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ITEM 8. Financial Statements and Supplementary Data

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2012

OR

o

 

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

For the transition period from                                  to                                   .

Commission File Number: 000-50855

Auxilium Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  23-3016883
(I.R.S. Employer Identification No.)

640 Lee Road
Chesterbrook, PA

(Address of principal executive offices)

 

19087
(Zip Code)

(484) 321-5900
(Registrant's telephone number, including area code)

         Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, Par Value $0.01 Per Share   The NASDAQ Global Market

         Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None

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

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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

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

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

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

         The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on The NASDAQ Global Market as of June 30, 2012, was approximately $1.32 billion.

         As of February 21, 2013, the number of shares outstanding of the issuer's common stock, $0.01 par value per share, was 49,838,949.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's definitive Proxy Statement for its 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2012.

   


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AUXILIUM PHARMACEUTICALS, INC.

FORM 10-K

December 31, 2012

TABLE OF CONTENTS

PART I

 

ITEM 1.

 

Business

   
4
 

ITEM 1A.

 

Risk Factors

   
38
 

ITEM 1B.

 

Unresolved Staff Comments

   
69
 

ITEM 2.

 

Properties

   
69
 

ITEM 3.

 

Legal Proceedings

   
70
 

ITEM 4.

 

Mine Safety Disclosures

   
72
 

PART II

 

ITEM 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   
72
 

ITEM 6.

 

Selected Financial Data

   
75
 

ITEM 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

   
76
 

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

   
98
 

ITEM 8.

 

Financial Statements and Supplementary Data

   
100
 

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   
145
 

ITEM 9A.

 

Controls and Procedures

   
145
 

ITEM 9B.

 

Other Information

   
146
 

PART III

 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

   
147
 

ITEM 11.

 

Executive Compensation

   
147
 

ITEM 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   
147
 

ITEM 13.

 

Certain Relationships and Related Transactions, and Director Independence

   
147
 

ITEM 14.

 

Principal Accountant Fees and Services

   
147
 

PART IV

 

ITEM 15.

 

Exhibits, Financial Statement Schedules

   
148
 

SIGNATURES

       

EXHIBIT INDEX

       

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        This Report on Form 10-K (the "Report") contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical information contained herein are forward-looking statements and may contain projections relating to financial results, economic conditions, trends and known uncertainties. These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed in this Report. You should review the "Risk Factors" section of this Report for a discussion of the important factors that could cause actual results to differ materially from those described in or implied by the forward-looking statements contained in this Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly reissue these forward-looking statements to reflect events or circumstances that arise after the date hereof.

        We obtained the market and competitive position data used throughout this Report from our own research, surveys or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data. Similarly, we believe our internal research is reliable but it has not been verified by any independent sources.

        This Report may include discussion of certain clinical studies relating to our products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data.

        As used herein, the terms "Company", "Auxilium", "we", "us", or "our", refer to Auxilium Pharmaceuticals, Inc.

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PART I

ITEM 1.    Business

COMPANY OVERVIEW

        We are a specialty biopharmaceutical company, incorporated in Delaware on July 23, 1999. We focus on developing and marketing products to predominantly specialist audiences. We are a fully integrated company and had approximately 526 employees as of December 31, 2012, including approximately 287 employees in our commercial organization, approximately 122 employees in manufacturing and quality, approximately 60 employees in research and development and approximately 57 employees providing administrative support.

        We reported net revenues in 2012 of $395.3 million compared to $264.3 million reported in 2011. Our fourth quarter 2012 net revenues included $93.6 million related to previously received and deferred up-front and milestone payments related to our European collaboration with Pfizer, Inc. ("Pfizer"), which were recognized as a result of our agreement to mutually terminate the collaboration effective April 24, 2013, as previously announced on November 7, 2012.

        We reported net income of $85.9 million, or $1.74 per share, fully diluted, compared to a net loss of ($32.9) million, or ($0.69) per share, fully diluted, reported for 2011. As a result of the agreement to mutually terminate the Pfizer European collaboration agreement, our fourth quarter 2012 net income included $85.2 million, reflecting the recognition of the $93.6 million in deferred revenues noted above, offset by the recording of $8.4 million in previously deferred expenses.

