology lessens the administrative burden on private insurance and Medicare by reducing the number of reimbursement claims processed per year.

Finally, since Vantas is based on Hydron Technology, we believe that the regulatory approval of Vantas may be helpful in obtaining approval of our product candidates that utilize this technology.

Hydron Technology is limited by the amount of drug which can be loaded into an implant due to its small size, the inability of the technology to deliver drugs that are water insoluble and the need for a minor surgical procedure to insert and remove the implant.

Our Business Strategy

In addition to increasing sales of our approved product, Vantas, our goal is to develop, acquire and commercialize products for the treatment of urological and endocrine conditions, diseases and disorders. To achieve this goal, our strategy includes the following key elements:


	•	Continue to Focus on Urological and Endocrine Conditions, Diseases and Disorders. We intend to continue to focus on the development, acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders. Our aim is to build our urological and endocrine product portfolio and opportunistically acquire or in-license later-stage urological and endocrine products that are currently on the market or require minimal development expenditures, or have some patent protection or potential for market exclusivity or product differentiation. We intend to collaborate with major and specialty pharmaceutical companies to develop and commercialize products that are outside of our core urology and endocrinology focus.

	•	Develop Proprietary Pharmaceutical Portfolio. We are building a product portfolio based on Hydron Technology. We have demonstrated the utility of Hydron Technology through Vantas, and we believe that we can utilize this technology to bring additional products to market. We intend to apply Hydron Technology to the delivery of drugs with established safety and efficacy profiles to reduce product development risk and speed time to market.

	•	Develop or Acquire New Drug Delivery Technologies. In addition to our Hydron Technology, we intend to continue to evaluate other drug delivery technologies as candidates for in-license, acquisition and development, including various implantable technologies and other drug delivery systems. We believe that, by devoting our resources to continued development of new drug delivery technologies, we can develop a broader base that will enable us to deliver a greater variety of drugs than would be possible using a single drug delivery technology.


	•	Leverage Sales and Marketing Expertise. We will continue to expand our commercialization efforts by leveraging our existing sales and marketing expertise to market new products as they are approved. We intend to expand our commercial organization, which consisted of approximately 41 employees as of January 1, 2006, incrementally in a cost-effective manner and expand or realign territories as products emerge from our development pipeline or are acquired.


	•	Partner Outside the U.S. to Reach New Geographic Markets. To reach markets outside the U.S., we intend to pursue primarily a licensing strategy, whereby we partner with companies with a local presence and proven distribution channels in the urology and endocrinology markets for distribution of our products. We may retain full or co-marketing rights, however, on a select territory-by-territory basis to further leverage our sales and marketing expertise.

Sales, Marketing and Distribution

As of January 1, 2006, our commercial organization consisted of approximately 41 employees, and we expect to hire approximately ten additional employees in this area. Our product specialists have an average of seven years of pharmaceutical sales experience and the majority of our sales force have sold other LHRH agonist products prior to joining us. Each product specialist is responsible for marketing Vantas to physicians in an assigned geographic territory. As of January 1, 2006, we had 31 product specialists. At present, we are calling on the urologists that account for the majority of LHRH agonist products in the U.S. As revenue increases and resources become available, we intend to scale up our sales force to market new products which emerge from our pipeline. We continue to analyze physician prescribing habits so that we can direct our product specialists to physicians who maintain the largest prostate cancer practices. We will also evaluate the need to hire additional product specialists as we get closer to acquiring a new product or launching VP002, our histrelin implant for CPP. By adjusting our current sales force structure slightly, we will be able to call on our current physician base and on physicians in additional specialty areas, such as endocrinology. Further, we believe that the direct physician distribution channel of Vantas may present a barrier to the future entry of competition from generic products because generic drug companies do not typically have a field sales force.

Our product specialists utilize various promotional materials when making clinical presentations, including, instructional videos on proper implantation technique. In remote areas where our product specialists cannot productively make personal visits, we conduct direct mail programs and telemarketing campaigns. We also supply physicians, health plan administrators and specialty pharmacies with a pharmaco-economic model to demonstrate the cost effectiveness of Vantas compared to other LHRH agonist products due to decreased utilization of staff time for repeated injections and one reimbursement claim per patient per year as opposed to three or four.

Additionally, we support our sales efforts by employing a wide range of marketing programs to promote Vantas, including journal advertising, industry publications, medical educational conferences and internet initiatives. We hold meetings in major cities where a Vantas clinical investigator presents data about Vantas, relates his own impressions and demonstrates proper implantation technique. In addition, our product specialists utilize local thought leaders as peer influence speakers in their specific markets.

As part of our marketing strategy, we entered into two group purchasing agreements with International Urology Networks, LLC, or IUN, a subsidiary of AmerisourceBergen Corporation. IUN was founded in 2001 as a group purchasing organization for over 40% of practicing urologists in the U.S. This network designs and supports practice management, business planning and accredited continuing medical education for all of its members. Our agreements with IUN provided for access to their physician members, support from their strategic account managers and services from two other AmerisourceBergen subsidiaries: US Bioservices Corporation, a specialty pharmacy, and Besse Medical, a wholesale distributor for many GPOs, including IUN. Under the agreements, physician practices and clients who are members of IUN or US Bioservices were eligible to purchase Vantas from Besse Medical. In addition, US Bioservices could dispense Vantas purchased under the agreements to patients of member physicians upon request by healthcare providers, patients, or third party payors, as well as provide drug management and patient care support services. Our agreements with IUN expired on November 30, 2005. However, we have continued to use the distribution services of Besse Medical and are currently discussing potential new arrangements with IUN.

Outside the U.S., we intend to primarily pursue a licensing strategy, whereby we partner with companies with a local presence and proven distribution channels in the urology or other market for distribution of Vantas or other products we may offer. We may retain co-marketing rights, however, on a select territory-by-territory, basis. For example, we have executed an agreement with Paladin Labs, Inc., a Canadian company, under which it will distribute Vantas and file all required regulatory applications in Canada, and have signed similar agreements with each of Key Oncologics (Pty) Ltd., a South African company, BioPro Pharmaceutical, Inc., an organization specializing in marketing oncology drugs in the pan Asian region, and Teva-Tuteur, an organization specializing in marketing oncology drugs in Argentina. We

are actively seeking relationships or distribution arrangements with additional GPOs, specialty pharmacies and local companies abroad.

Reimbursement

Advanced prostate cancer is generally treated by urologists in their offices. LHRH agonist products are sold directly from the pharmaceutical manufacturer to the physician and are administered in the office through injections or a 12-month implant. Once a physician acquires and administers the LHRH agonist product, he files a claim with Medicare or the patient’s private insurance for reimbursement.

Approximately 70% of patients diagnosed with prostate cancer and receiving LHRH agonist therapy are over the age of 65 and therefore covered by Medicare. In light of this, we have retained a group of Medicare experts to monitor pricing of LHRH agonist products and the Medicare reimbursement environment.

Medicare reimbursement for LHRH agonist therapy is comprised of two parts. The first part of the reimbursement is based on reimbursement for the LHRH agonist product. In some states, the reimbursement rate is based on the manufacturers’ average sales price, or ASP. This ASP method was introduced in 2005 for all products covered by Medicare. Under the ASP method, each LHRH agonist product manufacturer must calculate a quarterly average unit sales price for its product and report it to the Centers for Medicare and Medicaid Services, or CMS. CMS will then post the ASP for that product on its web page for the physicians to reference. A physician will be reimbursed by Medicare at 106% of the ASP for that product. In most states, however, the reimbursement rates for Vantas are even lower because the Medicare carriers in those states now apply the Least Costly Alternative, or LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement for drugs that have been determined by Medicare to be “medically equivalent”. The reimbursement rate for Vantas, as determined by the Medicare carriers, is lower in LCA states than the reimbursement rate in non-LCA states, resulting in a lower sales price in LCA states.

The second part of the reimbursement is derived from the actual procedure the physician completes to administer the LHRH agonist product. A physician can expect to receive approximately $125 for an implant procedure, such as Vantas, as compared to approximately $28 per injection procedure.

Reimbursement is often confusing and requires exacting procedures in order to be honored by Medicare or private insurance carriers. As a result, we have set up a toll-free phone number for physicians to call for help in resolving any billing issues concerning reimbursement for Vantas. In addition, effective January 1, 2006, Vantas has an assigned J-code from CMS which will further facilitate the physician’s reimbursement by Medicare.

Intellectual Property

Our success will depend in large part on our ability to maintain a proprietary position in our products and product candidates through patents, trade secrets and FDA exclusivity. We rely upon patents, trade secrets, know-how and continuing technological innovation to develop and maintain our competitive position. We plan to aggressively protect and defend our proprietary position.

As of December 2005, we own three issued U.S. patents and 24 issued foreign patents relating to our Hydron Technology. We own three pending foreign patent applications relating to our Hydron Technology. Our patents and patent applications cover a variety of novel pharmaceutical formulations, methods of use, and processes to manufacture hydrogel polymers and implants incorporating active agents. Within the Hydron Technology patent portfolio, we own two issued U.S. patents and 23 issued foreign patents relating to Vantas.

The following table sets forth information related to U.S. and foreign patents and patent applications owned by us:

Date of

No. of

No. of Pending

Grant/

Technology Family

Brief Description of Coverage

Patents

Applications

Expiration

Water-Swellable Hydrophilic Articles

Method of preparing a hydrophilic plastic cartridge

1994/2011

Homogenous Hydrogel Copolymers

Method of preparing homogeneous copolymers having a predetermined equilibrium water content value

1993/2010

Hydrogel Composition

Method of preparing homogenous porous hydrogel

2002/2020

Implanting Device

Device for inserting implantable objects under the skin

Not Applicable/ 2023

Implanting Device Design

Design for an implanting device

2004/2017

Compositions and Treatments for Central Precocious Puberty

Controlled delivery of gonadotropin- release hormone agonists for the treatment of central precocious puberty

Not Applicable/ 2025

Polyurethane Implant Formulations

Polyurethane implant formulations and methods of preparing

Not Applicable/ 2024

Total

We have filed a U.S. and a foreign patent application covering pharmaceutical formulations, processes and methods of use relating to VP002. In addition, as of December 2005, we also own four other issued patents and have approximately 18 other patent applications pending worldwide relating to other areas, including implanting devices and designs thereof.

Our commercial success will depend in part on obtaining this patent protection. Other intellectual property and know-how, including the Hydron Technology, that we have produced and own, are safeguarded through copyrights, trademarks, trade secret protections and contractual safeguards such as confidentiality and proprietary information agreements. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel. To protect our rights to this proprietary information and technology, which are not patentable, we require all employees, consultants and advisors to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside our company. As a matter of company policy, all scientific employees are “hired to invent” and all have executed agreements that recognize this policy and generally require disclosure and assignment to us of ideas, developments, discoveries and inventions made by employees. However, these agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information if there is unauthorized use or disclosure.

Material Agreements

We are a party to certain material agreements including:


	*GP Strategies Corporation*

In June 2000, we entered into a contribution agreement with GP Strategies Corporation, our former parent. Under this contribution agreement, GP Strategies contributed, assigned, transferred and conveyed to us the assets of GP Strategies’ drug delivery business, including all intellectual property and certain agreements with Hydron Technologies, Inc., formerly known as Dento-Med Industries, Inc., The Population Council, Inc., and Shire US Inc., successor to Roberts Laboratories Inc.

We assumed all assets, liabilities and obligations of GP Strategies relating or arising from the operation of the drug delivery business and the assets.


	*Hydron Technologies, Inc.*

In November 1989, National Patent Development Corporation entered into an agreement with Dento-Med Industries, Inc., now known as Hydron Technologies. Under the contribution agreement in June 2000 between us and GP Strategies, GP Strategies transferred its rights and obligations under the agreement with Hydron Technologies to us.

Under the agreement, Hydron Technologies was granted an exclusive, worldwide license, with the right to grant sublicenses, in and to presently owned or subsequently issued patents and the Hydron trademark, to manufacture, market or use products composed of the Hydron polymer or produced with the use of the Hydron polymer in certain consumer and oral health fields, excluding prescription and non-prescription drugs. The agreement purports to continue indefinitely, unless terminated earlier by the parties. We have the exclusive right to manufacture, sell or distribute any prescription drug or medical device as defined under the Federal Food, Drug and Cosmetic Act made with the Hydron polymer, however, we will not have the right to sell or distribute any Hydron polymer product in the oral health field, except for prescription drug products for lip sores and oral ulcers. We also have the exclusive right to manufacture, sell or distribute certain other excepted Hydron products from Hydron Technologies’ license. Neither party is prohibited from manufacturing, exploiting, using or transferring the rights to any new non-prescription drug product containing the Hydron polymer, subject to certain exceptions, for limited exclusivity periods.

In the event we withdraw from the business of manufacturing the Hydron polymer, we shall assign all of our right and interest in the Hydron trademark to Hydron Technologies. Upon request from Hydron Technologies, we may provide certain research services, including limited use of our facilities, for Hydron Technologies’ research activities, for which we will be reimbursed a specified amount. In addition, subject to certain conditions and exceptions, Hydron Technologies has the right to purchase from us and we are obligated to supply to Hydron Technologies certain types of Hydron polymers.

Subject to certain exceptions (including Vantas), each party will pay to the other a 5% royalty on net sales for Hydron polymer products marketed by us or Hydron Technology, as applicable, or a third party. Subject to certain excepted Hydron polymer products, in the event either party sells any non-prescription Hydron polymer drug products itself, such party will pay a 5% royalty fee on net sales, including research payments, to the other party. Subject to certain Hydron polymer excepted products, if either party sells non-prescription drug products to a third party and receives up-front license fees, royalties or similar payments, such party will pay a 25% royalty on such payments to the other.


	*The Population Council*

In September 1990, National Patent Development Corporation entered into a joint development agreement with The Population Council regarding the development of hydrogel implants containing LHRH. Under the contribution agreement entered into in June 2000 between us and GP Strategies, GP Strategies transferred its rights and obligations under the agreement with The Population Council to us.

By amendment to the agreement dated October 1, 1997, the Joint Development Agreement was terminated in its entirety and superseded by the terms and conditions of the amendment. Under the amendment, The Population Council concluded all ongoing prostate cancer clinical studies and provided us with all data and records relating to those trials to enable us to advance the clinical trials and seek regulatory approval to commercially develop and market any polymer implant containing any LHRH analog or any polymer implant containing any other active agent, other than an LHRH analog. We can enter into licensing and marketing agreements for the commercial development of those implants without the consent of The Population Council. The term of the agreement is the shorter of twenty five years from the date of the amendment or until the date on which The Population Council receives approximately $40,000,000 in payments from us. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings or if, after receiving written notice the other party is in default of a material term and such default has not been cured within thirty days of the notice.

By a further amendment to the agreement dated August 2004, The Population Council is entitled to 30% of certain revenues received by us from the licensing of Vantas or any other polymer implant containing an LHRH analog and 5% of certain revenues received by us from the licensing of any other polymer implant to the extent those revenues are related to the use or sale of implants in all areas other than the European Union and certain Southeast Asian countries. We are required to pay to The Population Council 3% of our net sales of Vantas and any polymer implant containing an LHRH analog and 0.5% of our net sales of any other polymer implant. The Population Council is also entitled to 4% of any licensee’s net sales of Vantas and any other polymer implant containing an LHRH analog within the European Union and certain Southeast Asian countries and 0.667% of any licensee’s net sales for any other polymer implant within the European Union and certain Southeast Asian countries. In addition, we are required to establish a patient assistance program within one year after the first commercial sale of Vantas in the U.S. and maintain the program for a period ending on the earlier of ten years after establishment of the program or the cessation of the marketing of Vantas.


	*Shire Pharmaceuticals Group plc*

In March 1998, GP Strategies entered into a license agreement and a related manufacturing and supply agreement with Roberts Laboratories Inc. under which Roberts was responsible for conducting Phase III clinical trials, managing the regulatory approval process and marketing the product now known as Vantas. When Roberts was acquired by Shire Pharmaceuticals Group in December 1999, Shire took over the development of Vantas. In December 2001, we entered into a termination, license back and option agreement with Shire US, a subsidiary of Shire Pharmaceuticals Group, which terminated and released all claims of the parties under the previous license and manufacturing agreements. Under this agreement, Shire transferred to us all on-going activities under the development program for Vantas, including all data, know-how and other information with respect to Vantas generated in connection with the development program, and granted us an exclusive license to such data, know-how and information for the development, manufacture, use, supply and sale of Vantas in the designated territory, including, but not limited to, the U.S., Canada, and various European and other countries. We must use our reasonable efforts to secure a sublicense for the purposes of developing and commercializing Vantas, however, we may market Vantas in the U.S.

The term of the license continues for ten years from the date of the first commercial sale of Vantas. Thereafter, we will have a fully paid up license in the designated territory with respect to all data, know-how and other information related to Vantas generated under Shire’s previous development program for Vantas.

We are required to pay Shire 2% of net sales of Vantas in the designated territory. However, for the purposes of this agreement, net sales are reduced by the amount of any royalty payments we make to the Population Council with respect to sales of Vantas. If we sublicense Vantas to another entity in the designated territory, we will pay Shire fees of 20% of royalty income and 20% of any milestone payments we receive, up to a maximum of $5,000,000, relating to any sublicensing of Vantas. Royalty income does not include amounts paid to The Population Council with respect to sales of Vantas by a sublicensee.

However, the $5,000,000 cap on our royalties payments with respect to milestone payments is only applicable if we are entitled to receive at least 10% of net sales under the sublicense agreement.

We also granted Shire an exclusive, irrevocable option, on a country-by-country basis in the designated territory, to exclusively market and distribute Vantas in each country of the designated territory, other than in the U.S. This option, with respect to each country, will expire on the earlier of the date we enter into a sublicense agreement for that particular country or 180 days following the date of regulatory approval in that particular country for Vantas. We may market Vantas in any country at the expiration of the option with respect to that country. Upon exercise of the option, with respect to a particular county, Shire is obligated to pay us milestone payments of $2,000,000 in respect of the European Union and $500,000 in respect of any other countries within the designated territory. This amount will be reduced by $250,000 if we enter into a sublicense agreement within the European Union. These milestone payments are payable with respect to a particular country when Vantas is approved for marketing in the applicable country. If Shire exercises the option with respect to a particular country, we will supply Vantas at the cost of manufacture. Shire will pay us 13.5% of its net sales within the option territory. Each marketing and distribution arrangement requested by Shire under its option will have a term of 10 years. Either party may terminate if either party becomes insolvent or there is a material breach of the agreement.


	*Paladin Labs, Inc.*

In October 2002, we entered into a license and distribution agreement with Paladin Labs under which we granted Paladin Labs an exclusive, royalty bearing license under our intellectual property, including our patents, trademarks and know-how, to seek regulatory approval for the marketing, distribution and sale in Canada and its territories of (i) Vantas for the treatment of prostate cancer and (ii) any other Hydron histrelin implant, which is, or may be, developed by us for other indications, such as our histrelin implant for CPP. Paladin Labs is obligated to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas and any other Hydron histrelin implant and to sell, market and distribute those implants in Canada and its territories. The initial term of the agreement is for fifteen years after the date on which regulatory approval for Vantas in Canada is obtained for the treatment of advanced prostate cancer and will automatically renew for subsequent three year terms, unless terminated earlier. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings, or if, after receiving written notice the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its obligations as a result of a force majeure event. Paladin may terminate the agreement if regulatory approval of Vantas for the treatment of prostate cancer is finally denied by Canada’s regulatory authority. Terminations with respect to one or more, but not all forms, dosages or indications, will only apply to the affected forms, dosages or indications. We also granted Paladin Labs an exclusive license to use the trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of Vantas or any other Hydron histrelin implant in the designated territory. We have given Paladin Labs the exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas for the treatment of prostate cancer in the designated territory. If Paladin Labs does not conduct such trials within one year of our request to do so, we will have the right to conduct such Phase IV clinical trials on our own.

We have the sole right and responsibility for the manufacturing, assembling, packaging and labeling of Vantas or any other Hydron histrelin implant in such quantities required for Paladin Labs’ demand forecast and we must use all reasonable efforts to supply those products. In addition, Paladin granted us a non-exclusive license to use its trademarks on labeling of Vantas or any other Hydron histrelin implant. We have agreed not to supply Vantas or any other Hydron histrelin implant for distribution or sale in Canada and its territories for use in any indication to any other party except Paladin Labs. Paladin Labs will pay us a flat transfer fee of $190 per unit and a royalty of 8% of its net sales of Vantas or any other Hydron histrelin implant.

We are obligated to use commercially reasonable efforts to complete all necessary pre-clinical and clinical trials that are required by the Therapeutic Products Directorate of Health Canada, Canada’s

federal regulatory authority for pharmaceutical drugs, for use of Vantas in the treatment of prostate cancer in Canada. However, we are not required to undertake any pre-clinical or clinical trials beyond those activities conducted in the U.S. and Canada. If the Therapeutic Products Directorate of Health Canada requires pre-clinical or clinical activities beyond those activities currently being undertaken by us at our own expense to obtain approval to sell Vantas, we will pay the first $250,000 of such pre-clinical and/or clinical activities and Paladin Labs shall pay all amounts above $250,000.

Under the terms of the agreement, we and Paladin have agreed not to develop, market, distribute or sell in Canada or its territories any products that contain the same active ingredient as that which is contained in Vantas, or any products similar to or competitive with Vantas or any other Hydron histrelin implant approved in Canada during the term of the agreement and for a period of three years following the expiration or termination of the agreement; provided that we are permitted to make, market, distribute and sell Vantas in the designated territory for all indications following the expiration or termination of the agreement.


	*Key Oncologics (Pty) Ltd.*

In September 2003, we entered into a license and distribution agreement with Key Oncologics, under which we appointed Key Oncologics as the exclusive agent to apply for regulatory approval for and distribute Vantas in South Africa and its territories for use in the treatment of prostate cancer. The initial term of the agreement is for five years after the date on which regulatory approval for Vantas for the treatment of prostate cancer is obtained in South Africa, subject to automatic one year renewal periods unless terminated earlier. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings, or if, after receiving written notice, the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its obligations as a result of a force majeure event. Key Oncologics may terminate the agreement if regulatory approval of Vantas for the treatment of prostate cancer is finally denied by South Africa’s regulatory authority. Terminations with respect to one or more, but not all forms or dosages, will only apply to the affected forms or dosages. Key Oncologics is obligated to use commercially reasonable efforts to apply for and maintain regulatory approval in South Africa for Vantas for use in the treatment of prostate cancer. Key Oncologics is required to use its best efforts to market, distribute and sell Vantas in South Africa.

We have agreed to supply Vantas, as well as containers for and components of Vantas, to Key Oncologics exclusively in South Africa. We are obligated to supply Key Oncologics with all data and information in our possession or control as is necessary for the purpose of obtaining regulatory approval of Vantas for use in the treatment of prostate cancer in South Africa. We have given Key Oncologics the exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas for the treatment of prostate cancer in the designated territory. If Key Oncologics does not conduct such trials within one year of our request to do so, we will have the right to conduct such Phase IV clinical trials on our own. We will receive a perpetual, fully-paid, royalty-free license to use any data developed by Key Oncologics in the Phase IV trials.

Under the terms of the agreement, Key Oncologics has agreed not to develop, market, distribute or sell in South Africa any products that contain the same active ingredient contained in Vantas, or any products similar to or competitive with Vantas that are used to treat prostate cancer during the term of the agreement and for a period of three years following the expiration or termination of the agreement, except that Key Oncologics may market, distribute and sell a certain product under a previous third party license agreement.

We have granted Key Oncologics an exclusive license to use our trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of Vantas in South Africa in connection with the treatment of prostate cancer. Key Oncologics has granted us a non-exclusive license to use Key Oncologics’ trademarks on labeling of Vantas. We have the sole right and responsibility for manufacturing, assembling, packaging and labeling Vantas and we are required

to supply Vantas in sufficient quantities to meet Key Oncologics’ demand forecast. We have agreed not to supply Vantas for distribution or sale in any of the designated countries for use in the treatment of prostate cancer to any other party except Key Oncologics. For a period of twelve months following the receipt of regulatory approval, Key Oncologics will pay us a flat transfer fee of $250 per unit of Vantas, plus 10% of the net sales collected by Key Oncologics. After the end of the first twelve-month period, we will have the right to adjust the price per unit once per year, subject to certain exceptions.


	*International Urology Network*

To supplement our own marketing and distribution efforts, we entered into two group purchasing agreements in November 2004 with the group purchasing organization, IUN. These agreements made Vantas available for purchase to IUN members with respect to facilities located in the U.S. The agreements were amended in March 2005 and expired on November 30, 2005. We are currently discussing potential new arrangements with IUN.

Under the agreements, physician practices and clients who are members of IUN or US Bioservices, Inc. a specialty pharmacy, were eligible to purchase Vantas from Besse Medical, IUN’s wholesale distributor. In addition, US Bioservices could dispense Vantas purchased under the agreements to patients of member physicians upon request by healthcare providers, patients, or third party payors, as well as provide drug management and patient care support services.


	*Besse Medical*

In connection with the amended IUN agreements described above, we entered into a separate letter agreement with Besse Medical in March 2005, with respect to Besse Medical’s distribution of Vantas. Under this agreement, we designated Besse Medical as an authorized specialty distributor of Vantas to those purchasers eligible to buy Vantas under the IUN agreements. Besse Medical was responsible for services customarily provided by a wholesale distributor under the agreement, including the stocking, packing and shipment of our products, and was paid a distribution services fee based on the purchases of Vantas through Besse Medical. The agreement with Besse Medical expired on November 30, 2005, together with the amended IUN agreements. Since November 30, 2005, and notwithstanding the termination of the written agreement with Besse Medical, we have continued to use the distribution services of Besse Medical and expect to continue use of such services through January 2006. We are currently considering both the need for, as well as our options with respect to, wholesale distribution of Vantas for the period after January 2006.


	*BioPro Pharmaceutical, Inc.*

In January 2005, we entered into an exclusive license and distribution agreement with BioPro. The initial term of the agreement is for ten years after the date on which the first regulatory approval allowing sales of Vantas to proceed in any country of the designated territory is issued, unless terminated earlier and automatically renews for additional periods of one year unless notice of termination is given. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings, or if, after receiving written notice, the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its obligations as a result of a force majeure event. Either party may terminate the agreement on a country-by-country basis if regulatory approval of Vantas for the treatment of prostate cancer is finally denied by the regulatory authority within that country. Terminations with respect to one or more, but not all, forms, dosages, countries or indications will apply to the affected forms, dosages, countries or indications. Additionally, we may terminate the agreement if BioPro fails to achieve minimum net sales and then fails to make minimum required payments to us, or we may terminate the agreement on a country-by-country basis and on an indications-by-indications basis if BioPro fails to file necessary marketing approval applications.

Under the agreement, BioPro will be the exclusive distributor of Vantas in the designated territory consisting of Brunei, Cambodia, China (including Hong Kong), Laos, India, Indonesia, Malaysia, the

Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. BioPro is required to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas for the treatment of prostate cancer in the designated territory. In connection with obtaining regulatory approval for Vantas, we are required to supply BioPro with all data and information in our possession or control as is necessary for that purpose. We also granted BioPro an exclusive license to use the trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of Vantas in the designated territory. We have given BioPro the non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas for the palliative treatment of prostate cancer in each country of the designated territory. BioPro has applied for regulatory approval for the commercialization of Vantas in Thailand, Singapore, Malaysia, and Taiwan.

BioPro granted us the right to use BioPro’s trademarks on labeling of Vantas. We have the sole right and responsibility to manufacture, assemble, package and label Vantas and are required to supply Vantas in quantities sufficient to meet BioPro’s demand forecast. We have agreed not to supply Vantas for distribution or sale in any of the countries in the designated territory for use in any indication to any other party except BioPro. BioPro shall pay us a flat transfer fee of $250 per unit and a royalty of 25% of net sales of Vantas, in addition to various milestone payments. BioPro must pay us a minimum amount if it fails to achieve certain minimum net sales. In addition, BioPro is obligated to pay a royalty of 2% of net sales of Vantas directly to The Population Council or a minimum payment if certain minimum net sales are not achieved. Twelve months following the first commercial sales of Vantas in the designated territory, we will have the right, subject to certain exceptions, to adjust the price per unit once per year.


	*Alpex Pharma S.A.*

In April 2005, we entered into a collaboration and development agreement with Alpex Pharma to research and develop a pharmaceutical peptide product. Under the agreement, we have an exclusive, royalty-bearing license, based in part on Alpex’s intellectual property, including the right to sublicense, to make, use, sell, and otherwise commercialize the peptide product in the United States, Canada, and Mexico. The agreement continues in effect until the expiration of all Alpex patents related to Alpex’s platform technology that cover the peptide product. Upon expiration of all Alpex patents related to Alpex’s platform technology that cover the peptide product, we will have a fully paid-up, royalty-free, non-exclusive, irrevocable license, including the right to sublicense, to make, use, sell, and otherwise commercialize the product in the United States, Canada and Mexico.

Under the agreement, Alpex is obligated to use commercially reasonable efforts to diligently perform its obligations under the agreement, including developing the peptide product. We are obligated to use commercially reasonable efforts to perform our obligations under the agreement, including to obtain and maintain all regulatory approval for the peptide product in the United States, Canada, and Mexico. If we do not file for regulatory approval in the United States within six months after satisfaction of certain product success criteria, as agreed upon by us and Alpex, Alpex may elect to transform our license into a non-exclusive, royalty-free license. Alpex is required to make all intellectual property and technical information available to us as may reasonably be necessary for regulatory approval. Alpex owns all intellectual property related to the platform technology, and will own any intellectual property developed pursuant to the collaboration that relates to the platform technology. We will own all intellectual property related to the peptide product in the United States, Canada and Mexico. Alpex will own all intellectual property related to the peptide product outside of the United States, Canada and Mexico.

We are obligated to use our commercially reasonable efforts to market, distribute and sell the peptide product in the United States, Canada and Mexico. Alpex has agreed not to, directly or indirectly develop, market, distribute or sell a product that contains the same peptide in the United States, Canada or Mexico. Alpex shall manufacture and supply sufficient quantities of the peptide product for clinical trials and commercial sale to meet our needs. Both parties must use best efforts to enter into such a manufacturing and supply agreement prior to the first commercial shipment of the peptide product.

We may terminate the agreement and obligations of the parties if we determine, in our sole discretion, that the development and/or commercialization of the peptide product has been impaired due to (i) difficulties in development or formulation; (ii) unfavorable action by the FDA; (iii) likelihood of failure to obtain regulatory approval; (iv) concerns of possible third party infringement; and (v) unfavorable market conditions for the peptide product. In the event we discontinue the development and/or commercialization of the product, Alpex may continue or resume the development and/or commercialization of the peptide product, provided that it reimburses us for at least a portion of our development costs, including any license or milestone payments.

We are required to pay Alpex one-time milestone payments related to the development of the peptide product and lump-sum payments upon regulatory filing in the United States and upon approval in the United States. We are also required to pay Alpex a range of royalty payments based on net sales of the peptide product and a percentage of all sublicensing income. Our royalty payment obligations will expire twenty years from the date of the first commercial shipment of the peptide product, and the license will become a royalty-free, non-exclusive, perpetual, worldwide license to make, have made, use, import, export, sell, offer to sell and otherwise commercialize the peptide product in the U.S., Canada and Mexico.

James Gale, the Chairman of our Board of Directors, is also on the Board of Directors of Alpex. Affiliates of Sanders Morris Harris, Inc. of which Mr. Gale is a managing director, own approximately 49% of our Company and more than 90% of Alpex.


	*Valrubicin*

In September 2005, we entered into an agreement with Anthra Pharmaceuticals, Inc. to acquire certain assets of Anthra associated with its valrubicin business in the U.S. and Canada. Anthra’s valrubicin business involved the manufacture and sale of valrubicin for use in the treatment of bladder cancer. The product was distributed in the U.S. and Canada by third party partners of Anthra. In the U.S., the product was distributed under the trademark Valstar. The product is not covered by any patents and its orphan drug status has expired.

Anthra’s valrubicin product was taken off the market in 2002 due to a manufacturing problem and a lack of resources to address the problem. We have analyzed the manufacturing issues and believe that we have determined the cause of, and a solution to, the problem. As such, we have agreed to acquire certain assets of Anthra required for the manufacture, marketing and sale of valrubicin in the U.S. and Canada including the NDA filed with the FDA, the drug master file, the Canadian regulatory submission and all data produced by or on behalf of Anthra in support of the NDA and other governmental approvals, or in any other scientific experiment or clinical trial relating to valrubicin. The acquisition is expected to close during the first quarter of 2006, subject to various conditions including termination of Anthra’s agreement with the existing distributor of the product in the U.S. We initiated discussions with the FDA in the fourth quarter of 2005 regarding our plan to reintroduce the product into the U.S. market, and in January 2006, the FDA agreed to our plan.

The purchase price payable for the product consists of guaranteed payments, revenue sharing payments based on our sales and receipt of license fees and additional payments based on our sales performance. Subject to certain exceptions, Anthra’s indemnification obligations survive for two years after closing and are funded by setoff against the purchase price payable to Anthra under the agreement.


	*Teva-Tuteur*

In December 2005, we entered into an exclusive distribution agreement with Teva-Tuteur for distribution of Vantas in Argentina. The initial term of the agreement ends on the date that is ten years after the date on which the first regulatory approval allowing sales of Vantas to proceed in Argentina, is granted, unless terminated earlier. The agreement automatically renews for additional periods of one year each unless notice of termination is given. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings or if the other party fails to cure a material breach within a specified time period after receipt of notice or the other party is unable to fully perform its obligations for one hundred-fifty days as a result of a force majeure event. Either party may terminate the

agreement on an indication-by-indication basis if regulatory approval of Vantas for such indication is finally denied by the regulatory authority within Argentina. Terminations with respect to one or more, but not all, forms, dosages or indications will apply to the affected forms, dosages or indications. Additionally, we may terminate the agreement if Teva-Tuteur fails to purchase a specified number of units of Vantas in a calendar year. We may also terminate the agreement on an indications-by-indications basis if Teva-Tuteur fails to file necessary marketing approval applications within the required time.

Under the agreement, Teva-Tuteur will be the exclusive distributor of Vantas in Argentina. Teva-Tuteur is required to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas in Argentina for each indication for which we own or hold a regulatory approval anywhere in the world. In connection with obtaining regulatory approval for Vantas, we are required to supply Teva-Tuteur with all data and information in our possession or control as is necessary for that purpose. We also granted Teva-Tuteur an exclusive license to use the trademarks owned and approved by us, in connection with the marketing, distribution and sale of Vantas. We have given Teva-Tuteur the non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas in each approved indication in Argentina.

Teva-Tuteur granted us the right to use Teva-Tuteur’s trademarks on labeling of Vantas. We have the sole right and responsibility to manufacture, assemble, package and label Vantas; provided that Teva-Tuteur is responsible for any and all Argentinean-specific labeling. We have agreed not to supply Vantas for distribution or sale for use in any indications to any other party except Teva-Tuteur. Teva-Tuteur shall pay us a flat transfer fee per unit, which fee is subject to an index-base adjustment. Beginning in the first calendar year after the first commercial sale of Vantas in Argentina, Teva-Tuteur must make certain minimum purchases during each calendar year unless it provides written notice one hundred and twenty (120) days prior to the end of any such calendar year, in which case Teva-Tuteur is relieved of the minimum purchase requirement for such calendar year. If Teva-Tuteur provides such notice, we have the option to (i) convert the exclusive right granted to Teva-Tuteur into a non-exclusive right effective as early as the date of the receipt of such written notice from Teva-Tuteur or (ii) terminate the agreement effective as early as the date of the receipt of such written notice from Teva-Tuteur.

Manufacturing and Facilities

We maintain our headquarters and manufacturing facility in Cranbury, New Jersey in one leased facility consisting of a total of 51,046 square feet. The following table sets forth more information regarding our facilities.


Address	Square Feet		Function	Lease Expiration

7 Clarke Drive Cranbury, NJ		21,274	Research and Development; Administration		2015

8 Clarke Drive Cranbury, NJ		29,772	Manufacturing		2015

Our manufacturing facility is subject to periodic inspections by the FDA and other federal and state regulatory agencies and is subject to cGMP regulations. Despite the relative complexity and length of our manufacturing process, we believe that our existing manufacturing facilities are capable of producing commercial quantities of our implants. In order to achieve cost-effective production, we have developed proprietary equipment and scalable commercial manufacturing methods that we use in our production line. In May 2005, we began a construction project at our headquarters to increase the size of our manufacturing facility. We believe that our current manufacturing facilities, as supplemented by the space under construction, will provide sufficient capacity to meet our current needs and support the introduction of new products over the next several years, and that suitable additional space will be available in the future on commercially reasonable terms as needed. Please refer to “Risk Factors” for a more comprehensive discussion of the risks related to the manufacture of our products.

Competition

The biotechnology and pharmaceutical industries are very competitive. In particular, competition for the development and marketing of urological and endocrine pharmaceutical products is intense and is expected to increase. Many of our competitors have substantially greater financial and other resources, larger research and development staffs and more experience developing products, obtaining FDA and other regulatory approval of products and manufacturing and marketing products. We compete against all pharmaceutical companies that manufacture or market LHRH agonist products. In addition, we compete against biotechnology companies, universities, government agencies, and other research institutions in the development of urological and endocrine products, technologies and processes that are, or in the future may be, the basis for competitive commercial products.

In particular, we compete against the following LHRH agonist products for the palliative treatment of advanced prostate cancer: TAP Pharmaceutical Products’ Lupron and Sanofi-Aventis’ Eligard, both multiple injection formulations that deliver leuprolide; Watson Pharmaceuticals’ Trelstar that delivers triptorelin; AstraZeneca’s Zoladex, a biodegradable rod that delivers goserelin for up to three months; and Bayer Pharmaceuticals’ Viadur, a rigid metal implant that releases leuprolide over a 12-month period. With respect to our endocrine pharmaceuticals in late-stage development for the treatment of CPP and acromegaly, our competitors currently include TAP Pharmaceutical Products’ Lupron Depot-PED and Novartis’ Sandostatin injections and Sandostatin LAR Depots and Pfizer’s Somavert. We believe that Vantas represents a more comfortable and convenient alternative to competing products because it eliminates the requirement of multiple physician visits and repeated injections, and is smaller, softer and more flexible than other implants.

Regulatory Issues


	*General*

The production, distribution and marketing of products employing our technology, and our research and development activities, are subject to extensive governmental regulation in the U.S. and in other countries. In the U.S., our product candidates are regulated as drugs, and are subject to the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and the regulations promulgated under these statutes, as well as to other federal, state and local statutes and regulations. These laws govern the clinical and non-clinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, import, export, storage, record keeping, reporting, advertising and promotion of our products. Product development and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial resources. Violation of regulatory requirements at any stage may result in various adverse consequences, including FDA’s delay in approving or refusal to approve a product. Violations of regulatory requirements also may result in enforcement actions including withdrawal of approval, labeling restrictions, seizure of products, fines, injunctions and civil or criminal penalties.


	*Research, Development and Product Approval Process*

The research, development and approval process in the U.S. is intensive and rigorous, and generally takes many years. The typical process required by the FDA before a therapeutic drug may be marketed in the U.S. includes:


	•	pre-clinical laboratory and animal tests and analysis;

	•	submission to the FDA of an application for an investigational new drug application, which must become effective before human clinical trials may commence;

	•	preliminary human clinical studies to evaluate the drug and its manner of use;

	•	adequate and well-controlled human clinical trials to establish whether the drug is safe and effective for its intended uses;


	•	FDA review of whether the facility in which the drug is manufactured, processed, packed or held meets standards designed to assure the product’s continued quality; and

	•	submission and approval of an appropriate product application to the FDA, and approval of the application by the FDA.

During pre-clinical testing, studies are performed with respect to the chemical and physical properties of candidate formulations. Biological testing is typically done in animal models to demonstrate the activity of the compound against the targeted disease or condition and to assess the apparent effects of the new product candidate on various organ systems, as well as its relative therapeutic effectiveness and safety. An investigational new drug application must be submitted to the FDA and become effective before studies in humans may commence.

In the U.S., clinical trial programs in humans generally follow a three-phase process:


	•	Phase I studies are typically conducted in small numbers of healthy volunteers or, on occasion, in patients afflicted with the target disease, to determine the metabolic and pharmacological action of the product candidate in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.

	•	Phase II studies are generally conducted in larger groups of patients having the target disease or condition in order to validate the clinical endpoint and to obtain preliminary data on both the effectiveness of the product candidate and optimal dosage. This phase also helps determine further the safety profile of the product candidate.

	•	Phase III large-scale clinical trials are generally conducted in hundreds of patients having the target disease or condition to provide sufficient data for the statistical proof of effectiveness and safety of the product candidate.

In the case of products for cancer and certain other life-threatening diseases, however, the initial Phase I testing may be done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease or condition, it is possible that such studies will provide results traditionally obtained in Phase II studies. These studies are often referred to as “Phase I/II” studies. Even if patients are used in initial human testing in a Phase I/II study, the sponsor is still responsible for obtaining all the data usually obtained in both Phase I and Phase II studies.

U.S. law requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control. Studies must also be conducted in compliance with the FDA’s good clinical practice regulations.

The clinical trial process can take up to ten years or more to complete, and the data may not be collected in compliance with good clinical practice regulations, demonstrate that the product is safe or effective, or be sufficient to support FDA approval of the product candidate. The FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, which must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede or prevent marketing authorization. Similarly, adverse events that are reported after marketing authorization can result in additional limitations being placed on a product’s use and, potentially, withdrawal of the product from the market. Any adverse event, either before or after marketing authorization, can result in liability claims against us.

During the course of, and following the completion of clinical trials, the data are analyzed to determine whether the trials successfully demonstrated safety and effectiveness and whether a product approval application may be submitted. In the U.S., if the product is regulated as a drug, a new drug application must be submitted and approved before commercial marketing may begin. The FDA Center for Drug Evaluation and Research, known as CDER, has responsibility for the review and approval of drugs. The new drug application must include a substantial amount of data and other information

concerning the safety and effectiveness of the compound from laboratory, animal and clinical testing, as well as data and information on manufacturing, product stability and proposed product labeling.

Each domestic and foreign biopharmaceutical manufacturing establishment, including any contract manufacturers we may decide to use must be listed in the new drug application and must be registered with the FDA. The application will not be approved until the FDA conducts a manufacturing inspection, approves the applicable manufacturing process for the drug product and determines that the facility is in compliance with the FDA’s current good manufacturing practice requirements. If the manufacturing facilities and processes fail to pass the FDA inspection, we will not receive approval to market these products.