        As of December 31, 2012, we had $157.4 million in cash, cash equivalents and short-term investments and no debt. In January 2013, we raised $350 million through the issuance of convertible senior notes (the "2018 Convertible Notes"). The net proceeds from the 2018 Convertible Notes offering were approximately $338.7 million after deducting underwriters' discounts and commissions and estimated offering expenses. We used approximately $28.5 million of the net proceeds from the offering to pay the cost of the note hedge transactions (after such cost was partially offset by the proceeds from the sale of the warrants) and we intend to use the remainder of the net proceeds from the offering for general corporate purposes, which may include the acquisition (including by merger, purchase, license or otherwise) of businesses, products, product rights or technologies.

        We currently market two products: Testim® testosterone gel and XIAFLEX® (collagenase clostridium histolyticum (also known as "CCH" for development purposes)).

        Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim is approved in the U.S., Canada and much of Europe for the treatment of hypogonadism.

        Testim worldwide net revenues for 2012 were $237.5 million, a 14% increase over the $207.9 million recorded in 2011.

        We commercialize Testim in the U.S., while Ferring International Center S.A. ("Ferring") and Paladin Labs Inc. ("Paladin") market Testim on our behalf in certain European countries and Canada, respectively. Commencing in July 2012, GlaxoSmithKline LLC ("GSK") also markets Testim in the U.S. pursuant to a co-promotion agreement we and GSK entered into in May 2012. Testim provides a medically necessary clinical benefit to patients and represents an attractive and profitable revenue platform in the testosterone replacement therapy ("TRT") market in the U.S., which was $2.1 billion in 2012 and exhibited growth of 31% as more large pharmaceutical companies launched products to this underserved market.

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        XIAFLEX is a proprietary, injectable clostridial collagenase enzyme approved by the U.S. Food and Drug Administration ("FDA") for the treatment of Dupuytren's contracture ("Dupuytren's" or "DC") in adult patients with a palpable cord. Dupuytren's is a condition that affects the connective tissue that lies beneath the skin in the palm. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient's fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of Dupuytren's in the U.S. in March 2010, and currently field a sales force covering 62 territories and 20 reimbursement specialists. They are supported by a group of eight medical scientists.

        U.S. XIAFLEX net revenues increased 31% to $55.2 million in 2012, compared to $42.2 million in 2011, excluding the $1.8 million revenue benefit from a 2011 change in revenue recognition. Worldwide net revenues for XIAFLEX were $157.8 million for the year ended December 31, 2012, compared to $56.4 million for the year ended December 31, 2011. The 2012 net revenues include $93.6 million related to previously received and deferred up-front and milestone payments related to our European collaboration with Pfizer which were recognized as a result of the mutual termination of the collaboration. Of the $93.6 million revenue recorded, $92.0 million represents the change in estimate recorded in the fourth quarter of 2012 to reflect the shortened term of the European collaboration contract.

        On December 27, 2012, the FDA accepted for filing and granted standard review status to our supplemental Biologics License Application ("sBLA") for XIAFLEX for the treatment of Peyronie's disease ("Peyronie's" or "PD"). The FDA has notified us that it is not presently planning to take this application to an Advisory Committee meeting; however, we can give no assurance that it will not require an Advisory Committee meeting in the future. Under the Prescription Drug User Fee Act ("PDUFA"), the FDA is expected to take action on this application by September 6, 2013.

        We have partnered with Pfizer for development and commercialization of XIAPEX® (EU tradename for XIAFLEX) for Dupuytren's and Peyronie's disease in Europe and certain Eurasian countries. On November 6, 2012, we and Pfizer mutually agreed to terminate this arrangement, effective April 24, 2013. We are currently evaluating all of our options for the continuing commercialization of XIAPEX for the treatment of Dupuytren's and for gaining approval for XIAPEX for the treatment of Peyronie's in the EU. We have partnered with Asahi Kasei Pharma Corporation ("Asahi Kasei") for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Japan. We have also partnered with Actelion Pharmaceuticals Ltd. ("Actelion") for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico. In July 2012, we were granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. The Marketing Authorization was subsequently transferred to Actelion and they expect to make XIAFLEX available to patients in Canada in the first half of 2013. We are seeking a partner or partners for development and commercialization in the rest of the world.