Under the Prescription Drug User Fee Act, the FDA receives fees for reviewing a new drug application and supplements thereto, as well as annual fees for both commercial manufacturing establishments and approved products. These fees can be significant. The new drug application review fee alone can exceed $0.5 million, although certain deferrals, waivers and reductions may be available. To date, we have paid no fees to the FDA.

Under applicable laws and FDA regulations, each new drug application submitted for FDA approval is usually reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application. If deemed complete, the FDA will “file” the new drug application, thereby triggering substantive review of the application. The FDA can refuse to file any new drug application that it deems incomplete or not properly reviewable. If the FDA refuses to file an application, the FDA will retain 25% percent of the user fee as a penalty. The FDA has established performance goals for the review of new drug applications — six months for priority applications and ten months for regular applications. However, the FDA is not legally required to complete its review within these periods and these performance goals may change over time. Moreover, the outcome of the review, even if generally favorable, typically is not an actual approval but an “action letter” that describes additional work that must be done before the application can be approved. The FDA’s review of an application may involve review and recommendations by an independent FDA advisory committee. Even if the FDA approves a product, it may limit the approved therapeutic uses for the product as described in the product labeling, require that warning statements be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval or otherwise limit the scope of any approval.

Significant legal and regulatory requirements also apply after FDA approval to market under a new drug application. These include, among other things, requirements related to adverse events and other reporting, product advertising and promotion and ongoing adherence to current good manufacturing practices, as well as the need to submit appropriate new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. The FDA also enforces the requirements of the Prescription Drug Marketing Act, which, among other things, imposes various requirements in connection with the distribution of product samples to physicians.

Overall research, development and approval times depend on a number of factors, including the period of review at the FDA, the number of questions posed by the FDA during review, how long it takes to respond to the FDA questions, the severity of life-threatening nature of the disease in question, the available of alternative treatments, the availability of clinical investigators and eligible patients, the rate of enrollment of patients in clinical trials and the risks and benefits demonstrated in the clinical trials.


	*Drugs for Serious or Life-threatening Illnesses*

The Federal Food, Drug and Cosmetic Act and FDA regulations provide certain mechanisms for the accelerated “Fast Track” approval of products intended to treat serious or life-threatening illnesses which have been studied for safety and effectiveness and which demonstrate the potential to address unmet medical needs. The procedures permit early consultation and commitment from the FDA regarding the pre-clinical and clinical studies necessary to gain marketing approval. Provisions of this regulatory framework also permit, in certain cases, new drug applications to be approved on the basis of valid surrogate markers of product effectiveness, thus accelerating the normal approval process. We have not

applied for fast track status for any of our current product candidates. However, certain product candidates employing our Hydron Technology might qualify for this accelerated regulatory procedure. However, the FDA may not agree, and even if the FDA agrees that these products qualify for accelerated approval procedures, the FDA may deny approval of our drugs or may require that additional studies be required before approval. The FDA may also require us to perform post-approval, or Phase IV, studies as a condition of such early approval. In addition, the FDA may impose restrictions on distribution and promotion in connection with any accelerated approval and may withdraw approval if post-approval studies do not confirm the intended clinical benefit or safety of the product candidates.


	*Other U.S. Regulatory Requirements*

In the U.S., the research, manufacturing, distribution, sale and promotion of drugs may also be subject to regulation by various federal, state and local authorities including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), the U.S. Department of Health and Human Services and state and local governments. For example, sales, marketing and scientific and educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, and False Claims Act and similar state laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

Moreover, we are now, and may become, subject to additional federal state and local laws, regulations and policies relating to safe working conditions, laboratory practices, and experimental use of animals, and the use, storage, handling, transportation and disposal of human tissue, waste and hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.


	*European Union Regulatory Requirements*

Our ability to market our products outside the U.S. will be contingent upon receiving marketing authorizations from the appropriate regulatory authorities and compliance with applicable post-approval regulatory requirements. Although the specific requirements and restrictions vary from country to country, as a general matter, foreign regulatory systems include risks similar to those associated with FDA regulation, described above. We received regulatory approval to commercialize Vantas in Denmark in November 2005. We expect to commence the mutual recognition process for regulatory approval in other European countries in the second quarter of 2006. Under the European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. Under the centralized procedure, a single application to the European Medicines Agency, known as the EMEA, leads to an approval granted by the European Commission which permits the marketing of the product throughout the European Union. We assume that the centralized procedure will apply to our products that are developed by means of a biotechnology process. The decentralized procedure provides for mutual recognition of nationally approved decisions and is used for product that do not qualify under the centralized procedure. Under the decentralized procedure, the holders of a national marketing authorization may submit further applications to the competent authorities of the remaining member states, which will then be requested to recognize the original authorization based upon an assessment report prepared by the original authorizing competent authority. The recognition process should take no longer than 90 days, but if one member state made an objection, which under the legislation can only be based on a possible risk to human health, we have the option to withdraw the application from that country or take the application to arbitration by the Committee for Proprietary Medicinal Products, known as CPMP, of the EMEA. If a referral for arbitration is made, the procedure is suspended, and in the intervening time, the only European Union country in which the product can be marketed will be the country where the original authorization has been granted, even if all the other designated countries are ready to recognize the product. The opinion of the CPMP, which is binding, could support or reject the

objection or alternatively could reach a compromise position acceptable to all European Union countries concerned. Arbitration can be avoided if the application is withdrawn in the objecting country, but once the application has been referred to arbitration, it cannot be withdrawn. The arbitration procedure may take an additional year before a final decision is reached and may require the delivery of additional data.

As with FDA approval, we may not be able to secure regulatory approvals in certain European countries in a timely manner, if at all. Additionally, as in the U.S., post-approval regulatory requirements, such as those regarding product manufacturers, marketing or distribution, would apply to any product that is approved in Europe, and failure to comply with such obligations could have a material adverse effect on our ability to successfully commercialize any product.

There has recently been introduced in Europe new legislation designed to harmonize the regulation of clinical trials across the European Union, and that legislation is currently being implemented on a country-by-country basis. In addition, new proposals are under advanced consideration which, if brought into law, will effect substantial and material changes in the regulation of medicinal products in Europe. Accordingly, in seeking approval for our products in Europe we face a marked degree of chance and uncertainty both in the regulation of clinical trials and in respect of marketing authorizations.


	*Other Foreign Regulatory Requirements*

We and our collaborative partners are subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, product registration and approval and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. In addition, under current U.S. law, there are significant restrictions on the export of products not approved by the FDA, depending on the country involved and the status of the product in that country.

Employees

As of January 1, 2006, we had 100 full-time employees, consisting of 13 individuals in management and administration, 41 individuals in sales and marketing, 12 individuals in research and development, 19 individuals in manufacturing and distribution and 15 individuals in quality assurance and quality control. We expect to hire approximately ten additional employees in sales and marketing. From time to time, we also employ independent contractors or consultants to support our clinical and regulatory efforts. None of our employees are represented by a collective bargaining unit and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Litigation

We are not subject to any pending or, to our knowledge, threatened litigation.

MANAGEMENT

Directors and Executive Officers

The following sets forth information for each of our directors and executive officers as of January 1, 2006.


Name	Age		Position

David S. Tierney, M.D.		42	President, Chief Executive Officer and Director
Andrew T. Drechsler		34	Chief Financial Officer and Secretary
Petr F. Kuzma		62	Vice President of Research and Development
Pete J. Perron		39	Vice President of Sales
Matthew L. Rue, III		55	Vice President of Marketing and Commercial Development
James C. Gale		55	Chairman of the Board of Directors
David R. Dantzker, M.D.		62	Director
Jerome Feldman		77	Director
Hubert Huckel, M.D.		74	Director
Jeffrey M. Krauss		48	Director
Ogden R. Reid		80	Director
Howard Silverman		70	Director
John T. Spitznagel		64	Director

David S. Tierney, M.D. joined us in August 2000 as our President and Chief Executive Officer. In December 2001, Dr. Tierney became a member of our board of directors. Prior to joining us, Dr. Tierney was president of Biovail Technologies, a division of Biovail Corporation, a Canadian drug delivery company, from January 2000 to August 2000. Prior to Biovail, Dr. Tierney spent three years at Roberts Pharmaceutical Corporation as senior vice president of drug development from March 1997 to January 2000. Prior to joining Roberts, Dr. Tierney spent eight years at Elan Corporation, plc, a pharmaceutical company, in a variety of management positions. Dr. Tierney currently serves as a director on the boards of Able Laboratories, a pharmaceutical company, and Catalyst Pharmaceutical Partners, a pharmaceutical company. Dr. Tierney received a medical degree from the Royal College of Surgeons in Dublin, Ireland and was subsequently trained in internal medicine.

Andrew T. Drechsler joined us in April 2005 as our Chief Financial Officer and Secretary. Prior to joining us, from May 2001 to April 2005, Mr. Drechsler served as controller of i-STAT Corporation, a point of care diagnostics company and a division of Abbott Laboratories subsequent to its acquisition in January 2004. He also served as controller for HydraWEB Technologies, a software development firm, from September 2000 to May 2001. From April 1997 to September 2000, Mr. Drechsler served in various senior financial positions at Biomatrix, a biotech company focused on the orthopedic and ophthalmic markets until the company was acquired by Genzyme in 2000. From August 1994 to April 1997, Mr. Drechsler was a senior associate with the public accounting firm Coopers & Lybrand LLP. Mr. Drechsler graduated magna cum laude from Villanova University with a B.S. in Accountancy. Mr. Drechsler obtained his qualification as a certified public accountant in the state of New Jersey.

Petr F. Kuzma is our Vice President of Research and Development. Mr. Kuzma has been with us since 1987 serving in various roles and became Vice President of Research and Development in March 2000. Mr. Kuzma has over thirty years of experience in the polymer, medical device and pharmaceutical industries. He joined GP Strategies, our former parent and a global provider of training, e-Learning solutions, management consulting, engineering and simulation services in 1975. During his tenure at GP Strategies, he held numerous research and development positions of increasing scope and responsibility with various divisions of GP Strategies. Mr. Kuzma received a M.S. in chemical engineering from Slovak

University in Czechoslovakia, a B.S. in chemistry from St. Peter’s College, and a B.S. in chemical technology from the Institute of Industrial Chemistry in Czechoslovakia.

Pete J. Perron joined us in April 2004 as our Vice President of Sales. Prior to joining us, Mr. Perron was at Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company from July 2001 to April 2004, where he served as product director for several brands, including two with combined annual sales in excess of $500 million, and as a regional business director responsible for overseeing several district managers and more than 75 sales representatives. Prior to Ortho-McNeil, Mr. Perron was product manager at G.D. Searle/ Pharmacia from October 1999 to July 2001. Mr. Perron received a B.A. and an M.S. in business communications from the University of North Texas.

Matthew L. Rue, III joined us as our Vice President of Marketing and Commercial Development in January 2002. Mr. Rue served as a consultant of ours from August 2000 to December 2001. Prior to joining us, Mr. Rue previously served as director of marketing, product manager, and consultant at Roberts Pharmaceuticals Corporation from 1996 to July 2000. Mr. Rue’s expertise is in prescription marketing and product launches and he has launched or re-launched three prescription brands. Prior to joining Roberts, Mr. Rue served as an account supervisor at Cline, Davis & Mann, an advertising company, and was a senior product manager at Reed & Carnick, a specialty pharmaceutical firm, where he developed and launched numerous over-the-counter and prescription pharmaceuticals. Mr. Rue received a B.F.A. in English from Emerson College.

James C. Gale is the Chairman of our board of directors and has served as a member of our board of directors since December 2001. Mr. Gale is a managing director of Sanders Morris Harris, Inc., a national investment management and investment banking company and affiliate of several stockholders of ours, and is the managing partner of LOF Partners, an affiliate of Sanders Morris Harris that manages several stockholders of ours and has served in this capacity since 1998. From 1992 to 1998, Mr. Gale was head of investment banking at Gruntal & Co., L.L.C., a large brokerage and investment banking company. Prior to joining Gruntal, Mr. Gale originated and managed private equity investments for the Home Insurance Co., Gruntal’s parent, from 1989 to 1992. Mr. Gale also serves on the board of directors of Relm Wireless Corporation.

David R. Dantzker, M.D. has served as a member of our board of directors since June 2003. Dr. Dantzker has been a general partner at Wheatley Partners, L.P., a New York-based venture capital firm and one of our stockholders, since January 2001. He has served on the faculty and in leadership positions of four major research-oriented medical schools and has authored or co-authored 130 research papers and five textbooks. He is an internationally recognized expert in the area of pulmonary medicine and critical care. Prior to serving with Wheatley Partners, Dr. Dantzker served as chief executive officer of Redox Pharmaceuticals Corporation from November 2000 until October 2001. From January 2000 to May 2000, Dr. Dantzker was president of North Shore-LIJ Health System, one of the largest academic health systems in the country. Dr. Dantzker is currently chairman of the board of directors of Versamed, Inc. and Q-RNA, Inc. and a director of CNS, Visionsense, Ltd., and Surgical Sealants, Inc.

Jerome I. Feldman has served as a member of our board of directors since January 2005. Mr. Feldman is the founder of GP Strategies Corporation, and since 1959, has served as its chief executive officer. He has also served as chairman of the board of directors of GP Strategies Corporation since 1999. Mr. Feldman was president of GP Strategies from 1959 until 2001. He has been chairman of the board of directors of Five Star Products, Inc., a wholesale distributor of home decorating, hardware and finishing products, since 1994, a director of GSE Systems, Inc., a global provider of real-time simulation and training solutions, since 1994, and chairman of the board of directors of GSE since 1997. Mr. Feldman is also chairman of the board of directors and chief executive officer of National Patent Development Corporation, the parent of one of our stockholders, MXL Industries, Inc., and a holding company with interests in optical plastics, paint and hardware distribution and pharmaceuticals. Mr. Feldman is also chairman of the New England Colleges Fund and a Trustee of Northern Westchester Hospital Center.

Hubert E. Huckel, M.D. has served as a member of our board of directors since January 2002. From 1964 until his retirement in December 1992, Dr. Huckel served in various positions with the Hoechst Group, an agri-chemical company. At the time of his retirement, he was chairman of the board of

Hoechst-Roussel Pharmaceuticals, Inc., chairman and president of Hoechst-Roussel Agri-Vet Company and a member of the executive committee of Hoechst Celanese Corporation. Dr. Huckel currently serves as a director on the boards of Titan Pharmaceuticals, Inc., Thermogenesis Corporation, a biotechnology firm, Concordia Pharmaceuticals, Inc. and Catalyst Pharmaceutical Partners.

Jeffrey M. Krauss has served as a member of our board of directors since August 2004. Mr. Krauss has been a managing member of the Psilos Group, a New York-based venture capital firm since 2000 and one of our stockholders since August 2004. Prior to joining Psilos, Mr. Krauss spent ten years at Nazem & Company as a general partner of three venture capital funds from 1990 to 2000. Prior to joining Nazem, Mr. Krauss was an attorney at the law firm of Simpson Thacher & Bartlett LLP, where he specialized in private equity transactions. Mr. Krauss is currently a member of the Healthcare Sector Group of the New York City Investment Fund. Mr. Krauss is also a certified public accountant. Mr. Krauss currently serves as a director on the boards of Quovadx, Inc. and Tegal Corporation.

Ogden R. Reid has served as a member of our board of directors since December 2001. Mr. Reid was formerly vice chairman of GTS Duratek, Inc. and is currently director of General Physics Corporation. From 1953 to 1959, he was president and executive editor of both the New York Herald Tribune Inc. and the New York Herald Tribune S.A. As a member of the U.S. Congress from 1961 to 1974, he served on the Foreign Affairs, Education and Labor, and Government Operations Committees. A candidate for Governor of New York in 1974, he later became Commissioner of the New York State Department of Environmental Conservation. He was also chairman of the executive committee for the Board of MGM from 1956 to 1957. Mr. Reid is currently chairman of the Council of American Ambassadors.

Howard Silverman has served as a member of our board of directors since December 2001. From 1974 to 1995, Mr. Silverman was chairman, president and chief executive officer of Gruntal and Company, a large brokerage and investment banking company. While at Gruntal, Mr. Silverman served on numerous committees for the New York Stock Exchange. Mr. Silverman formerly served as a director on the boards of Getty Petroleum, Work Wear Corp., Inc., and Carteret Savings Bank. He has also served as a trustee of Long Island University and Chemotherapy Foundation. Mr. Silverman currently serves as a charter member for the Financial Analysts Federation and The New York Society of Analysts.

John T. Spitznagel has served as a member of our board of directors since December 2001. Since May 2005 Mr. Spitznagel has served as chairman and chief executive officer of Esprit Pharma, Inc., a specialty pharmaceutical firm. From 2002 until March 2005, Mr. Spitznagel was the chairman and chief executive officer of ESP Pharmaceuticals, Inc. Previously, from 1996 to 1999, Mr. Spitznagel served as president and chief executive officer of Roberts Pharmaceutical Corporation, a specialty pharmaceutical firm, which merged with Shire Pharmaceuticals Group plc in 1999. Prior to joining Roberts, Mr. Spitznagel was president of Reed and Carnick, a specialty pharmaceutical firm, from 1990 to 1995. Mr. Spitznagel is a director of Saturn Pharmaceuticals, Barbeau Pharma, Inc. and IRX Therapeutics, Inc. and a trustee of Rider University.

Board Composition

Our amended and restated certificate of incorporation, which will become effective upon completion of this offering, will provide for a classified board of directors consisting of three staggered classes of directors, as nearly equal in number as possible. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2007 for the Class I directors, 2008 for the Class II directors and 2009 for the Class III directors.

Upon the closing of this offering:


	•	our Class I directors will be Mr. Feldman, Dr. Huckel and Mr. Reid;

	•	our Class II directors will be Dr. Dantzker, Mr. Gale and Mr. Silverman; and

	•	our Class III directors will be Mr. Krauss, Mr. Spitznagel and Dr. Tierney.

The board and each committee of the board will observe all criteria for independence established by The Nasdaq National Market, or Nasdaq, and other governing laws and regulations. No director will be deemed to be independent unless the board affirmatively determines that the director has no material relationship with us directly, or as an officer, stockholder or partner of an organization that has a relationship with us.

Board Committees

Upon the completion of this offering, the standing committees of our board of directors will consist of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. These committees are described below. Our board of directors may also establish various other committees to assist it in its responsibilities.

Audit Committee

The Audit Committee is primarily concerned with the accuracy and effectiveness of the audits of our financial statements by our internal audit staff and by our independent auditors. Its duties include:


	•	selecting independent auditors;

	•	reviewing the scope of the audit to be conducted by them and the results of their audit;

	•	approving non-audit services provided to us by the independent auditor;

	•	reviewing the integrity, adequacy and effectiveness of our financial reporting process and internal controls; assessing our financial reporting practices, including the disclosures in our annual and quarterly reports and the accounting standards and principles followed; and

	•	conducting other reviews relating to compliance by our employees with our policies and applicable laws.

Currently, the Audit Committee is comprised of Messrs. Krauss and Reid and Dr. Huckel, each of whom is independent as defined under Nasdaq rules. Mr. Krauss currently serves as Chairman of the committee. The board of directors has determined that Mr. Krauss qualifies as “audit committee financial expert” as that term is defined under the rules of the Securities and Exchange Commission, or SEC.

Compensation Committee

This Compensation Committee’s primary responsibility is to discharge our board of director’s responsibilities relating to compensation of our senior executives. Its duties include:


	•	developing guidelines and reviewing the compensation and performance of our executive officers;

	•	setting the compensation of the chief executive officer and evaluating his performance based on corporate goals and objectives;

	•	making recommendations to the board of directors with respect to incentive compensation plans, equity-based plans and deferred compensation plans; and

	•	reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices to the board of directors.

Currently, the Compensation Committee is comprised of Messrs. Spitznagel and Silverman and Dr. Dantzker, each of whom is independent as defined under Nasdaq rules. Mr. Silverman currently serves as Chairman of the committee.

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee’s responsibilities include the selection of potential candidates for our board of directors and the development and annual review of our governance principles. This committee also annually reviews director compensation and benefits, and oversees the annual self-evaluations of our board of directors and its committees. It also makes recommendations to our board of directors concerning the structure and membership of the other board committees.

The Nominating and Corporate Governance Committee is comprised of Messrs. Gale, Krauss and Feldman, each of whom is independent as defined under Nasdaq rules. Mr. Gale currently serves as Chairman of the committee.

Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee were at any time an officer or employee of ours. In addition, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or Compensation Committee. Dr. Dantzker has voting control over 428,571 shares of our series C convertible preferred stock, which were purchased by Wheatley Med Tech Partners, L.P. in 2004. Mr. Silverman invested $126,846 in SMH Valera LLC, which purchased shares of our series C convertible preferred stock in 2004. In addition, Dr. Dantzker was elected a director as a representative of Wheatley Med Tech Partners, L.P. under our second amended and restated investor rights agreement dated August 16, 2004.

Compensation of Directors

Our directors currently do not receive, and have not received, any cash compensation for serving on our board of directors, but are eligible to receive options and restricted shares of our common stock under the Valera Pharmaceutical Equity Incentive Plan. No options were granted to our non-employee directors during 2005.

Executive Compensation

The following table summarizes the compensation earned in the years ended December 31, 2004 and 2005 by our Chief Executive Officer and the other four most highly paid executive officers whose total salary and bonus awards exceeded $100,000 for the year ended December 31, 2005. In this prospectus, we refer to these individuals as our “named executive officers.”

Summary Compensation Table


								Long-term
								Compensation
				Annual Compensation				Awards

								Shares
								Underlying		Other
Name and Principal Position		Fiscal Year		Salary ($)		Bonus ($)(1)		Options		Compensation(2)

David S. Tierney, M.D.			2005	$	312,500		*		—	$	7,000
	President and Chief Executive		2004	$	287,500	$	75,000		79,167	$	6,500
	Officer
Andrew T. Drechsler(3)			2005	$	142,500		*		79,167	$	—
	Chief Financial Officer
Petr F. Kuzma			2005	$	156,327		*		—	$	7,438
	Vice President of Research and		2004	$	135,000	$	20,000		25,000	$	4,801
	Development
Pete J. Perron(4)			2005	$	186,667		*		6,667	$	7,000
	Vice President of Sales		2004	$	119,109	$	30,000		83,333	$	—
Matthew L. Rue, III			2005	$	186,333		*		—	$	8,800
	Vice President of Marketing and		2004	$	168,000	$	25,000		33,333	$	6,324
	Commercial Development



(1)	Bonus amounts represent the bonus earned in the year stated. The actual bonus payment was made in the subsequent year.



(2)	Such amounts represent matching contributions made by Valera under our 401(k) plan.



(3)	Mr. Drechsler joined Valera in April 2005 at an annual salary of $190,000.


(4)	Mr. Perron joined Valera in April 2004 at an annual salary of $170,000.


	*	Bonus amounts for 2005 have not been calculated or approved by the Board of Directors at the time of this filing.

Option Grants

The following table contains information concerning the grant of options to purchase shares of our common stock to each of the named executive officers during the year ended December 31, 2005. The percentage of total options granted to employees set forth below is based on an aggregate of 193,583 shares subject to options granted in 2005, including options granted to named executive officers.


	Option Grants in Last Fiscal Year(1)
												Potential Realizable
			Percent of									Value at Assumed
	Number of		Total									Annual Rates of Stock
	Securities		Options					Fair Market				Price Appreciation for
	Underlying		Granted to			Exercise or		Value on				Option Term
	Options		Employees			Base Price		Date of		Expiration
Name	Granted		in 2004			($/share)		Grant(2)		Date		5%(3)		10%(3)

David S. Tierney, M.D.		—		—	%	$	—	$	—		—
Andrew T. Drechsler		79,167		41	%	$	12.00	$	12.00		6/27/2015	$	468,498	$	1,308,723
Petr F. Kuzma		—		—	%	$	—	$	—		—
Pete J. Perron		6,667		23	%	$	12.00	$	12.00		6/27/2015	$	39,454	$	110,213
Matthew L. Rue, III		—		—	%	$	—	$	—		—


(1)	These options become exercisable as to 25% of the underlying shares upon the yearly anniversary of the date of grant.


(2)	There was no public trading market for our common stock during 2005. Accordingly, these prices represent the fair market value, as established by our board of directors, of our common stock on the date of grant of the options.



(3)	Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, assuming that the aggregate stock value derived from that calculation compounds at an annual 5% or 10% rate shown in the table for the entire ten-year term of the option and subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock appreciation are mandated by the rules of the SEC and do not reflect our estimate or projection of future stock price growth.

Aggregated Options Values at December 31, 2005

The following table sets forth the number and value of securities underlying unexercised options held by the named executive officers at December 31, 2005. Because there was no public market for our common stock as of December 31, 2005, amounts described in the following table under the heading “Value of Unexercised In-the-Money Options at December 31, 2005” are determined by multiplying the number of shares issued or issuable upon exercise of the option by the difference between the assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover

and the per share option exercise price. In 2005, none of our named executive officers exercised any options.


					Value of Unexercised
	Number of				In-the-money Options at
	Unexercised Options at				December 31, 2005
	December 31, 2005				($)(1)

Name	Exercisable		Unexercisable		Exercisable		Unexercisable

David S. Tierney, M.D.		294,792		167,708	$	2,358,336	$	1,341,664
Andrew T. Drechsler		—		79,167		—		—
Petr F. Kuzma		43,750		39,583		350,316		316,664
Pete J. Perron		20,833		69,167		166,664		493,333
Matthew L. Rue, III		75,000		41,667		600,000		333,336


(1)	Based upon an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus.

Employment Agreements

We entered into an employment agreement with David S. Tierney, M.D., our President and Chief Executive Officer, on September 16, 2003. In connection with the employment agreement, Dr. Tierney also entered into an employee confidentiality and non-competition agreement with us setting forth his obligations not to compete with us or disclose confidential information of ours. Pursuant to his employment agreement, Dr. Tierney is required to devote his full time, attention, skill and efforts to our business and affairs. Dr. Tierney’s current base salary, as adjusted by our board of directors in accordance with the terms of the agreement, is $325,000. In addition, Dr. Tierney is eligible to participate in any annual bonus program or benefit plans and programs adopted by our board of directors. Following July 1, 2006, unless this employment agreement is renewed, Dr. Tierney will become an “at-will” employee. The employment agreement provides that we may terminate Dr. Tierney’s employment with or without cause and that Dr. Tierney may terminate his employment with or without good reason.

In the event of Dr. Tierney’s employment is terminated as a result of his death or permanent disability, Dr. Tierney and/or his spouse or dependents, as applicable, will receive 24 months in the case of death and 29 months in the case of permanent disability, of healthcare and dental insurance continuation at our expense.

In the event Dr. Tierney’s employment is terminated by us other than for cause or if he resigns with good reason, Dr. Tierney will receive any earned and accrued but unpaid annual bonus and the continuation of his current base salary until the last day of the 12-month period following such termination or resignation, or 18-month period, if following a change in control.

For purposes of the employment agreement, “cause” means (i) the commission by the executive of an act of fraud, misappropriation or personal dishonesty relating to or involving us in any way; (ii) the executive’s arrest for, conviction of, or plea of no contest to a felony, the willful failure, neglect or refusal to perform, or gross negligence, in the performance of duties and responsibilities; (iii) the violation by the executive of our rules, regulations, policies or plans regarding the conduct of our employees, where such violation continues for 10 days following the executive’s receipt of notice from our board of directors; or (iv) the violation of any obligations under the employee confidentiality and non-competition agreement or the employment agreement, where such violation continues for 10 days following the executive’s receipt of notice from our board of directors.

In addition, for purposes of the employment agreement, “good reason” means (i) a change by us in the executive’s position that materially reduces his duties or responsibilities (where such change continues for 10 days following our receipt of notice from the executive); (ii) a reduction by us in the executive’s base salary (other than pursuant to a company-wide reduction of base salaries for executives generally); (iii) an executive’s relocation by us to a facility or location more than 50 miles from the greater Cranbury, New Jersey area, or (iv) our failure to perform any obligations under the employment agreement (where such failure continues for 10 days following our receipt of notice from the executive).

Change in Control Agreements

We have entered into change in control agreements with the following executive officers: Andrew Drechsler, Petr Kuzma, Pete Perron and Matthew Rue. Under the agreements, if an executive’s employment is terminated by us without cause, or by the executive following a demotion, relocation or certain other similar reasons, within the period that is between 30 days prior to, and one year following, the date we consummate a “change in control” (as defined in the agreements), then the executive will be entitled to a severance payment equal to the sum of his or her annual base salary and “bonus amount.” “Bonus amount” is defined in the agreements as the executive’s target annual bonus or, if after the first anniversary of the date the agreement was entered into, the highest annual bonus received by the executive during the past three years (or such lesser number of years the executive was employed by us). The agreements also provide for payment of any unpaid bonus earned with respect to the year ended prior to the date the executive’s employment terminated and the waiver of any applicable COBRA premiums for the executive (and, if applicable, his or her spouse and dependents) for a period of twelve months following termination of employment. Under the agreements, all payments to an executive in connection with a change in control are subject to reduction to the extent that the reduction would avoid the imposition of certain “golden parachute” excise taxes and thereby increase the executive’s net after-tax proceeds. Payment of benefits are conditioned upon execution by the executive of a release and the executives are subject to confidentiality and proprietary information covenants following cessation of employment.

Valera Pharmaceuticals, Inc. Equity Incentive Plan

In September 2002, we adopted our Equity Incentive Plan or Equity Plan, which was approved by our stockholders in May 2003. Our Equity Plan provides for the award of:


	•	restricted shares of our common stock;

	•	incentive stock options;

	•	non-qualified stock options; or

	•	any combination of the foregoing.

Grants of restricted shares and non-qualified stock options can be made to our employees, directors, consultants, and other individuals who perform services for us. Grants of incentive stock options may only be made to our employees. The principal features of our Equity Plan are summarized below, but the summary is qualified in its entirety by reference to our Equity Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

Number of shares of our common stock available under our Equity Plan

We have reserved a total of 1,833,333 shares of our common stock for issuance pursuant to our Equity Plan. Shares subject to forfeited, cancelled, or expired awards and shares received in satisfaction of the exercise price of an option become available for grant again under our Equity Plan. In addition, shares withheld in payment of any exercise price or in satisfaction of any withholding obligation arising in connection with an award granted under our Equity Plan become available for grant again under our Equity Plan. In connection with recapitalizations, stock splits, combinations, stock dividends, and other events affecting our common stock, the compensation committee may make adjustments or equitable substitutions it deems appropriate in its sole discretion to the maximum number, type and issuer of the securities reserved for issuance under the Equity Plan, to the maximum number, type and issuer of shares of our common stock subject to outstanding options, to the exercise price of the options and to the number, type and issuer of restricted shares.

Administration of our Equity Plan

Our compensation committee administers our Equity Plan under authority granted to it by our board of directors in accordance with the terms of our Equity Plan. To administer our Equity Plan, our compensation committee must consist of at least two members of our board of directors, each of whom is a “non-employee director” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, or the Exchange Act and, with respect to awards that are intended to constitute performance-based compensation

under Section 162(m) of the Internal Revenue Code of 1986, an “outside director” for the purposes of Section 162(m). Our compensation committee, among other things, interprets our Equity Plan, selects award recipients, determines the type of awards to be granted to such recipients and determines the number of shares subject to each award and the terms and conditions thereof. Our compensation committee may also determine if or when the exercise price of an option may be paid in the form of shares of our common stock and the extent to which shares or other amounts payable with respect to an award can be deferred by the participant. Our board of directors may amend or modify our Equity Plan at any time. In addition, our board of directors is also authorized to adopt, alter and repeal any rules relating to the administration of our Equity Plan and to rescind the authority of the compensation committee and thereafter directly administer our Equity Plan. However, subject to certain exceptions, no amendment or modification will impair the rights and obligations of a participant with respect to an award unless the participant consents to that amendment or modification.

Our Equity Plan will continue in effect until terminated by us in accordance with its terms, although incentive stock options may not be granted more than 10 years after the adoption of our Equity Plan.

Restricted shares under our Equity Plan

Under the Equity Plan, we may issue restricted shares under a restricted share agreement, the terms and conditions of which will be set forth by our compensation committee at the time of the grant. Restricted shares are shares of our common stock issued to a participant that may not be sold or otherwise transferred by the participant until certain vesting conditions established by our compensation committee, in its discretion, at the time of grant (such as a specified period of continued employment or the fulfillment of specified individual or corporate performance goals) are met or until such time as set by our compensation committee. Holders of the restricted shares will not have voting rights with respect to such restricted shares until the lapse of the transfer restrictions described above. If a participant’s service with us terminates prior to the end of the transfer restrictions, all of that participant’s restricted shares which have not vested will be forfeited. Restricted shares may be sold under our Equity Plan (at its full value or at a discount) or may be granted solely in consideration for services.

Upon or in anticipation of a change in control, our compensation committee may, in its discretion:


	•	cause restrictions on all outstanding shares of restricted stock to lapse;

	•	cancel restricted stock in exchange for shares of restricted stock of a successor corporation; or

	•	redeem restricted shares for cash or other substitute consideration.

Stock options under our Equity Plan

Our Equity Plan permits the grant of incentive stock options and non-qualified stock options. The exercise price of any incentive stock options granted under our Equity Plan may not be less than 100% of the fair market value of our common stock on the date of grant. In the case of any incentive stock option granted to a participant who owns at least 10% of the total combined voting power of all classes of our capital stock, our Equity Plan provides that the exercise price must be at least 110% of the fair market value of our common stock on the date of the grant and the incentive stock option must expire on the fifth anniversary of the date of the grant. In addition, the aggregate fair market value of shares of our common stock into which incentive stock options are exercisable, for the first time by a participant, in any calendar year may not exceed $100,000. Options granted under our Equity Plan may be exercised for cash and/or in exchange for previously acquired shares of our common stock owned by the option holder having a combined value on the date of exercise equal to the option exercise price.

Under our Equity Plan, each option will vest and be exercisable at such time and to such extent as specified in the pertinent option agreement between us and the option recipient. However, no award will be exercisable with respect to any shares of our common stock more than 10 years after the date of such award. Unless otherwise specified by our compensation committee with respect to a particular option, all options are non-transferable, except upon death. If a participant’s service with us terminates due to death or disability, any options held by the participant may be exercised until (i) such time specified by the compensation committee, (ii) if not specified by the compensation committee, 12 months from

termination of service, or (iii) if earlier than the foregoing, the expiration for the stated term of the option. If a participant’s service with us is terminated for cause, any unexercised options will be automatically forfeited, and any shares of our common stock into which options are exercisable but for which certificates have not been issued, will be automatically forfeited and any exercise price paid for such shares will be refunded. In addition, if a participant’s service with us is terminated for any other reason, any option held by the participant may be exercised until (i) such time specified by the compensation committee, (ii) if not specified by the compensation committee, 90 days from termination of service, or (ii) if earlier than the foregoing, the expiration of the stated term of the option.

Upon our change in control, our compensation committee may:


	•	cause outstanding options to become immediately and fully vested and exercisable;

	•	require that the grantees surrender their outstanding options in exchange for a payment by us of an amount equal to the amount by which the fair market value of the shares of stock subject to the option exceeds the option exercise price; or

	•	cancel any outstanding option in exchange for an option to purchase common stock of any successor corporation.

401(k) plan

We maintain a retirement plan for all employees who satisfy certain eligibility requirements, including requirements, including requirements relating to age and length of service. The retirement plan is intended to qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. The retirement plan provides that each participant may contribute up to, up to a statutory limit, which for most employees is $14,000 in 2005 and $15,000 in 2006. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee at the direction of the employee. The retirement plan also permits us to make discretionary contributions and matching contributions, subject to established limits and vesting schedule. To date, we have not made any discretionary contributions to the retirement and deferred savings plan on behalf of participating employees.

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2005, and as adjusted to give effect to this offering, for the following individuals, entities or groups:


	•	each person or entity who we know beneficially owns more than 5% of our outstanding common stock;

	•	each of the named executive officers;

	•	each of our directors; and

	•	all directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days of December 31, 2005 are deemed outstanding and are included in the number of shares beneficially owned and are also are shown separately in the column below entitled “Options Exercisable within 60 Days of December 31, 2005”, while the shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.

Applicable percentage ownership in the following table is based on 10,946,482 shares of common stock outstanding as of December 31, 2005 and 14,696,482 shares of common stock immediately following the completion of this offering. Unless otherwise indicated, the address for each stockholder listed in the table is c/o Valera Pharmaceuticals, Inc., 7 Clarke Drive, Cranbury, New Jersey 08512.


					Percentage of
					Shares Outstanding
			Options Exercisable
	Number of Shares		within 60 Days of		Before			After
Name	Beneficially Owned		December 31, 2005		Offering			Offering

Five Percent Stockholders:
Sanders Morris Harris, Inc.(1)		5,410,440		3,750		49.4	%		36.8	%
MXL Industries, Inc.(2)		2,066,561		—		18.9	%		14.1	%
Wheatley Partners(3)		1,282,572		—		11.7	%		8.7	%
Psilos Group Partners II SBIC, L.P.(4)		723,576		—		6.6	%		4.9	%
NJTC Venture Fund SBIC, L.P.(5)		603,367		—		5.5	%		4.1	%
Directors and Named Executive Officers:
David S. Tierney, M.D.		294,792		294,792		2.6	%		2.0	%
Andrew T. Drechsler		—		—		*			*
Petr F. Kuzma		43,756		43,756		*			*
Pete J. Perron		20,833		20,833		*			*
Matthew L. Rue, III		75,000		75,000		*			*
James C. Gale(6)		5,413,148		6,459		49.4	%		36.8	%
David R. Dantzker, M.D.(7)		595,217		7,500		5.4	%		4.1	%
Jerome I. Feldman(8)		2,070,311		3,750		18.9	%		14.1	%
Hubert Huckel, M.D.		21,250		21,250		*			*
Jeffrey M. Krauss(9)		727,326		3,750		6.6	%		4.9	%
Ogden R. Reid		29,160		29,160		*			*
Howard Silverman		7,500		7,500		*			*
John T. Spitznagel		21,250		21,250		*			*
All Directors and Executive Officers as a group		9,319,537		534,994		81.2	%		61.2	%


*	Less than 1%.

(1)	Represents shares held by SMH Hydro Med, LLC, SMH Hydro Med II, LLC, SMH Valera, LLC, Corporate Opportunities Fund, L.P., by Corporate Opportunities Fund (Institutional), L.P., Life Sciences Opportunities Fund, L.P., Life Sciences Opportunities Fund (Institutional), L.P., each an affiliate of Sanders Morris Harris, Inc., or SMH. Mr. Gale has sole voting and dispositive power over the shares held by Sanders Morris Harris Inc. The address for Sanders Morris Harris, Inc. is 3100 JP Morgan Chase Tower, 600 Travis, Suite 3100, Houston, TX 77002.

(2)	MXL Industries, Inc. is a wholly-owned subsidiary of National Patent Development Corporation, a publicly held corporation. Mr. Feldman is the chairman of the board of directors and chief executive officer of National Patent Development Corporation. The address for MXL Industries, Inc. is 777 Westchester Avenue, Fourth Floor, White Plains, NY 10604.


(3)	Represents shares held by Wheatley MedTech Partners, L.P., Wheatley Partners III, L.P., Wheatley Associates III, L.P., Wheatley Foreign Partners III, L.P., each an affiliate of Wheatley Partners. Mr. David Dantzker shares voting and dispositive power as to 587,717 shares held by Wheatley MedTech Partners, L.P. with Barry Rubenstein, Irwin Lieber, Barry Fingerhut, Jonathan Lieber, Seth Lieber, Nancy Casey and Brian Rubenstein. Barry Rubenstein, Irwin Lieber, Barry Fingerhut, Jonathan Lieber, Seth Lieber and Nancy Casey share voting and dispositive power over the remaining 694,855 shares held by the other Wheatley entities. The address for Wheatley Partners is 80 Cuttermill Road, Great Neck, NY 11021.


(4)	Mr. Jeffrey Krauss, one of our directors, Dr. Albert Waxman and Stephen Kroupa share voting and dispositive power as to the shares held by Psilos Group Partners II SBIC, L.P. The address for Psilos Group is 625 Avenue of the Americas, 4th Floor, New York, NY 10011.

(5)	Mr. Robert Chefitz, Mr. Joseph Falkenstein and Mr. James Guntner share voting and dispositive power as to the shares held by NJTC Venture Fund SBIC, L.P. The address for NJTC Venture Fund is 4 Becker Farm Rd., Roseland, NJ 07068.


(6)	Includes 5,410,440 shares held by Sanders Morris Harris Inc. described in footnote 1 above. The number of options exercisable within 60 days of December 31, 2005 includes 3,750 options held by affiliates of SMH. Mr. Gale is an affiliate of SMH and manages the funds described in footnote 1 above. Mr. Gale disclaims beneficial ownership of the 5,410,440 shares held by SMH except to the extent of his pecuniary interest in the funds described in footnote 1 above.



(7)	Includes 587,717 shares held by Wheatley MedTech Partners, L.P. described in footnote 3 above. Dr. Dantzker is a voting member of Wheatley MedTech Partners LLC, the general partner of Wheatley MedTech Partners, L.P. Dr. Dantzker disclaims beneficial ownership of the 587,717 shares held by Wheatley MedTech Partners, L.P. except to the extent of his pecuniary interest in that fund.



(8)	Includes 2,066,561 shares held by MXL Industries, Inc. Mr. Feldman is the chairman of the board of directors and chief executive officer of National Patent Development Corporation, the parent of MXL Industries, Inc. Mr. Feldman disclaims beneficial ownership of the 2,066,561 shares held by MXL Industries, Inc.



(9)	Includes 723,576 shares held by Psilos Group described in footnote 4 above. Mr. Krauss is a managing director of Psilos Group. Mr. Krauss disclaims beneficial ownership of the 723,576 shares held by Psilos Group, except to the extent of his pecuniary interest in the fund described in footnote 4 above.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have entered into certain agreements or transactions with certain officers, directors and 5% stockholders. These agreements or transactions are each summarized below. The following description is only a summary of what we believe are the material provisions of the agreements.

Loan from Our President and Chief Executive Officer

We issued a promissory note to our President and Chief Executive Officer, David S. Tierney, M.D. for the aggregate principal amount of $200,000 on June 23, 2004. The note bore interest at the UBS Margin Interest Rate charged to Dr. Tierney plus 1.0% and was due and immediately payable upon our receipt of at least $1,000,000 in other debt or subscriptions to purchase shares of our series B or series C convertible preferred stock. We satisfied our obligations under this note on November 3, 2004.