        Our current product pipeline includes:

    CCH

        Phase III:

    XIAFLEX for the treatment of Peyronie's with our sBLA having been accepted for filing in December 2012 with a PDUFA date scheduled for September 6, 2013

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    Phase II:

    XIAFLEX for the treatment of Adhesive Capsulitis with top-line data expected in the first quarter of 2013

    XIAFLEX for the treatment of edematous fibrosclerotic panniculopathy with top-line data having been reported in the fourth quarter of 2012 and the initiation of a Phase IIa trial expected to commence in the second half of 2013

    Testosterone

        We expect to commence clinical studies in 2013 for our high concentration testosterone gel product.

        Our vision is to build a rapidly growing, profitable and sustainable biopharmaceutical company. To achieve this vision we plan to:

    maximize revenues of Testim and XIAFLEX in the currently approved indications;

    execute a successful launch of XIAFLEX for the treatment of Peyronie's, if approved by the FDA;

    deliver on our current product pipeline;

    build out our business and development pipeline in specialty therapeutic areas through corporate development and licensing activities; and

    continue our focus on financial discipline.

        In the short term, we plan to focus on commercial execution with respect to Testim and XIAFLEX for Dupuytren's, successfully launching XIAFLEX for Peyronie's, if approved by the FDA, bringing additional indications for XIAFLEX to market, and pursuing opportunities for growth through in-licensing or acquisition activities in our current or additional specialty therapeutic areas. We believe that we are well positioned to be a profitable and sustainable specialty biopharmaceutical company by executing on these core strategic initiatives. We believe that we can further leverage our sales forces and our expertise in clinical development and regulatory strategy with the addition of new products. We plan to be opportunistic and nimble with respect to corporate development and licensing opportunities. We will explore opportunities to add marketed products and/or product opportunities that we believe represent a good strategic fit and are fiscally responsible. Although we may seek products that have a therapeutic fit with XIAFLEX or Testim, we believe that the core competencies we have with respect to drug development and commercialization can be applied to a number of other specialty focused therapeutic areas.

MARKETED PRODUCTS

    Testim

        Testim is a proprietary, topical 1% testosterone once-a-day gel that treats hypogonadism by restoring normal testosterone blood levels for a 24-hour period following application and sustaining them in that range when used daily. Testim is packaged in convenient, easy-to-open, single-use tubes. Patients apply Testim once per day to the upper arms and shoulders, enabling Testim's active ingredient, testosterone, to be absorbed through the skin and into the bloodstream.

        Hypogonadism market.    Hypogonadism, or low testosterone, is a disorder that affects millions of men in the U.S. A 2006 study showed that 39% of men over 45 years of age may have low testosterone (total testosterone levels below 300 ng/dL). Based on the 2010 U.S. Census Bureau estimates, we believe there are approximately 59 million U.S. men aged 45 and older with hypogonadism. The effects

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of low testosterone lead to symptoms such as low energy, diminished libido, adverse changes in body composition, irritability and poor concentration. Hypogonadism also affects a high percentage of men with certain co-morbidities regardless of age. The 2006 study documented associations with other co-morbidities such as: obesity (52%) and diabetes (50%). Other articles have highlighted associations with other conditions: AIDS (50%), hypertension (42%), hyperlipidemia (40%), erectile dysfunction (19%) and up to 74% of men being treated with high doses of opioids for chronic pain.

        TRT is the standard treatment for hypogonadism. The total number of prescriptions within the TRT market has grown from 1.0 million to 7.0 million between 2000 and 2012. Before 2000, the TRT market consisted of oral, injectable and patch therapies. In 2000, the first topical gel was introduced, and this product segment has been the driver of much of the total growth in the TRT market. The gel segment accounted for approximately 67% of the total prescriptions and 89% of the total value in the TRT market in 2012. Despite this growth, it was estimated in 2006 that only approximately 10% of men with hypogonadism currently were receiving TRT. According to our physician research, this low diagnosis rate stems primarily from low patient and physician awareness of the symptoms, treatment options and non-standardized screening methods.


U.S. Prescription TRT Market

GRAPHIC

        The once daily gel segment has experienced a 37% compound annual growth rate since 2007 and represents 89% of the total $2.1 billion U.S. TRT market. We continue to believe the population of hypogonadal males remains under-diagnosed and under-treated, and with increased marketing efforts by several major pharmaceutical companies we believe that a significant, growing market opportunity continues to exist for Testim.