Preferred Stock Issuances

In 2004, we sold 11,600,000 shares of our series C convertible preferred stock at a price of $1.00 per share to the following holders of more than 5% of our securities and their affiliated entities: Sanders Morris Harris, Inc. — 4,500,000; Wheatley Partners — 1,000,000; Psilos Group — 4,000,000; and NJTC Venture Fund — 1,000,000. All of our shares of series C convertible preferred stock were sold at the same price, which was determined by our board of directors to be the fair market value based upon arm’s length negotiations between us and those purchasers and a managing director of Sanders Morris Harris Inc., who at the time were not our stockholders. Sanders Morris Harris Inc. acted as placement agent with respect to the shares of series C convertible preferred stock that we sold to SMH Valera LLC, an affiliate of Sanders Morris Harris, Inc. for which we paid Sanders Morris Harris Inc. a fee of $280,000. James C. Gale, one of our directors and a managing director of Sanders Morris Harris Inc., has voting and dispositive power over all of the shares of series C convertible preferred stock purchased by Sanders Morris Harris Inc; David R. Dantzker, a director, has voting control over 458,281 shares of series C preferred stock, purchased by Wheatley MedTech Partners, L.P.; and Howard Silverman, a director, invested $126,846, and David S. Tierney, M.D., our President and Chief Executive Officer and a director, invested $50,000 in SMH Valera LLC.

Appointment of Directors

Pursuant to our second amended and restated investor rights agreement dated August 16, 2004, or investor rights agreements, the following persons were elected to our board of directors: James C. Gale as representative of the Corporate Opportunities Fund, L.P., David R. Dantzker, M.D. as representative of Wheatley MedTech Partners L.P., Jeffrey M. Krauss as representative of Psilos Group Managers, LLC, and Jerome Feldman as representative of MXL Industries, Inc. The rights to appoint directors under the investor rights agreement will terminate upon the effective date of the registration statement pertaining to this offering. However, pursuant to our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, we will have a classified board and Messrs. Gale (Class II), Feldman (Class I), Krauss (Class III) and Dr. Dantzker (Class II) will each continue to serve as a director for his respective term and until his respective successor is duly elected and qualified. The initial terms of the directors will expire upon election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2007 for the Class I directors, 2008 for the Class II directors and 2009 for the Class III directors.

The purchasers of our preferred stock are entitled to certain registration rights under the investor rights agreement. See “Description of Capital Stock — Registration Rights.”

DESCRIPTION OF CAPITAL STOCK

The description below of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to the amended and restated certificate of incorporation and the amended and restated bylaws that will become effective upon closing of this offering. These documents will be filed as exhibits to the registration statement of which this prospectus is a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

Upon the closing of this offering, our authorized capital stock will consist of 30,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2005, there were 10,946,482 shares of common stock outstanding after giving effect to the automatic conversion of all of our outstanding preferred stock into 9,279,399 shares of common stock. As of December 31, 2005, we had two record holders of our common stock and approximately 18 record holders of our convertible preferred stock. All of our outstanding shares of convertible preferred stock will automatically convert into shares of common stock immediately prior to the closing of this offering. After the closing of this offering, we will have 14,696,482 shares of common stock and no shares of preferred stock outstanding. In addition, as of December 31, 2005, 1,833,333 shares of our common stock were reserved for grants under our Equity Incentive Plan and of that amount options to purchase 1,265,842 shares of our common stock were outstanding.

Common Stock

Holders of shares of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors. The holders of our common stock are entitled to receive dividends when, as and if declared by the board of directors out of funds legally available therefore subject to the rights of any class of stock having a preference as to dividends.

In the event of a liquidation, dissolution or winding up of us, the holders of our common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock. The rights, preferences and privileges of holders of common stock are subject to and may be affected by, the rights of the holders of any shares of preferred stock that we may designate and issue in the future.

Preferred Stock

Our certificate of incorporation also authorizes the issuance of 5,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors can also fix the number of shares constituting a series of preferred stock, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of our common stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying or preventing our change in control and may cause the market price of our common stock to decline or impair the voting and other rights of the holders of our common stock. We have no current plans to issue any shares of preferred stock.

Registration Rights

In August 2004, concurrently with the sale of our series C convertible preferred stock, we entered into a second amended and restated investor rights agreement with the existing holders of all of our convertible preferred stock and common stock. Under the agreement, if, at any time after December 31, 2005, the holders of at least 50% of the outstanding common stock issued or issuable upon conversion of the series A, series B, and series C convertible preferred stock request that we file a registration statement relating to the sale of our securities held by such holders, we will use our commercially reasonable best

efforts to cause such shares to be registered, subject to certain limitations. We are not obligated to effect more than two registrations under this demand provision. In the case of an underwritten offering, these demand registration rights are subject to customary cutbacks.

In addition, if available for our use, the holders of at least 50% of our common stock subject to the agreement, including shares held by MXL Industries and shares, issued or issuable upon conversion of the series A, series B, and series C convertible preferred stock may request, subject to certain limitations, that we file a registration statement on Form S-3 or other similar short-form registration statement, subject to customary cutbacks in the case of an underwritten offering. S-3 registration rights will not available if, among other things, the covered securities are proposed to be sold to the public at an aggregate offering price of less than $3,000,000 or if we have filed a registration statement pursuant to such rights within the preceding six months.

In addition to the demand registration rights, if we register any of our securities under the Securities Act, the holders of our common stock subject to the agreement, including shares held by MXL Industries and shares issued or issuable upon conversion of our series A, series B, and series C convertible preferred stock, may require that we include some or all of such shares in that registration, subject to customary cutbacks in the case of an underwritten offering.

We are obligated to pay all of the expenses incurred in connection with any registration under the agreement (exclusive of underwriting discounts and commissions with respect to any selling stockholder’s shares).

The holders of our series A, series B, and series C convertible preferred stock and common stock have agreed to not sell or otherwise transfer or dispose of any shares (excluding shares acquired in or following our initial public offering) for such period of time as required by the underwriters, in connection with our initial public offering, not to exceed 180 days following the effective date of the registration statement.

Our obligations to register shares of our common stock under the agreement terminate with respect to any holder when all of the shares of common stock held by such holder that were entitled to be registered under the agreement may be sold under Rule 144 of the Securities Act during any 90-day period.

Anti-takeover Effects of Provisions of Our Amended and Restated Certificate of Incorporation and Bylaws and Certain Provisions of the Delaware General Corporation Law

Certain provisions of our amended and restated certificate of incorporation, or certificate of incorporation, and amended and restated bylaws, or bylaws, that will be in effect upon completion of this offering, as summarized below, and applicable provisions of the Delaware General Corporation Law (the “DGCL”) may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or in our management. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and in the policies furnished by them and to discourage certain types of transactions that may involve an actual or threatened change in our control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in our management.


	*Election and removal of directors*

Our certificate of incorporation to be in effect upon the closing of this offering provides for our board of directors to be divided into three classes serving staggered terms. Approximately one-third of our board of directors will be elected each year. The provision for a classified board could prevent a party who acquires control of a majority of our outstanding voting stock from obtaining control of our board of directors until the second annual stockholders meeting following the date the acquiring party obtains the controlling stock interest. The classified board provision could discourage a potential acquirer from making

a tender offer or otherwise attempting to obtain control of us and could increase the likelihood that incumbent directors will retain their positions. Our certificate of incorporation to be in effect upon the closing of this offering also provides that directors may be removed without cause by the affirmative vote of the holders of 80% of the outstanding shares of common stock. Directors may be removed with cause by the vote of a majority of the shares represented in person or by proxy at a meeting entitled to vote generally in the election of directors, voting as a single class. For more information on the classified board, see the section entitled “Management – Directors and Executive Officers.”


	*No cumulative voting*

Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. The combination of ownership by a few stockholders of a significant portion of our issued and outstanding common stock and lack of cumulative voting will make it more difficult for our other stockholders to replace our board of directors or for another party to obtain control of us by replacing our board of directors.


	*Size of board and vacancies*

Our certificate of incorporation provides that the exact number of directors on our board of directors will be fixed exclusively by our board of directors, but will consist of at least three but no more than 15 directors. Unless otherwise determined by our board of directors, and subject to the rights of holders of any series of preferred stock, newly created directorships resulting from any increase in our authorized number of directors and any vacancies in our board of directors resulting from death, resignation or removal from office or other cause, will be filled solely by the vote of our remaining directors in office.


	*Stockholder action by written consent*

Our certificate of incorporation provides that our stockholders may not act by written consent without a meeting.


	*Stockholder meetings*

Our certificate of incorporation and bylaws provide that, except as otherwise required by law and subject to the rights of holders of any series of preferred stock, special meetings of stockholders may be called at any time, but only by the chairman of our board of directors, our president, or upon a resolution adopted by, or affirmative vote of, a majority of our board of directors, and not by the stockholders.


	*Requirements for advance notification of stockholder nominations and proposals*

Our bylaws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of our board of directors or a committee of our board of directors.


	*Undesignated preferred stock*

The authorization of our undesignated preferred stock makes it possible for our board of directors to issue our preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us.


	*Section 203 of the General Corporation Law of the State of Delaware*

We will be subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. In general, Section 203 prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the time the person became an interested stockholder unless:


	•	prior to the time the person became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;


	•	upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the stockholder owned a least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding stock owned by the interested stockholder) those (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentiality whether shares held subject to the plan will be tendered in a tender or exchange offer; or

	•	at or subsequent to the time the person became an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66²/3% of the outstanding voting stock which is not owned by the interested shareholder.

The application of Section 203 may limit the ability of stockholders to approve a transaction that they may deem to be in their interests.

Under Section 203, a “business combination” generally includes a merger, asset or stock sale, or other similar transaction with an interested stockholder, and an “interested stockholder” is generally a person who, together with it affiliates and associates, owns or, in the case of affiliates or associates of the corporation, owned 15% or more of a corporation’s outstanding voting securities within three years prior to the determination of interested stockholder status.

Supermajority Provisions

The DGCL provides generally that the affirmative vote of a majority in voting power of the outstanding shares entitled to vote is required to amend a corporation’s certificate of incorporation, unless the certificate of incorporation requires a greater percentage. Our certificate of incorporation provides that the following provisions in the certificate of incorporation may be amended only by a vote of at least 80% in voting power of the then outstanding shares of our capital stock entitled to vote:


	•	the provisions relating to adoption, amendment or repeal of our amended and restated by-laws;

	•	the provision relating to meetings of our stockholders;

	•	the provisions relating to our board of directors; and

	•	the supermajority voting requirements listed above.

In addition, our certificate of incorporation grants our board of directors the authority to adopt, amend and repeal our by-laws without a stockholder vote in any manner not inconsistent with the laws of the State of Delaware or our certificate of incorporation, subject to the right of the stockholders, upon the affirmative vote of at least 80% in voting power, of the then outstanding shares of our capital stock, to adopt, amend or repeal our by-laws, including to amend or repeal the by-laws adopted or amended by our board of directors.

Transfer Agent and Registrar

Our transfer agent and registrar is Computershare Trust Company, N.A. Their address is 250 Royall Street, Canton, MA 02021 and their telephone number is (781) 575-2000.

The Nasdaq National Market

We have applied to have our common stock approved for quotation on The Nasdaq National Market under the symbol “VLRX.”

SHARES ELIGIBLE FOR FUTURE SALE

General

Upon completion of this offering, there will be 14,696,482 shares of our common stock outstanding. Of the shares which will be outstanding after the offering:



	•	all 3,750,000 shares of common stock sold in the offering will be freely tradeable without restriction or further registration, unless purchased by an affiliate as defined in Rule 144 under the Securities Act, and;



	•	the remaining 10,946,482 shares held by existing stockholders will be “restricted securities”.

The restricted securities described above as well as any other shares held by our affiliates, may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144.

Rule 144

In general, under Rule 144 as currently in effect, a person who has beneficially owned “restricted securities” for at least one year, including an affiliate, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:



	•	one percent of the then outstanding shares of our common stock (approximately 146,965 shares immediately following the offering); or


	•	the average weekly trading volume of our common stock on The Nasdaq National Market during the four calendar weeks preceding filing of notice of such sale.

Sales under Rule 144 are also subject to the manner of sale requirements, notice requirements, the availability of current public information about us and other limitations.

A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who owns shares that were acquired from us or an affiliate of ours for at least two years prior to the proposed sale is entitled to sell such shares pursuant to Rule 144(k) without regard to the volume limitations, manner of sale provisions or other limitations of Rule 144.

Rule 701

Subject to limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisors prior to the date we become subject to the reporting requirements of the Exchange Act. To be eligible for resale under Rule 701, shares must have been issued pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of the offering). Securities issued in reliance on Rule 701 are restricted securities and, subject to the lock-up agreements described below, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates, subject only to the manner of sale provisions of Rule 144, and by affiliates, under Rule 144 without compliance with its one-year minimum holding period requirements.

Lock-up Agreements

In addition to the limits placed on the sale of shares of our common stock by operation of Rule 144 and other provisions of the Securities Act of 1933, as amended, we, our directors and executive officers and holders of 74% of our common stock (assuming conversion of all of our shares of convertible preferred

stock immediately prior to the completion of this offering), have entered into lock-up agreements with the underwriters. Under these agreements, subject to exceptions, we may not issue any new shares of common stock, and those holders of stock may not, directly or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock, or publicly announce the intention to do any of the foregoing, without the prior written consent of UBC Securities LLC and Banc of America Securities LLC for a period of 180 days from the date of this prospectus. This consent may be given at any time without public notice. If we issue an earnings release or material news or if a material event relating to us occurs during the 15 calendar days plus 3 business days before the last day of the lock-up period, or if prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16 days following the last day of the lock-up period, the restrictions provided in the lock-up agreements will continue to apply until 18 days after the issuance of the earnings release or the occurrence of material news or a material event. Also, during this 180-day period, we have agreed not to file any registration statement for, and each of our officers and stockholders has agreed not to make any demand for, or exercise any right of, the registration of, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of UBS Securities LLC and Banc of America LLC.

Registration Rights

Pursuant to a second amended and restated investor rights agreement with our existing holders of our convertible preferred stock and common stock, the holders of approximately 10,946,066 shares of our common stock, including shares to be issued upon conversion of their convertible preferred stock, will be entitled to customary demand and piggyback registration rights, subject to certain exceptions, which will require us to register these shares under the Securities Act upon the occurrence of certain events, including the earlier of six months following a qualified offering and December 31, 2005 and the registration of any shares of our common stock, either for our own account or the account of another person. These stockholders have agreed to not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction for a period of 180 days following the effective date of the registration statement covering this offering. See “Description of Capital Stock — Registration Rights” for a more complete description of the agreement.

Equity Plan

We intend to file a registration statement on Form S-8 under the Securities Act to register the shares of common stock available for issuance pursuant to our Equity Plan. Subject to the lock-up agreements, shares issued pursuant to these plans after the effective date of such registration statement will be available for sale in the open market and, for our affiliates, subject to the conditions and restrictions of Rule 144. As of December 31, 2005, options to purchase a total of 1,265,842 shares of common stock were outstanding and 567,075 shares of our common stock were available for future grant.

UNDERWRITING

We are offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC and Banc of America Securities LLC are the representatives of the underwriters. We have entered into an underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table:


		Number
Underwriter		of Shares

UBS Securities LLC
Banc of America Securities LLC
First Albany Capital Inc.
Fortis Securities LLC

	Total

The underwriting agreement provides that the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

Our common stock is offered subject to a number of conditions, including:


	•	receipt and acceptance of our common stock by the underwriters; and

	•	the underwriters’ right to reject orders in whole or in part.

We have been advised by the representatives that the underwriters intend to make a market in our common stock but that they are not obligated to do so and may discontinue making a market at any time without notice.

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.

Sales of shares made outside of the U.S. may be made by affiliates of the underwriters.

Over-allotment Option

We have granted the underwriters an option to buy up to 562,500 additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above.

Commissions and Discounts

Shares sold by the underwriters to the public will initially be offered at the initial offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein and, as a result, will thereafter bear any risk associated with changing the offering price to the public or other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed % of the shares of common stock to be offered.

The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional shares.


	No	Full
	Exercise	Exercise

Per share	$	$
Total	$	$

We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ .

No Sales of Similar Securities

We, our executive officers and directors and our existing stockholders holding an aggregate of over 74% of our shares outstanding (including securities convertible into or exchangeable or exercisable for our common stock) have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of UBS Securities LLC and Banc of America Securities LLC, offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus. If we issue an earnings release or material news or a material event relating to us occurs during the 15 calendar days plus 3 business days before the last day of the lock-up period, or if prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16 days following the last day of the lock-up period, the restrictions provided in the lock-up agreements will continue to apply until 18 days after the issuance of the earnings release or the occurrence of material news or a material event. At any time and without public notice, UBS Securities LLC and Banc of America Securities LLC may in their sole discretion release all or some of the securities from these lock-up agreements.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be required to make in respect of those liabilities.

Nasdaq National Market Quotation

We have applied to have our common stock approved for quotation on The Nasdaq National Market under the symbol “VLRX.”

Price Stabilization, Short Positions

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock, including


	•	stabilizing transactions;

	•	short sales;

	•	purchases to cover positions created by short sales;

	•	imposition of penalty bids; and

	•	syndicate covering transactions.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering and purchasing shares of common stock on the open market to cover positions created by short sales. Short

sales may be “covered short sales,” which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked short sales,” which are short positions in excess of that amount.

The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.

Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on The Nasdaq National Market, in the over-the-counter market or otherwise.

Determination of Offering Price

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:


	•	the information set forth in this prospectus and otherwise available to the representatives;

	•	our history and prospects, and the history of and prospects for the industry in which we compete;

	•	our past and present financial performance and an assessment of our management;

	•	our prospects for future earnings and the present state of our development;

	•	the general condition of the securities markets at the time of this offering;

	•	the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and

	•	other factors deemed relevant by the underwriters and us.

Directed Share Program

At our request, certain of the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Certain employees and other persons purchasing these reserved shares will be prohibited from disposing of or hedging the shares for a period of at least 180 days after the date of this prospectus.

Affiliations

Certain of the underwriters and their affiliates may from time to time provide certain commercial banking, financial advising, investment banking and other services for us for which they will be entitled to receive a separate fee.

LEGAL MATTERS

The validity of the securities being offered will be passed upon for us by Pepper Hamilton LLP. Certain legal matters will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP.

EXPERTS

Our financial statements at December 31, 2003 and 2004, and for each of the three years in the period ended December 31, 2004, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form S-1 with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to us and our common stock and the attached rights, reference is made to the registration statement and the exhibits and schedules thereto. You may read and copy any document we file, including the registration statement and any periodic reports, proxy statements and other information, at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.

Upon completion of the offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC.

INDEX TO FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			F-1
Balance Sheets as of December 31, 2003 and 2004 and September 30, 2005 (unaudited)			F-2
Statements of Operations for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2004 and 2005 (unaudited)			F-3
Statements of Shareholders’ Deficit for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2005 (unaudited)			F-4
Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2004 and 2005 (unaudited)			F-5
Notes to Financial Statements			F-6
Financial Statement Schedule			F-25

VALERA PHARMACEUTICALS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Valera Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of Valera Pharmaceuticals, Inc. as of December 31, 2003 and 2004, and the related statements of operations, shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in Item 16(b) and the Index to Financial Statements of Form S-1 of this Registration Statement. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 financial position of Valera Pharmaceuticals, Inc. at December 31, 2003 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As described in Note 2 to the financial statements, the Company has restated its 2003 financial statements to reflect a deemed dividend on its Series A preferred stock which was not previously recorded.


	Ernst & Young LLP

March 10, 2005

MetroPark, New Jersey

Except as to Note 1, as to which date is , 2006.

The foregoing report is the form that will be signed upon completion of the reverse stock split described in Note 1 to the financial statements.


	/s/ Ernst & Young LLP

January 13, 2006

MetroPark, New Jersey

F-1

VALERA PHARMACEUTICALS, INC.

BALANCE SHEETS


		December 31,									Pro Forma at
								September 30,			September 30,
		2003			2004			2005			2005

		(Restated)						(Unaudited)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	5,241,246		$	5,052,643		$	2,569,262		$	2,569,262
	Accounts receivable, net of allowances of $91,272 at December 31, 2004 and $296,814 at September 30, 2005		—			5,258,329			5,910,990			5,910,990
	Other accounts receivable		573,500			—			—			—
	Inventories, net		—			1,365,018			2,929,482			2,929,482
	Prepaid and other current assets		91,467			141,651			544,525			544,525
	Restricted cash		—			100,000			—			—

Total current assets			5,906,213			11,917,641			11,954,259			11,954,259
Fixed assets, net			351,422			1,704,305			3,074,087			3,074,087
Deferred offering costs			—			—			1,257,269			1,257,269
Security deposits			406,915			45,000			91,181			91,181

Total assets		$	6,664,550		$	13,666,946		$	16,376,796		$	16,376,796


LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
	Accounts payable	$	1,185,298		$	2,041,393		$	1,584,378		$	1,584,378
	Accrued liabilities		101,383			1,552,051			4,264,242			4,264,242
	Current portion of capital lease obligations		34,044			17,873			15,516			15,516

			1,320,725			3,611,317			5,864,136			5,864,136
Capital lease obligations			32,709			17,193			6,943			6,943
Deferred revenue			—			—			300,000			300,000
Series A 6% Cumulative Convertible Preferred Stock, $0.001 par value; 7,000,000 shares authorized, 7,000,000 shares issued and outstanding; liquidation preference — $7,160,638 and $7,485,267 at December 31, 2004 and September 30, 2005, respectively			7,743,391			13,603,856			13,603,856			—
Series B 10% Cumulative Convertible Preferred Stock, $0.001 par value; 24,500,000 shares authorized, 18,620,690 shares issued and outstanding at December 31, 2003 and 22,068,966 shares issued and outstanding at December 31, 2004 and September 30, 2005; liquidation preference — $18,362,875 and $19,727,839 at December 31, 2004 and September 30, 2005, respectively			12,726,055			15,082,305			15,082,305			—
Series C 6% Cumulative Convertible Preferred Stock, $0.001 par value; 11,600,000 shares authorized, 11,600,000 shares issued and outstanding; liquidation preference — $11,866,201 and $12,404,156 at December 31, 2004 and September 30, 2005, respectively			—			11,238,834			11,238,834			—
Shareholders’ (deficit) equity:
	Common stock, $0.001 par value; 75,000,000 shares authorized, 1,666,667 shares issued and outstanding; 10,764,251 shares issued and outstanding pro forma (unaudited)		1,667			1,667			1,667			10,764
	Additional paid-in capital		5,273,600			9,961,656			8,894,114			48,810,012
	Deferred stock-based compensation		—			(1,532,766	)		(448,552	)		(448,552	)
	Accumulated deficit		(20,433,597	)		(38,317,116	)		(38,166,507	)		(38,166,507	)

Total shareholders’ (deficit) equity			(15,158,330	)		(29,886,559	)		(29,719,278	)		10,205,717

Total liabilities and shareholders’ (deficit) equity		$	6,664,550		$	13,666,946		$	16,376,796		$	16,376,796

See accompanying notes.

F-2

VALERA PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS


		Year Ended December 31,									Nine Months Ended September 30,

		2002			2003			2004			2004			2005

		(Restated)									(Unaudited)
Net product sales		$	15,006		$	7,353		$	5,511,286		$	—		$	21,632,421
Licensing revenue			—			—			134,636			127,984			27,317

Total net revenue			15,006			7,353			5,645,922			127,984			21,659,738
Operating costs and expenses:
	Cost of product sales		—			—			608,150			—			4,782,775
	Research and development		4,319,709			5,229,529			6,375,819			5,281,673			4,411,733
	Selling and marketing		269,633			509,514			5,025,038			1,847,901			8,231,583
	General and administrative		1,324,378			1,838,101			5,897,435			2,132,602			4,128,564

Total operating expenses			5,913,720			7,577,144			17,906,442			9,262,176			21,554,655

(Loss) income from operations			(5,898,714	)		(7,569,791	)		(12,260,520	)		(9,134,192	)		105,083
Interest income			44,358			26,609			64,719			25,153			49,129
Interest expense			(28,439	)		(13,475	)		(70,871	)		(20,037	)		(3,603	)

(Loss) income before income taxes			(5,882,795	)		(7,556,657	)		(12,266,672	)		(9,129,076	)		150,609
Benefit from income taxes			—			—			243,618			—			—

Net (loss) income			(5,882,795	)		(7,556,657	)		(12,023,054	)		(9,129,076	)		150,609
Deemed dividend			—			(1,139,535	)		(5,860,465	)		(5,860,465	)		—

Net (loss) income attributable to common shareholders		$	(5,882,795	)	$	(8,696,192	)	$	(17,883,519	)	$	(14,989,541	)	$	150,609

Basic net (loss) income attributable to common shareholders per share		$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.09

Weighted average shares outstanding — basic			1,666,667			1,666,667			1,666,667			1,666,667			1,666,667

Diluted net (loss) income attributable to common shareholders per share		$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.01

Weighted average shares outstanding — diluted			1,666,667			1,666,667			1,666,667			1,666,667			10,801,555

Unaudited pro forma basic net (loss) income attributable to common shareholders per share								$	(2.24	)				$	0.01

Unaudited pro forma weighted average shares outstanding — basic									7,995,897						10,508,433

Unaudited pro forma diluted net (loss) income attributable to common shareholders per share								$	(2.24	)				$	0.01

Unaudited pro forma weighted average shares outstanding — diluted									7,995,897						10,801,555

See accompanying notes.

F-3

VALERA PHARMACEUTICALS, INC.

STATEMENTS OF SHAREHOLDERS’ DEFICIT

For the Years Ended December 31, 2002, 2003 and 2004 and the

Nine Months Ended September 30, 2005


		Common Stock
						Additional									Total
				Par		Paid-in			Deferred			Accumulated			Shareholders’
		Shares		Value		Capital			Compensation			Deficit			Deficit

Balance at December 31, 2001			1,666,667	$	1,667	$	5,270,892					$	(5,854,610	)	$	(582,051	)
	Net loss												(5,882,795	)		(5,882,795	)

Balance at December 31, 2002			1,666,667		1,667		5,270,892						(11,737,405	)		(6,464,846	)
	Expense related to options granted to non-employees						2,708									2,708
	Deemed dividend												(1,139,535	)		(1,139,535	)
	Net loss												(7,556,657	)		(7,556,657	)

Balance at December 31, 2003 (Restated)			1,666,667		1,667		5,273,600						(20,433,597	)		(15,158,330	)
	Deferred compensation related to stock options, net of cancellations						4,636,952		$	(4,636,952	)					—
	Amortization of deferred stock-based compensation									3,104,186						3,104,186
	Expense related to options granted to non-employees						51,104									51,104
	Deemed dividend												(5,860,465	)		(5,860,465	)
	Net loss												(12,023,054	)		(12,023,054	)

Balance at December 31, 2004			1,666,667		1,667		9,961,656			(1,532,766	)		(38,317,116	)		(29,886,559	)
	Deferred compensation related to stock options, net of cancellations						(1,139,851	)		1,139,851						—
	Amortization of deferred stock based compensation									(55,637	)					(55,637	)
	Expense related to options granted to non-employees						72,309									72,309
	Net income												150,609			150,609

Balance September 30, 2005 (unaudited)			1,666,667	$	1,667	$	8,894,114		$	(448,552	)	$	(38,166,507	)	$	(29,719,278	)

See accompanying notes.

F-4

VALERA PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS


												Nine Months Ended
			Year Ended December 31,									September 30,

			2002			2003			2004			2004			2005

												(unaudited)
Operating activities
Net (loss) income			$	(5,882,795	)	$	(7,556,657	)	$	(12,023,054	)	$	(9,129,076	)	$	150,609
Adjustments to reconcile net (loss) income to net cash used in operating activities:
	Depreciation and amortization			199,522			153,254			257,495			175,778			351,657
	Allowances for accounts receivable			—			—			91,272			—			205,542
	Expense related to options granted to non-employees			—			2,708			51,104			—			72,309
	Stock-based compensation			—			—			3,104,186			525,909			(55,637	)
	Change in assets and liabilities:
		Accounts receivable		—			—			(5,005,848	)		—			(858,202	)
		Other accounts receivable		—			(573,500	)		573,500			(4,000	)		—
		Inventories		—			—			(1,365,018	)		—			(1,564,464	)
		Restricted cash		—			—			(100,000	)		—			100,000
		Prepaid and other current assets		17,044			(45,167	)		(50,184	)		466,489			(402,874	)
		Security deposits		(227,599	)		(154,616	)		361,915			352,857			(46,181	)
		Accounts payable		116,064			201,176			856,095			(479,115	)		(457,016	)
		Accrued liabilities		—			66,384			1,106,915			129,517			2,712,191
		Deferred revenue		—			—			—			—			300,000

Net cash (used in) provided by operating activities				(5,777,764	)		(7,906,418	)		(12,141,622	)		(7,961,641	)		507,934
Investing activities
Capital expenditures				(93,365	)		(147,664	)		(1,610,378	)		(1,482,972	)		(1,721,439	)

Net cash used in investing activities				(93,365	)		(147,664	)		(1,610,378	)		(1,482,972	)		(1,721,439	)
Financing activities
Payment of capital lease obligations				(109,163	)		(71,304	)		(31,687	)		(26,292	)		(12,607	)
Proceeds from officer loan				—			—			200,000			200,000			—
Repayment of officer loan				—			—			(200,000	)		(200,000	)		—
Deferred offering costs				—			—			—			(3,319	)		(1,257,269	)
Net proceeds from issuance of convertible preferred stock				—			12,726,055			13,595,084			13,595,084			—

Net cash (used in) provided by financing activities				(109,163	)		12,654,751			13,563,397			13,565,473			(1,269,876	)

Net (decrease) increase in cash and cash equivalents				(5,980,292	)		4,600,669			(188,603	)		4,120,860			(2,483,381	)
Cash and cash equivalents at beginning of period				6,620,869			640,577			5,241,246			5,241,246			5,052,643

Cash and cash equivalents at end of period			$	640,577		$	5,241,246		$	5,052,643		$	9,362,106		$	2,569,262

Supplemental Disclosure of Non-Cash Financing Activities
	Deemed dividends on preferred stock		$	—		$	1,139,535		$	5,860,465		$	5,860,465		$	—

See accompanying notes.

F-5

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS


1.	Organization and Description of Business


	*Nature of Operations and Basis of Presentation*

Valera Pharmaceuticals, Inc. (“Valera” or the “Company”), is a specialty pharmaceutical company focused on the development, acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders. Valera was incorporated in the state of Delaware on May 30, 2000. On July 1, 2003, Valera changed its name from Hydro Med Sciences, Inc. Prior to May 30, 2000, the Company operated as a division of GP Strategies, and was included in their consolidated financial statements and federal tax returns. The Company’s headquarters and manufacturing operations are located in Cranbury, New Jersey. In May 2005, the Company created Valera Pharmaceuticals Ireland Limited, a wholly owned subsidiary. The Company operates in a single business segment.

The Company incurred operating losses in each period from inception through December 31, 2004. The Company has been able to fund its cash needs to date through initial funding from one of its investors, GP Strategies Corporation, through the sale of its preferred stock, and through the sales of its product. The ability of the Company to manage its operating expenses to a level that can be financed by existing cash flows and its ability to obtain additional funding is therefore critical. The Company’s management intends to raise additional equity funds and also enter into collaborative agreements.

Prior to November 2004, the Company operated as a development-stage company and did not generate any substantial revenue. In November 2004, the Company exited the development stage when it began selling its initial product Vantas.


	*Reverse Stock Split*

As a result of the one-for-six reverse stock split that will be effective prior to the time the Company’s registration statement on Form S-1 relating to the initial public offering of the Company’s common stock becomes effective, every six shares of the Company’s common stock were replaced with one share 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 notes to consolidated financial statements prior to the effective date of the reverse stock split have been restated to reflect the one-for-six reverse stock split on a retroactive basis. Concurrent with the reverse split, the Company will reduce the number of common shares authorized for issuance to 30,000,000 and the number of preferred shares authorized for issuance to 5,000,000.


2.	Basis of Presentation and Significant Accounting Policies


	*Restatement of 2003 Financial Statements*

The Company has determined that in connection with the issuance of its Series B 10% Cumulative Convertible Preferred Stock, (“Series B Preferred Stock”) certain anti-dilution provisions in its Series A 6% Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) were activated. Because the shares of Series B Preferred Stock were sold at a price below the price that the shares of Series A Preferred Stock were sold, the conversion price and conversion ratio of the Series A Preferred Stock were adjusted in accordance with the original terms of that issuance when each tranche of Series B Preferred Stock was issued. These adjustments to the conversion price and the resulting conversion ratio resulted in deemed dividends being afforded to the holders of the Series A Preferred Stock. The total deemed dividend for the two tranches of Series B Preferred Stock issued in 2003 of $1,139,535 was not originally recorded in the Company’s 2003 financial statements but such statements have been restated to reflect this deemed dividend as an increase of Accumulated Deficit and an increase in the Series A Preferred Stock.

F-6

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


	*Use of estimates*

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) 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.


	*Unaudited pro forma information*

In January, 2005, the board of directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. If the initial public offering is completed under the terms presently anticipated, all of the convertible preferred stock outstanding at the time of the offering, including accrued dividends will automatically convert into 9,097,584 shares of common stock as of September 30, 2005 (See Note 8). Unaudited pro forma convertible preferred stock and stockholders’ equity, as adjusted for the assumed conversion of the Convertible Preferred Stock, is set forth on the accompanying balance sheets and unaudited pro forma earnings per share information assuming the conversion of the Convertible Preferred Stock is set forth on the accompanying statements of operations.


	*Reclassifications*

Certain reclassifications of prior year amounts have been made to conform to current year presentation.


	*Cash and Cash Equivalents*

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash and cash equivalents. At December 31, 2004, the Company had substantially all of its cash and cash equivalents deposited with one financial institution.


	*Restricted Cash*

Restricted cash at December 31, 2004 collateralizes an outstanding letter of credit associated with the firm that manages some of the Company’s credit card processing. This letter of credit was released during the second quarter of 2005.


	*Property and Equipment*

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years.

Leasehold improvements and capitalized leases are recorded at the fair market value at the inception of the leases and are amortized over the shorter period of their estimated useful life or the lease ranging from five to ten years.


	*Research and Development*

Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and indirect costs associated with specific projects as well as fees paid to various entities that perform research for the Company.

F-7

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


	*Inventory*

Upon regulatory approval of Vantas, the Company’s initial product, on October 12, 2004 the Company began capitalizing all costs associated with the manufacturing of Vantas. Inventory is valued at the lower of cost or market, on a first in first out (“FIFO”) basis. For all periods presented prior to October 12, 2004, the Company expensed all of its manufacturing costs as research and development.


	*Shipping and Handling Costs*

Shipping and handling costs incurred for inventory purchases and product shipments are included within cost of product sales in the statements of operations.


	*Stock-based Compensation*

As allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), the Company has elected to continue to apply the intrinsic value-based method of accounting prescribed in Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and, accordingly, does not recognize compensation expense for stock option grants made at an exercise price equal to or in excess of the estimated fair 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

F-8

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

and basic and diluted net (loss) income per share, would have been changed to the following pro forma amounts:


										Nine Months Ended
	Year Ended December 31,									September 30,

	2002			2003			2004			2004			2005

										(unaudited)
Net (loss) income attributable to common shareholders as reported	$	(5,882,795	)	$	(8,696,192	)	$	(17,883,519	)	$	(14,989,541	)	$	150,609
Add non-cash employee compensation as reported								3,104,186			491,378			(55,637	)
Deduct total stock-based employee compensation expense determined under fair value based method for all awards		(47,529	)		(46,893	)		(301,983	)		(159,981	)		(538,680	)

SFAS 123 pro forma net (loss) attributable to common shareholders	$	(5,930,324	)	$	(8,743,085	)	$	(15,081,316	)	$	(14,658,144	)	$	(443,708	)
Basic net (loss) income attributable to common shareholders per share, as reported	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.09

Diluted net (loss) income attributable to common shareholders per share, as reported	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.01

Basic net (loss) income attributable to common shareholders per share, SFAS 123 pro forma	$	(3.56	)	$	(5.25	)	$	(9.05	)	$	(8.79	)	$	(0.27	)

Diluted net (loss) income attributable to common shareholders per share, SFAS 123 pro forma	$	(3.56	)	$	(5.25	)	$	(9.05	)	$	(8.79	)	$	(0.27	)

Unaudited pro forma basic net (loss) income attributable to common shareholders per share (Note 2) SFAS 123							$	(1.89	)				$	(0.04	)

Unaudited pro forma diluted net (loss) income attributable to common shareholders per share (Note 2) SFAS 123							$	(1.89	)				$	(0.04	)

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 at the date of grant using the minimum value pricing model with the following assumptions:


										Nine Months
	Year Ended									Ended
	December 31,									September 30,

	2002			2003			2004			2004			2005

										(Unaudited)
Risk-free interest rate		4.65	%		4.58	%		4.19	%		4.24	%		4.51	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Expected lives (in years)		4.0			4.0			4.0			4.0			4.0
Weighted-average contractual life		9.8			8.3			8.8			9.1			8.5

F-9

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Stock option grants are expensed ratably over their respective vesting periods.

The Company accounts for options issued to non-employees under SFAS No. 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 and income or expense is recognized during their vesting terms.


	*Deferred Stock Compensation*

During the year ended December 31, 2004, in connection with the grant of options to employees and directors, the Company recorded deferred stock compensation totaling $4,636,952. Included in this amount was $3,730,512, net of forfeitures, for options that were granted in 2002 and repriced in 2003. These repriced options are marked to market, using the estimated fair value of the Company’s common stock at the end of each reporting period. Such deferred compensation for these repriced options is amortized over the remaining vesting period for the options. In addition, included in the total amount was $906,440, net of forfeitures, recorded for options that were granted below fair market value on the date of grant. The deferred compensation for these options will be recognized ratably over the vesting period of these options, which is typically four years. During the year ended December 31, 2004, the Company amortized $3,104,186 of deferred stock compensation expense, of which $3,031,119 was for the repriced options and $73,067 was for the options granted below fair market value.

During the nine months ended September 30, 2005 (unaudited), the Company recorded deferred stock compensation of $364,865, net of forfeitures, for options that were granted below fair market value on the date of grant. During the nine months ended September 30, 2005 (unaudited), the Company amortized $431,793 of deferred stock compensation related to all options that were granted below fair market value at the date of grant. In addition, the Company marked to market the repriced options. In the Company’s determination the fair value of its common stock had declined from $18.00 per share during the first quarter of 2005 to $12.00 per share during the six months ended September 30, 2005 as a result of the delay in the timing of its initial public offering, resulting lack of near term liquidity for such options, and the temporary disruption in supply of Vantas due to issues with the supply of histrelin, the active ingredient in Vantas. The result of this mark to market, was the reversal of $487,456 of previously recorded stock option compensation.


	*Income Taxes*

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.


	*Net Loss Per Share*

The Company computes basic net (loss) income per share in accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net (loss) income per common share (“Basic EPS”) is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding. Diluted net loss per share of common stock (“Diluted EPS”) is computed by dividing net loss by the weighted-average number of shares of common stock and dilutive common equivalent shares then outstanding as long as such impact would not be anti-dilutive. Common stock equivalent shares consist of the incremental common shares issuable upon the conversion of preferred stock, and shares of common stock issuable upon the exercise of stock options. Diluted EPS is

F-10

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

identical to Basic EPS for the three years ended December 31, 2004 since common equivalent shares are excluded from the calculation, as their effect is anti-dilutive.


	Year Ended									Nine Months Ended

	December 31,			December 31,			December 31,			September 30,			September 30,
	2002			2003			2004			2004			2005

										(unaudited)
Numerator:
Net (loss) income	$	(5,882,795	)	$	(7,556,657	)	$	(12,023,054	)	$	(9,129,076	)	$	150,609
Deemed dividend		—			(1,139,535	)		(5,860,465	)		(5,860,465	)		—

Numerator for basic and diluted net income (loss) attributable to common shareholders per share — net income (loss) attributable for common shareholders	$	(5,882,795	)	$	(8,696,192	)	$	(17,883,519	)	$	(14,989,541	)	$	150,609

Denominator:
Denominator for basic net income (loss) attributable to common shareholders per share — weighted-average shares		1,666,667			1,666,667			1,666,667			1,666,667			1,666,667

Basic net income (loss) attributable to common shareholders per share	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.09

Denominator for diluted net income (loss) attributable to common shareholders per share — weighted- average shares		1,666,667			1,666,667			1,666,667			1,666,667			10,801,555

Diluted net income (loss) attributable to common shareholders per share	$	(3.53	)	$	(5.22	)	$	(10.73	)	$	(8.99	)	$	0.01

Denominator for unaudited pro forma basic net income (loss) attributable to common shareholders per share — weighted-average shares (Note 2)								7,995,897						10,508,433

Unaudited pro forma basic net income (loss) attributable to common shareholders per share (Note 2)							$	(2.24	)				$	0.01

F-11

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Year Ended

Nine Months Ended

December 31,

September 30,

2002

2003

2004

2005

(unaudited)

Denominator for unaudited pro forma diluted net income (loss) attributable to common shareholders per share — weighted-average shares (Note 2)

7,995,897

10,801,555

Unaudited pro forma diluted net income (loss) attributable to common shareholders per share (Note 2)

(2.24

)

0.01


	*Long-lived Assets*

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. There have been no indicators of impairment through September 30, 2005.


	*Concentration of Credit Risk*

The financial instrument that potentially subjects the Company to concentration of credit risk is cash. The Company places its cash with high-credit quality financial institutions. Concentrations of credit risk, with respect to this financial instrument, exist to the extent of amounts presented in the financial statements. For the year ended December 31, 2004 and the nine months ended September 30, 2005 (unaudited), one customer accounted for 10.1% and 7.7%, respectively, of our net sales and 11.6% and 8.0% of our outstanding receivables at December 31, 2004 and September 30, 2005 (unaudited), respectively.


	*Fair Value of Financial Instruments*

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


	*Revenue Recognition*

The Company’s revenue recognition policies are in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”), and SFAS No. 48, “Revenue Recognition When Right of Return Exists” (“SFAS 48”), which provides guidance on revenue recognition in financial statements, and is based on the interpretations and practices developed by the Securities and Exchange Commission. SFAS 48 and SAB 104 require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause

F-12

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

management to determine that these criteria are not met for certain future transactions, revenue recognition for those transactions will be delayed and the Company’s revenue could be adversely affected.

Allowances have been recorded for any potential returns or adjustments in accordance with the Company’s policy. Returns are allowed for damaged or outdated goods. As of September 30, 2005, we had a reserve of $746,231 for returns and adjustments, of which $118,003 related to sales made in 2004 and $628,228 related to sales made in 2005. The entire amount of the reserve relates to sales made to urologists. During the nine months ended September 30, 2005, there was no change in return and adjustment reserve estimates related to the December 31, 2004 balance. As of December 31, 2004 and September 30, 2005, there were approximately $570,000 and $228,800 worth of Vantas, respectively, at distributors and there were no returns of these products subsequent to those dates.


	Distributors			Physicians			Total

Balance at 12/31/2003		—			—			—
Provision related to sales made in current period	$	28,250		$	370,103		$	398,353
Provision related to sales made in prior periods		—			—			—
Returns and adjustments		—			(54,600	)		(54,600	)

Balance at 12/31/2004		28,250			315,503			343,753
Provision related to sales made in current period		—			1,685,436			1,685,436
Provision related to sales made in prior periods		—			—			—
Returns and adjustments		(9,318	)		(1,273,640	)		(1,282,958	)

Balance at 9/30/2005	$	18,932		$	727,299		$	746,231


	Customer Sales — Urologists

Our revenue from product sales is recognized when there is persuasive evidence an arrangement exists, the price is fixed in accordance with the Company’s Customer Price List and/or approved exception pricing, or determinable from executed contracts, delivery to the customer has occurred and collectibility is reasonably assured. We use contracts, purchase orders, sales orders directly taken by product specialists and sales order confirmations to determine the existence of an arrangement. Title to the product is taken upon delivery of the product, at which time risk of loss shifts to the customer. Billing does not take place until the day after shipment has occurred. We use shipping documents and, we are provided third party proof of delivery to verify delivery to our customers.


	Customer Sales — Distributor Sales

With respect to sales to distributors, revenue is recognized upon shipment, as the title, risks and rewards of ownership of the products pass to the distributors and the selling price of our product is fixed and determinable at that point. Payment is due based upon the agreed terms of the contract. The distributor is responsible for selling and distributing the product to its customer base and the rights for return are restricted to the Company’s published return policy in effect for all customers.

In December 2004, Valera entered into two group purchasing agreement with International Physicians Networks, LLC d/b/a International Urology Network (IUN) which were subsequently amended in March 2005. Under the agreements, IUN will sell to eligible members within their group purchasing organization. Under the terms of the agreement, pricing is fixed and subsequently adjusted to reflect the established price list published for IUN members. Allowances have been recorded for any potential returns in accordance with the Company’s policy, as well as an estimate for uncollectible receivables.

F-13

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


	*Allowances for Accounts Receivable*

The Company maintains an allowances for accounts receivable, which includes an allowance for doubtful accounts related to the estimated losses that may result from the inability of its customers to make required payments. This allowance is determined based upon historical experience and any specific customer collection issues that have been identified. The Company began selling its first product on November 8, 2004 and has not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. Also included in the allowance for accounts receivable is an allowance for early payment discounts.

Preferred Stock Dividends

The Company records deemed dividends when modifications to its preferred stock are required in accordance with EITF 98-5 and EITF 00-27. Such modifications occurred in 2003 and 2004 resulting in deemed dividends of $1,139,535 in 2003 and $5,860,465 in 2004. There were no modifications in the nine months ended September 30, 2005.


	*Recently Issued Accounting Pronouncements*

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

SFAS 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not been issued. The Company expects to adopt SFAS 123(R) on January 1, 2006.

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


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

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

The company is currently evaluating which alternative to adopt.

As permitted by SFAS 123, the company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in

F-14

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 2 to the Company’s financial statements. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options).


3.	Inventory

Inventories consist of the following:


	December 31,				September 30,

	2003		2004		2005

					(unaudited)
Raw Materials	$	—	$	707,893	$	959,265
Work in process		—		596,866		1,727,911
Finished goods		—		60,259		242,306

	$	—	$	1,365,018	$	2,929,482

The inventory balance at December 31, 2004 is presented net of a reserve of $90,666 for certain raw materials. The balance of work in process inventory at September 30, 2005 is presented net of a reserve of $994,180 for certain products that failed to meet the Company’s quality control specifications.


4.	Property and Equipment

Property and equipment consists of the following:


			December 31,						September 30,

	Useful Lives		2003			2004			2005

									(unaudited)
Laboratory equipment		5 years	$	629,841		$	1,389,871		$	1,520,511
Furniture and fixtures		7 years		41,976			60,286			159,913
Office equipment		5 years		23,565			41,617			108,366
Computer equipment		5 years		122,517			326,260			380,702
Computer software		3 years		51,334			159,117			199,651
Construction in process				—			—			1,304,135
Leasehold improvements		1-10 years		97,124			599,584			624,896

				966,357			2,576,735			4,298,174
Less accumulated depreciation and amortization				(614,935	)		(872,430	)		(1,224,087	)

Fixed assets, net			$	351,422		$	1,704,305		$	3,074,087

Depreciation and amortization expense was $199,522, $153,254 and $257,495, for the years ended December 31, 2002, 2003 and 2004, respectively and $351,657 for the nine months ended September 30, 2005 (unaudited). There were fixed assets totaling $161,839 at December 31, 2003, 2004 and $67,896 at September 30, 2005 (unaudited) subject to capital lease obligations with accumulated amortization of $104,179, $134,342 and $50,584 as of December 31, 2003, 2004 and September 30, 2005 (unaudited), respectively.

F-15

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


5.	Accrued Liabilities

Accrued liabilities consist of the following:


	December 31,
					September 30,
	2003		2004		2005

					(unaudited)
Accrued royalties	$	—	$	307,258	$	485,859
Accrual for sales returns and adjustments		—		343,753		746,231
Accrued legal fees		—		—		721,237
Accrued marketing expenses		—		—		387,236
Accrued compensation, bonus and benefits		—		416,821		540,229
Accrued commissions		—		245,580		240,075
Accrued regulatory fees		—		—		303,910
Accrued other		101,383		238,639		839,465

	$	101,383	$	1,552,051	$	4,264,242


6.	Capital Lease Obligations

The minimum future lease payments related to capital leases at December 31, 2004 are as follows:


	2005	$	22,316
	2006		18,723

Total minimum lease payments			41,039
Less amount representing interest payments			5,973

Present value of minimum lease payments		$	35,066


7.	Commitments

The Company leases its facilities and some equipment under noncancellable operating lease agreements. The minimum future lease payments under these leases are as follows:


Year ending December 31:
	2005	$	1,105,857
	2006		1,277,627
	2007		1,277,627
	2008		1,277,627
	2009		1,360,857
	Thereafter		8,098,561

Total rent expense was approximately $405,000, $422,000, and $663,817 for the years ended December 31, 2002, 2003 and 2004, respectively. Rent expense was $474,603 and $957,869 for the nine months ended September 30, 2004 and 2005 (unaudited), respectively. The Company’s building lease expires March 31, 2015, and the equipment lease expires October 2006.

The Company is a party to certain agreements that require the Company to pay royalties to third parties based on certain net product sales. For the year ended December 31, 2004 and for the nine months ended September 30, 2005 (unaudited), the Company incurred royalty expense of $307,258 and $1,169,597, respectively. Future royalties are dependent on future sales levels.

F-16

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

8. Capitalization


	*Common Stock*

The Company had 1,666,667 shares of common stock outstanding at September 30, 2005 and its par value was $0.001. The Company is authorized to issue 75,000,000 shares of common stock with a par value of $0.001 per share. Each holder of common stock is entitled to one vote of each share of common stock held of record on all matters on which stockholders generally are entitled to vote.


	*Convertible Preferred Stock*

The Company is authorized to issue 43,100,000 shares of $0.001 par value convertible preferred stock of which 7,000,000 shares have been designated Series A Preferred Stock, 24,500,000 shares have been designated Series B Preferred Stock and 11,600,000 shares have been designated Series C 6% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”). Such preferred stock is subject to the following rights and privileges:


	Voting

Preferred stockholders shall be entitled to cast the number of votes equal to the number of shares of common stock into which such shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (together referred to as the “Convertible Preferred Stock”) could then be converted and shall have full voting rights and powers equal to the voting rights and powers of the common stock on all matters submitted to the stockholders.


	Dividends

The Convertible Preferred Stock shall be entitled to receive dividends on an as-converted basis with shares of common stock when, as and if declared by the Board of Directors out of funds legally available therefore.

In addition to the foregoing provision, each share of Series A Preferred Stock and Series C Preferred Stock shall accrue dividends at the rate of 6% of its respective Preferred Stock Stated Value, and each share of the Series B Preferred Stock shall accrue dividends at the rate of 10% of the Series B Stated Value per share (as such stated value may be adjusted for any stock dividends, combinations or splits with respect to such shares) per annum, which shall accrue daily based on a 360-day year, payable when and as declared by the Board of Directors of the Company out of funds legally available. The Series A Preferred Stock dividends shall only accrue from the date of the first issuance of the shares of Series C Preferred Stock, August 16, 2004. No dividends have been declared by the Board of Directors through September 30, 2005.


	Liquidation

In the event of any voluntary or involuntary liquidation, sale, dissolution or winding up of the Company, subject to the rights of the series of preferred stock that may from time to time come into existence, the holders of the Convertible Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment shall be made in respect of the Common Stock, an amount per share of Convertible Preferred Stock equal to the Series A Stated Value, Series B Stated Value or the Series C Stated Value, as the case may be, plus all accrued but unpaid dividends thereon to the date fixed for distribution (the “Convertible Preferred Liquidation Amount”). If upon the liquidation, dissolution or winding up of the Company, the assets of the Company available for distribution to its stockholders shall be insufficient to pay the full Convertible Preferred Liquidation Amount, then all the assets so available for distribution to its stockholders shall be

F-17

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

distributed ratably to the holders of the Convertible Preferred Stock in proportion to the aggregate amounts that would be payable to such holders if the assets of the Company were sufficient to pay the full amount to which they were entitled pursuant to this section and nothing more.


	Conversion

Each share of Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time after the issuance of such share, at the office of the Company or any transfer agent for such stock, into fully paid and nonassessable shares of common stock of the Company. The number of shares of common stock to which a holder of Convertible Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the Convertible Preferred Conversion Rate then in effect by the number of shares of Convertible Preferred Stock, being converted. The Convertible Preferred Conversion Rate in effect at any time for conversion of any series of the Convertible Preferred shall be the quotient obtained by dividing (i) the Convertible Preferred Stated Value for such series of Convertible Preferred Stock plus an amount equal to all accrued and unpaid dividends per share of such Convertible Preferred Stock as of the conversion date (the “Dividend Amount”) by (ii) the Conversion Price for such series of Convertible Preferred Stock; provided, however that a holder of Convertible Preferred Stock may elect to receive all or a portion of the Dividend Amount in cash upon conversion of the Convertible Preferred Stock, in which event the portion of the Dividend Amount paid in cash shall not be added to the Convertible Preferred Stated Value in determining the Conversion Rate for such holder of Convertible Preferred Stock. The initial conversion price for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be $3.00, $4.35 and $6.00 respectively.

The initial Conversion Price for each series of Convertible Preferred Stock shall be adjusted from time to time in accordance with the agreement. In accordance with the anti-dilution feature in the Series A Preferred Stock, there was a deemed dividend for the years ended December 31, 2003 and 2004 of $1,139,535 and $5,860,465, respectively. Conversion will occur automatically concurrent with a firm underwritten public offering of not less than $25,000,000, or on the date specified by vote or written consent or agreement of holders of at least 80% of the then outstanding shares of Convertible Preferred Stock voting together as a class on an as-if-converted basis.

The following table summarizes certain information about the Convertible Preferred Stock for each series at September 30, 2005 (unaudited):


							Shares		Undeclared
	Authorized		Issued and		Liquidation		Reserved for		Accrued
	Shares		Outstanding		Preference		Conversion		Dividends

Series A		7,000,000		7,000,000	$	7,485,267		2,495,089	$	485,267
Series B		24,500,000		22,068,966		19,727,839		4,535,136		3,727,839
Series C		11,600,000		11,600,000		12,404,156		2,067,359		804,156

		43,100,000		40,668,966	$	39,617,262		9,097,584	$	5,017,262


9.	Stock Options

During 2002, the Company adopted the Valera Pharmaceuticals Equity Incentive Plan which provides for the granting of nonqualified and incentive stock options, as defined by the Internal Revenue Code, to key employees of the Company at prices not less than the fair market value at the date of grant for incentive stock options granted. The option price for each share of common stock for non-qualified options is determined by the Board of Directors and may be more or less than the fair market value of a share of common stock.

F-18

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In March 2005, the number of options that could be granted to employees to purchase under the Company Equity Incentive Plan was amended to a maximum of 1,833,333 shares of common stock.

In December 2003, the exercise price of all options issued prior to 2003 was amended to $3.00, the fair market value at that time. In accordance with FASB Interpretation (“FIN”) No. 44, the repriced options will be accounted for as variable from the date of the modification to the date the options are exercised, forfeited, or expire. In connection with these options, the Company recorded $3,730,512, net of forfeitures, in deferred stock-based compensation in 2004. Non-cash compensation expense related to these repriced options was $3,031,119 in 2004 and $(487,456) for the nine months ended September 30, 2005 (unaudited).

The following table summarizes option activity for the Company’s common stock for the years ended December 31, 2002, 2003, and 2004 and the nine months ended September 30, 2005:


		Common			Weighted-
		Stock			Average
		Options			Exercise Price

Plan adopted September 23, 2002
	Granted		286,750		$	6.00
	Exercised		—
	Forfeited		—

Outstanding at December 31, 2002			286,750
	Granted		489,275		$	3.00
	Exercised		—
	Forfeited		(3,833	)	$	3.00

Outstanding at December 31, 2003			772,192
	Granted		353,833		$	3.00
	Exercised		—
	Forfeited		(6,600	)	$	3.00

Outstanding at December 31, 2004			1,119,425
	Granted		162,416		$	11.46
	Exercised		—
	Forfeited		(31,583	)	$	3.30

Outstanding at September 30, 2005 (unaudited)			1,250,258

The following table summarizes information about vested stock options outstanding:


	December 31,
							September 30,
	2002		2003		2004		2005

							(unaudited)
Vested Stock Options		71,688		143,375		334,148		369,815
Weighted average exercise price	$	6.00	$	3.00	$	3.00	$	3.18

The following table summarizes information about stock options outstanding at September 30, 2005:

Options

Weighted-

Range of

Outstanding

Average

Exercise

and

Options

Remaining

Exercise

Prices

Exercisable

Vested

Contractual Life

Price

$3.00-$12.00

1,250,258

369,815

8.3

4.08

F-19

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The weighted average fair value of options granted as of September 30, 2005 (unaudited) was $4.02.

In connection with the granting of employee stock options below fair market value in 2004 and during nine months ended September 30, 2005 (unaudited), the Company recorded deferred compensation of $906,440 and $364,865, respectively, net of forfeitures. Deferred compensation is being amortized over the vesting period of the options resulting in non-cash stock-based compensation expense of $73,067 for the year ended December 31, 2004 and $431,793 for the nine months ended September 30, 2005 (unaudited). There was no deferred compensation recorded in prior years.

For the years ended December 31, 2003 and 2004 the Company granted a total of 10,833 and 5,000, respectively, in stock options to certain consultants. For the nine months ended September 30, 2005 the Company granted 10,833 stock options to certain consultants. The Company has accounted for these options in accordance with EITF 96-18 and, accordingly, recorded non-cash expense of $2,708, $51,104 and $44,466 for the years ended December 31, 2003 and 2004 and the nine months ended September 30, 2005 (unaudited), respectively. No options were granted to consultants in 2002.

During the twelve month period ended September 30, 2005, the Company granted stock options with exercise prices as follows:


	Number				Weighted		Weighted
	of		Weighted		Average		Average
	Options		Average		Fair Value		Intrinsic Value
Grants Made During Quarter Ended	Granted		Exercise Price		per Share		per Share

December 31, 2004		229,500	$	3.00	$	16.20	$	13.20
March 31, 2005 (unaudited)		14,500	$	6.00	$	16.20	$	10.20
June 30, 2005 (unaudited)		143,583	$	12.00	$	12.00	$	—
September 30, 2005 (unaudited)		4,333	$	12.00	$	12.00	$	—

The intrinsic value per share is being recognized as compensation expense over the applicable vesting period (which equals the service period).

F-20

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


10.	Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amount used for income tax purposes. The Company’s deferred tax assets relate primarily to net operating loss carryforwards, research and development tax credits, and non-cash stock-based compensation. At December 31, 2003 and 2004 and September 30, 2005, a valuation allowance was recorded to fully offset the net deferred tax asset. The change in the valuation allowance for the years ended December 31, 2003, 2004 was approximately $3,213,000 and $4,913,000, respectively. Significant components of the Company’s deferred tax assets were as follows:


		December 31,

		2003			2004

Deferred tax assets:
	Net operating loss carryforwards	$	4,990,000		$	8,050,000
	Research and development credits		853,000			1,131,000
	Stock-based compensation		—			1,085,000
	Amortization of stock-based compensation		—			156,000
	Non-employee stock compensation		1,000			22,000
	Other		—			353,000

Total gross deferred tax assets			5,844,000			10,797,000
Deferred tax liabilities:
	Depreciation and amortization		111,000			151,000

Total gross deferred tax liabilities			111,000			151,000
Valuation allowance for deferred tax assets			(5,733,000	)		(10,646,000	)

Net deferred tax assets		$	—		$	—

As of December 31, 2004, the Company had federal net operating loss carryforwards of approximately $20,000,000. The net operating loss carryforwards will expire at various dates beginning in 2022, if not utilized. The Company has research and development tax credit carry forwards at December 31, 2004, 2005 of approximately $1,131,000, which will begin to expire in 2022. If an ownership change, as defined under Internal Revenue Code Section 382, occurs the use of these carry forwards may be subject to limitation.

Benefit (provision) for income tax consists of:


	For the Year
	December 31,

	2002		2003		2004

Federal	$	—	$	—	$	—
State		—		—		243,618

Total	$	—	$	—	$	243,618

In 2004, the New Jersey Economic Development Authority approved the Company’s application to sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program (the “Program”). During the fourth quarter of 2004, the Company recognized $243,618 from the sale of State of New Jersey income tax benefits. The Program requires that the Company maintain certain employment levels in New Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey.

F-21

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

A reconciliation of the statutory tax rates and the effective tax rates for the periods ended:


	December 31,

	2002			2003			2004

Statutory rate		(34	)%		(34	)%		(34	)%
State and local income taxes (net of federal tax benefit)		(6	)		(6	)		(6	)
Research and development tax credits		(4	)		(4	)		(2	)
Alternative minimum tax		—			—			—
Change in valuation allowance		44			44			42

		0	%		0	%		0	%

We have incurred net operating losses since inception and, consequently, have not recorded any federal or state income tax provision.


11.	Related Party Transactions

In June 2004, David S. Tierney, the Company’s President and CEO, loaned the Company $200,000 at prime plus 1% above the UBS Margin Interest Rate. The loan was repaid in November 2004. Interest in the amount of $1,574 is included in interest expense for 2004.


12.	Pension Plan

The Company sponsors a 401(k) plan for eligible employees. The Company’s contributions to the plan are discretionary and are 50% of the employee’s contribution, not to exceed 5% of total compensation. The total Company 401(k) contributions amounted to approximately $40,000, $49,000 and $55,358 for the years ended December 31, 2002, 2003 and 2004, respectively. Company contributions for the nine months ended September 30, 2005 were $112,739.


13.	Acquisition of Product

In September 2005, the Company entered into an agreement with Anthra Pharmaceuticals, Inc. to acquire certain assets of Anthra associated with its valrubicin business in the U.S. and Canada. If the transaction closes as planned, the Company will pay $600,000 for the assets, and may make additional payments based upon net sales and certain milestone payments based upon achieving certain sales levels. Anthra’s valrubicin business involved the manufacture and sale of valrubicin for use in the treatment of bladder cancer. The product was distributed in the U.S. and Canada by third party partners of Anthra. In the U.S., the product was distributed under the trademark Valstar. The product is not covered by any patents and its orphan drug status has expired.

Anthra’s valrubicin product was taken off the market in 2002 due to a manufacturing problem and a lack of resources to address the problem. The Company has analyzed the manufacturing issues and believe that we have determined the cause of, and a solution to, the problem. As such, the Company has agreed to acquire certain assets of Anthra required for the manufacture, marketing and sale of valrubicin in the U.S. and Canada including the NDA filed with the FDA, the drug master file, the Canadian regulatory submission and all data produced by or on behalf of Anthra in support of the NDA and other governmental approvals, or in any other scientific experiment or clinical trial relating to valrubicin. The acquisition is expected to close during the first quarter of 2006, subject to various conditions including (i) that the FDA has not indicated by closing that it will require a Phase III clinical trial as a condition to the reintroduction of the product in the U.S. and (ii) termination of Anthra’s agreement with the existing distributor in the U.S. We initiated discussions with the FDA in the fourth quarter of 2005 regarding the Company’s plan to reintroduce the product into the U.S. market and in January 2006, the FDA accepted

F-22

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

the Company’s plan. The Company expects to address reintroduction of the product in Canada following reintroduction in the U.S. and expect distribution to be handled by the existing Canadian distributor.

The purchase price payable for the product consists of guaranteed payments, revenue sharing payments based on our sales and receipt of license fees and additional payments based on Valera’s sales performance. Subject to certain exceptions, Anthra’s indemnification obligations survive for two years after closing and are funded by setoff against the purchase price payable to Anthra under the agreement.

14. Subsequent Events (Unaudited)

Credit Line Agreement

In October 2005, the Company entered into a two year, $7,500,000 line of credit with Merrill Lynch Capital. Under the line of credit, the amount the Company may borrow at any given time is dependent upon its accounts receivable balance and related aging of such accounts. Borrowings under the line of credit bear an initial interest rate at the sum of the one-month LIBOR rate plus 3.75%. The Company is subject to certain covenants under the credit agreement. In connection with the credit agreement, the Company has pledged all of its assets, with the exception of intellectual property, to Merrill Lynch. In November 2005, the Company drew down $1,500,000 under the line of credit.

Teva-Tuteur

In December 2005, the Company entered into an exclusive distribution agreement with Teva-Tuteur for distribution of Vantas in Argentina. The initial term of the agreement ends on the date that is ten years after the date on which the first regulatory approval allowing sales of Vantas to proceed in Argentina, is granted, unless terminated earlier. The agreement automatically renews for additional periods of one year each unless notice of termination is given. Either party may terminate the agreement if the other party becomes insolvent or is involved in bankruptcy proceedings or if the other party fails to cure a material breach within a specified time period after receipt of notice or the other party is unable to fully perform its obligations for one hundred-fifty days as a result of a force majeure event. Either party may terminate the agreement on an indication-by-indication basis if regulatory approval of Vantas for such indication is finally denied by the regulatory authority within Argentina. Terminations with respect to one or more, but not all, forms, dosages or indications will apply to the affected forms, dosages or indications. Additionally, the Company may terminate the agreement if Teva-Tuteur fails to purchase a specified number of units of Vantas in a calendar year. The Company may also terminate the agreement on an indications-by-indications basis if Teva-Tuteur fails to file necessary marketing approval applications within the required time.

Under the agreement, Teva-Tuteur will be the exclusive distributor of Vantas in Argentina. Teva-Tuteur is required to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas in Argentina for each indication for which we own or hold a regulatory approval anywhere in the world. In connection with obtaining regulatory approval for Vantas, the Company is required to supply Teva-Tuteur with all data and information in the Company’s possession or control as is necessary for that purpose. The Company also granted Teva-Tuteur an exclusive license to use the trademarks owned and approved by the Company, in connection with the marketing, distribution and sale of Vantas. The Company has given Teva-Tuteur the non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas in each approved indication in Argentina.

Teva-Tuteur granted the Company the right to use Teva-Tuteur’s trademarks on labeling of Vantas. The Company has the sole right and responsibility to manufacture, assemble, package and label Vantas; provided that Teva-Tuteur is responsible for any and all Argentinean-specific labeling. The Company has agreed not to supply Vantas for distribution or sale for use in any indications to any other party except Teva-Tuteur. Teva-Tuteur shall pay the Company a flat transfer fee per unit, which fee is subject to an index-base adjustment. Beginning in the first calendar year after the first commercial sale of Vantas in

F-23

VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Argentina, Teva-Tuteur must make certain minimum purchases during each calendar year unless it provides written notice one hundred and twenty (120) days prior to the end of any such calendar year, in which case Teva-Tuteur is relieved of the minimum purchase requirement for such calendar year. If Teva-Tuteur provides such notice, the Company has the option to (i) convert the exclusive right granted to Teva-Tuteur into a non-exclusive right effective as early as the date of the receipt of such written notice from Teva-Tuteur or (ii) terminate the agreement effective as early as the date of the receipt of such written notice from Teva-Tuteur.


15.	Selected Quarterly Financial Data (Unaudited)


	Quarter Ended

	March 31			June 30			September 30			December 31

2003
Total revenue	$	1,484		$	1,585		$	—		$	4,284
Loss from operations		(1,362,145	)		(1,504,341	)		(1,867,930	)		(2,835,375	)
Net loss		(1,369,119	)		(1,503,083	)		(1,855,843	)		(2,828,612	)
Net loss attributable to common shareholders		(1,369,119	)		(2,549,060	)		(1,855,843	)		(2,922,170	)
Basic and diluted net loss attributable to common shareholders per common share	$	(0.82	)	$	(1.53	)	$	(1.11	)	$	(1.75	)
2004
Total revenue	$	—			—		$	134,636		$	5,511,286
Cost of product sales		—			—			—			608,150
Loss from operations		(2,017,870	)		(3,539,880	)		(3,569,788	)		(3,132,982	)
Benefit for income taxes		—			—			—			243,618
Net loss		(2,016,161	)		(3,545,041	)		(3,567,872	)		(2,893,980	)
Net loss attributable to common shareholders		(2,016,161	)		(3,640,800	)		(9,332,578	)		(2,893,980	)
Basic and diluted net loss attributable to common shareholders per common share	$	(1.21	)	$	(2.18	)	$	(5.60	)	$	(1.74	)

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

F-24

VALERA PHARMACEUTICALS, INC.

VALUATION AND QUALIFYING ACCOUNTS SCHEDULE


		Balance at		Charged to		Charged to					Balance at
		Beginning of		Cost and		Other					End of
		Period		Expenses		Accounts		Deductions			Period

For the nine months ended September 30, 2005:
Allowance for Sales Returns and Adjustments			343,753		1,685,436		—		1,282,958			746,231
For the year ended December 31, 2004:
	Allowance for Sales Returns and Adjustments		—		398,353		—		(54,600	)		343,753
For the year ended December 31, 2003:
	Allowance for Sales Returns and Adjustments		—		—		—		—			—
For the year ended December 31, 2002:
	Allowance for Sales Returns and Adjustments		—		—		—		—			—
For the nine months ended September 30, 2005:
Allowance for Doubtful Accounts and Cash Discounts			91,272		353,769		—		148,227			296,814
For the year ended December 31, 2004:
	Allowance for Doubtful Accounts and Cash Discounts		—		91,272		—		—			91,272
For the year ended December 31, 2003:
	Allowance for Doubtful Accounts and Cash Discounts		—		—		—		—			—
For the year ended December 31, 2002:
	Allowanced for Doubtful Accounts and Cash Discounts		—		—		—		—			—
For the year ended December 31, 2004:
	Tax Valuation Allowance		5,733,000		4,913,000		—		—			10,646,000
For the year ended December 31, 2003:
	Tax Valuation Allowance		2,521,000		3,212,000		—		—			5,733,000
For the year ended December 31, 2002:
	Tax Valuation Allowance		94,000		2,427,000		—		—			2,521,000
For the nine months ended September 30, 2005:
	Inventory Valuation Reserve		90,666		1,017,005		—		113,491			994,180
For the year ended December 31, 2004:
	Inventory Valuation Reserve		—		90,666		—		—			90,666
For the year ended December 31, 2003:
	Inventory Valuation Reserve		—		—		—		—			—
For the year ended December 31, 2002:
	Inventory Valuation Reserve		—		—		—		—			—

F-25

Dealer Prospectus Delivery Obligation

Through and including , 2006 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS


Item 13.	*Other Expenses of Issuance and Distribution*

The following table sets forth the costs, other than underwriting discounts and commission, payable by us in connection with the sale of common stock being registered. All expenses, except the SEC registration fee and the NASD filing fee, are estimated.


		Amount
		to be Paid

Securities and Exchange Commission registration fee		$	5,537
NASD filing fee			7,975
Nasdaq National Market listing fee			105,000
Printing and engraving expenses			350,000
Transfer agent and registrar fees and expenses			30,000
Legal fees and expenses			850,000
Accountants’ fees and expenses			500,000
Blue Sky fees and expenses (including legal fees)			10,000
Miscellaneous expenses			196,488

	Total	$	2,055,000


Item 14.	*Indemnification of Directors and Officers.*

Our certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law (DGCL). Section 145 of the DGCL provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlements actually and reasonably incurred by the person in connection with a threatened, pending, or completed action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, indemnification is limited to expenses (including attorney fees) actually and reasonably incurred by the person in connection with defense or settlement of such action or suit and no indemnification shall be made with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

In addition, to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding described above (or claim, issue, or matter therein), such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be advanced by the corporation upon receipt of an undertaking by such person to repay such amount if it is ultimately determined that such person is not entitled to indemnification by the corporation under Section 145 of the DGCL.

Our certificate of incorporation provides that we will, to the fullest extent permitted by law, indemnify, and upon request shall advance expenses to, any person made or threatened to be made a party

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to an action, suit or proceeding by reason of the fact that he or she (or his or her legal representative) is or was our director or officer or serves or served at any other corporation, partnership, joint venture, limited liability company, trust or other enterprise in a similar capacity or as an employee or agent at our request, including service with respect to employee benefit plans or public service or charitable organizations, against all expense and liability (including attorneys’ fees and disbursements, court costs, damages, fines, amounts paid or to be paid in settlement, and excise taxes or penalties) incurred in connection with such action, suit or proceeding.

Our certificate of incorporation also provides that, to the fullest extent permitted by law, a director of the corporation shall not be personally liable to the corporation or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit.

Any repeal or modification of these provisions of our certificate of incorporation or of our bylaws shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of that director occurring prior to the amendment or repeal.

We expect to obtain insurance policies under which our directors and officers are insured, within the limits and subject to the limitations of those policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been directors or officers.

Reference is also made to the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement for information concerning the underwriters’ obligation to indemnify us and our officers and directors in certain circumstances.


Item 15.	*Recent Sales of Unregistered Securities.*

Set forth below is information regarding securities sold by us since January 1, 2002 which were not registered under the Securities Act.


	(a) Issuances and sales of preferred stock.


	(1) In May 2003, we issued and sold an aggregate of 15,172,414 shares of our series B preferred stock at a price per share of $0.725 to ten accredited investors for an aggregate offering price of approximately $11,000,000.

	(2) In June 2003, we issued and sold an aggregate of 1,379,310 shares of our series B preferred stock at a price per share of $0.725 to three accredited investors for an aggregate offering price of approximately $1,000,000.

	(3) In December 2003, we issued and sold an aggregate of 2,068,966 shares of our series B preferred stock at a price per share of $0.725 to an accredited investor for an aggregate offering price of approximately $1,500,000.

	(4) In June 2004, we issued and sold an aggregate of 3,448,276 shares of our series B preferred stock at a price per share of $0.725 to two accredited investors for an aggregate offering price of approximately $2,500,000.

	(5) In August 2004, we issued and sold an aggregate of 11,600,000 shares of our series C preferred stock at a price per share of $1.00 to eleven accredited investors for an aggregate offering price of approximately $11,600,000.


	No underwriters were involved in the foregoing sales of securities. The securities described in this paragraph (a) of Item 15 were issued to a combination of U.S. investors and one Canadian investor 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

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thereunder relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. The purchasers of shares of our 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 sales of these securities were made without general solicitation or advertising.


	(b) Stock Option Grants.



	(1) In October 2002, we issued to certain of our employees and directors options to purchase an aggregate of 286,750 shares of our common stock at an exercise price of $1.00 per share. The exercise price was lowered to $3.00 per share in December 2003. The number of shares underlying the grants have been adjusted to reflect a reverse stock split of our common stock in a ratio of one-for-six.



	(2) In December 2003, we issued to certain of our employees, directors and consultants options to purchase an aggregate of 489,275 shares of our common stock at an exercise price of $3.00 per share.



	(3) In June 2004, we issued to one of our employees options to purchase an aggregate of 833 shares of our common stock at an exercise price of $3.00 per share.



	(4) In July 2004, we issued to certain of our employees options to purchase an aggregate of 99,167 shares of our common stock at an exercise price of $3.00 per share.



	(5) In August 2004, we issued to certain of our employees options to purchase an aggregate of 17,500 shares of our common stock at an exercise price of $3.00 per share.



	(6) In September 2004, we issued to certain of our employees options to purchase an aggregate of 4,167 shares of our common stock at an exercise price of $3.00 per share.



	(7) In October 2004, we issued to certain of our employees, directors and a consultant options to purchase an aggregate of 232,167 shares of our common stock at an exercise price of $3.00 per share.



	(8) In January 2005, we issued to certain of our employees and a consultant options to purchase an aggregate of 5,333 shares of our common stock at an exercise price of $6.00 per share.



	(9) In February 2005, we issued to certain of our employees options to purchase an aggregate of 9,167 shares of our common stock at an exercise price of $6.00 per share.



	(10) In June 2005, we issued to certain of our employees and consultants options to purchase an aggregate of 143,583 shares of our common stock at an exercise price of $12.00 per share.



	(11) In September 2005, we issued to certain of our employees options to purchase an aggregate of 4,333 shares of our common stock at an exercise price of $12.00 per share.



	(12) In December 2005, we issued to certain of our employees options to purchase an aggregate of 31,167 shares of our common stock at an exercise price of $12.00 per share.


	The stock option grants described in this paragraph (b) of Item 15 were made pursuant to written compensatory plans or agreements in reliance on the exemption provided by Rule 701 promulgated under the Securities Act.

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Item 16.	*Exhibits and Financial Statement Schedules.*

(a) Exhibits.


Exhibit
Number			Exhibit

	1	.1*	Form of Underwriting Agreement
	3	.1	Amended and Restated Certificate of Incorporation
	3	.2*	Certificate of Amendment to Amended and Restated Certificate of Incorporation (to be effective from effectiveness of the registration statement until consummation of the offering)
	3	.3*	Amended and Restated Certificate of Incorporation (to be effective upon consummation of the offering)
	3	.4	Bylaws
	3	.5*	Amended and Restated Bylaws (to be effective upon consummation of the offering)
	4	.1*	Specimen Common Stock Certificate
	4	.2	Second Amended and Restated Investor Rights Agreement dated August 16, 2004
	4	.3	Form of Incentive Stock Award Agreement
	4	.4	Form of Non-Qualified Stock Option Agreement
	5	.1*	Opinion of Pepper Hamilton LLP
	10	.1	Executive Employment Agreement between Valera Pharmaceuticals, Inc. and David S. Tierney dated September 16, 2003
	10	.2	License and Distribution Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002
	10	.3	Investment Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002
	10	.4	License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Key Oncologics dated September 17, 2003
	10	.5	Termination Agreement, License Back and Option between Hydro Med Sciences, Inc. and Shire US Inc. dated December 21, 2001
	10	.6	Termination of Agreement dated September 12, 1990 between National Patent Development Corporation and The Population Council, Inc. dated October 1, 1997
	10	.7	Amendment to the Termination of the Joint Development Agreement between GP Strategies Corporation and The Population Council, Inc. dated November 29, 2001
	10	.8	Amendment No. 2 to Termination Agreement between Valera Pharmaceuticals, Inc. and The Population Council, Inc. dated August 31, 2004
	10	.9	Lease Agreement between National Patent Development Corporation and Cedar Brook Corporate Center, L.P. dated October 6, 1997
	10	.10	Amendment to Lease between Valera Pharmaceuticals, Inc. and Cedar Brook Corporate Center, L.P. dated January 7, 2004
	10	.11	Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar Brook 7 Corporate Center, L.P. dated March 8, 2005
	10	.12	Contribution Agreement between Hydro Med Sciences, Inc. and GP Strategies Corporation dated June 30, 2000
	10	.13	License and Distribution Agreement between Valera Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated January 28, 2005
	10	.14	Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan
	10	.15	Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC dated as of March 21, 2005**
	10	.16	Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC (on behalf of U.S. Urology Practices) dated as of March 21, 2005**
	10	.17	Agreement between National Patent Development Corporation and Dento-Med Industries, Inc. dated November 30, 1989
	10	.18	Fee for Services Agreement between Valera Pharmaceuticals, Inc. and Besse Medical Supply dated as of March 21, 2005**
	10	.19	Collaboration and Development Agreement between Valera Pharmaceuticals, Inc. and Alpex Pharma S.A. dated April 6, 2005**
	10	.20	Form of Change in Control Agreement with Executive Officers

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Exhibit
Number			Exhibit

	10	.21	Asset Purchase Agreement between Valera Pharmaceuticals, Inc. and Anthra Pharmaceuticals, Inc. dated as of September 28, 2005**
	10	.22	Credit Agreement between Valera Pharmaceuticals, Inc. and Merrill Lynch Capital dated October 20, 2005
	10	.23	Distribution Agreement between Valera Pharmaceuticals, Inc. and Teva-Tuteur dated December 9, 2005
	21	.1	List of Subsidiary
	23	.1*	Consent of Ernst & Young LLP
	23	.2*	Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
	24	.1	Power of Attorney (set forth on the signature page to the registration statement filed with the SEC on Form S-1 on March 14, 2005)

* Filed herewith.

** Portions omitted pursuant to a request for confidential treatment under Rule 406.

(b) Financial Statement Schedules.

Financial statements and schedule filed as a part of this registration statement are listed in the Index to Financial Statements on page 82. All other financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.


Item 17.	*Undertakings*

(1) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(3) The undersigned registrant hereby undertakes that:


	(i) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

	(ii) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in City of Cranbury, State of New Jersey on January 17, 2006.


	VALERA PHARMACEUTICALS, INC.


	By:	/s/ David S. Tierney, M.D.


	Name: David S. Tierney, M.D.


	Title:	President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons, in the capacities and on the dates indicated.


	Title	Date
Signature


/s/ David S. Tierney, M.D. David S. Tierney, M.D.	President, Chief Executive Officer and Director (Principal Executive Officer)	January 17, 2006

/s/ Andrew T. Drechsler Andrew T. Drechsler	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	January 17, 2006

/s/ James C. Gale* James C. Gale	Chairman of the Board of Directors	January 17, 2006

/s/ David Dantzker, M.D.* David Dantzker, M.D.	Director	January 17, 2006

/s/ Jerome Feldman* Jerome Feldman	Director	January 17, 2006

/s/ Hubert Huckel, M.D.* Hubert Huckel, M.D.	Director	January 17, 2006

/s/ Jeffrey Krauss* Jeffrey Krauss	Director	January 17, 2006

/s/ Ogden R. Reid* Ogden R. Reid	Director	January 17, 2006

/s/ Howard Silverman* Howard Silverman	Director	January 17, 2006

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		Title	Date
Signature


/s/ John T. Spitznagel* John T. Spitznagel		Director	January 17, 2006

*By:	/s/ David S. Tierney, M.D.
Name: David S. Tierney, M.D.
	Attorney-in-fact

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INDEX TO EXHIBITS


Exhibit
Number			Exhibit

	1	.1*	Form of Underwriting Agreement
	3	.1	Amended and Restated Certificate of Incorporation
	3	.2*	Certificate of Amendment to Amended and Restated Certificate of Incorporation (to be effective from effectiveness of the registration statement until consummation of the offering)
	3	.3*	Amended and Restated Certificate of Incorporation (to be effective upon consummation of the offering)
	3	.4	Bylaws
	3	.5*	Amended and Restated Bylaws (to be effective upon consummation of the offering)
	4	.1*	Specimen Common Stock Certificate
	4	.2	Second Amended and Restated Investor Rights Agreement dated August 16, 2004
	4	.3	Form of Incentive Stock Award Agreement
	4	.4	Form of Non-Qualified Stock Option Agreement
	5	.1*	Opinion of Pepper Hamilton LLP
	10	.1	Executive Employment Agreement between Valera Pharmaceuticals, Inc. and David S. Tierney dated September 16, 2003
	10	.2	License and Distribution Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002
	10	.3	Investment Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002
	10	.4	License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Key Oncologics dated September 17, 2003
	10	.5	Termination Agreement, License Back and Option between Hydro Med Sciences, Inc. and Shire US Inc. dated December 21, 2001
	10	.6	Termination of Agreement dated September 12, 1990 between National Patent Development Corporation and The Population Council, Inc. dated October 1, 1997
	10	.7	Amendment to the Termination of the Joint Development Agreement between GP Strategies Corporation and The Population Council, Inc. dated November 29, 2001
	10	.8	Amendment No. 2 to Termination Agreement between Valera Pharmaceuticals, Inc. and The Population Council, Inc. dated August 31, 2004
	10	.9	Lease Agreement between National Patent Development Corporation and Cedar Brook Corporate Center, L.P. dated October 6, 1997
	10	.10	Amendment to Lease between Valera Pharmaceuticals, Inc. and Cedar Brook Corporate Center, L.P. dated January 7, 2004
	10	.11	Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar Brook 7 Corporate Center, L.P. dated March 8, 2005
	10	.12	Contribution Agreement between Hydro Med Sciences, Inc. and GP Strategies Corporation dated June 30, 2000
	10	.13	License and Distribution Agreement between Valera Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated January 28, 2005
	10	.14	Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan
	10	.15	Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC dated as of March 21, 2005**
	10	.16	Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC (on behalf of U.S. Urology Practices) dated as of March 21, 2005**
	10	.17	Agreement between National Patent Development Corporation and Dento-Med Industries, Inc. dated November 30, 1989
	10	.18	Fee for Services Agreement between Valera Pharmaceuticals, Inc. and Besse Medical Supply dated as of March 22, 2005**
	10	.19	Collaboration and Development Agreement between Valera Pharmaceuticals, Inc. and Alpex Pharma S.A. dated April 6, 2005**


Exhibit
Number			Exhibit

	10	.20	Form of Change in Control Agreement with Executive Officers
	10	.21	Asset Purchase Agreement between Valera Pharmaceuticals, Inc. and Anthra Pharmaceuticals, Inc. dated as of September 28, 2005**
	10	.22	Credit Agreement between Valera Pharmaceuticals, Inc. and Merrill Lynch dated October 20, 2005
	10	.23	Distribution Agreement between Valera Pharmaceuticals, Inc. and Teva-Tuteur dated December 9, 2005
	21	.1	List of Subsidiary
	23	.1*	Consent of Ernst & Young LLP
	23	.2*	Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
	24	.1	Power of Attorney (set forth on the signature page to the registration statement filed with the SEC on Form S-1 on March 14, 2005)

* Filed herewith.

** Portions omitted pursuant to a request for confidential treatment under Rule 406.

Valera Pharmaceuticals Inc S-1/A