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        There were approximately 804,500 Testim U.S. prescriptions in 2012, an increase of 8% over 2011, and Testim revenues were $233.4 million in the U.S., an increase of 14% over 2011. Based in part on the presence of new competitors and significant direct to consumer spending in this segment by the market leader, Testim's total prescription market share at the end of December 2012 was down 5.1 percentage points from 20% at the end of December 2011. In the fourth quarter of 2012, according to IMS Health Incorporated ("IMS"), a pharmaceutical research firm, the TRT gel market grew 27% versus the same period in 2011 and 3% versus the third quarter of 2012. Additionally, the TRT gel market in 2012 grew 31% over 2011. We believe that our strategies have enabled us to minimize Testim's market share loss in a market being dominated by competitors who are much larger than us, who have much larger promotional budgets and who have been experiencing significant double-digit growth. Testim U.S. prescriptions in the fourth quarter of 2012 declined by 4% over the fourth quarter of 2011 to approximately 192,000, and Testim U.S. revenues were $58.4 million in the U.S., which is an increase of 3% over the same period in 2011. Importantly, our managed care access for covered lives has remained strong with 83% of covered lives able to receive Testim.

        Cost-effectiveness and convenience.    We believe that, based on market feedback from physicians and an analysis of pharmacy prescription data, 9 out of 10 Testim patients stayed on their starting dose of 5g (one tube) after 12 months. The simplicity of a single daily 5g tube of Testim we believe provides controlled dosing, no complicated titration schedule, low rates of irritation and convenience for travel as the tube is small, discrete and TSA-compliant.

        Broad prescription coverage.    Currently, 83% of covered lives are able to receive Testim under managed care programs.

        Regulation.    On May 7, 2009, the FDA announced that it was requiring the manufacturers of two prescription topical testosterone gels, Abbott Laboratories Inc. ("Abbott") and Auxilium, to make changes to the prescribing information and develop Risk Evaluation and Mitigation Strategies ("REMS") for the products. The FDA stated that it was requiring this action after it became aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer from adult males using testosterone gel drug products ("transference"). The FDA considered this information to be "new safety information". We believe that all topical testosterone gels have a potential for transference. Testim's prescribing information has described the risk and procedures for avoidance of transference since the product was launched in 2003. The changes to the prescribing information for Testim include a "boxed warning", which is used to highlight warning information that is especially important to the prescriber. The goal of the REMS is to inform patients about the serious risks of transference associated with the use of Testim and Abbott's topical testosterone products, consisting of the AndroGel franchise. The REMS includes assessments and a Medication Guide to inform patients. The revised prescribing information and REMS for Testim were approved on September 18, 2009. The FDA approved a revised Medication Guide on November 11, 2011.

    XIAFLEX for Dupuytren's

        On February 2, 2010, we received approval from the FDA to begin the sale in the U.S. of XIAFLEX for Dupuytren's in adult patients with a palpable cord, and we commenced the commercial launch in the U.S. in March 2010.

        Dupuytren's market.    XIAFLEX offers the first and only FDA-approved medical treatment option for physicians and patients who desire a minimally invasive alternative to surgery. We believe that every year in the U.S. approximately 300,000 people are diagnosed with Dupuytren's. We also believe that approximately 70,000 Dupuytren's surgical procedures occur every year. Common co-morbidities include diabetes, epilepsy, alcoholism, HIV or Peyronie's. Dupuytren's is most common in men. It usually starts in adult life, with a peak incidence in people aged 40 to 60 and an average of 2.2 joints

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are affected at diagnosis. In about 50% of patients, the disease affects both hands, and it is estimated that approximately 30-40% of patients undergo surgical procedures for multiple cords concurrently. Quality of life and daily activities can be significantly affected by a contracture and surgery has been the historical standard of care. Generally, Dupuytren's is treated by hand, plastic, orthopedic and general surgeons, as well as rheumatologists. Surgery has typically been reserved for the advanced disease due to potential complications, a long recovery period and possible recurrence which could require additional surgeries. Recurrence after surgical treatment is common (as high as 30% in the first two years post-surgery, and 55% within 10 years of surgery).

        We believe that treatment with XIAFLEX offers benefits compared to surgery as it:

    delivers improvement to 0 to 5 degrees of normal joint contracture without surgery for a majority of patients;

    safeguards patients from the complications commonly associated with surgery;

    simplifies treatment by offering a convenient in-office procedure alternative;

    streamlines recovery for a rapid return to daily activities; and

    significantly reduces costly and time-consuming physical therapy associated with surgery.

        Prior to receipt of FDA approval of XIAFLEX for Dupuytren's, surgery was the only treatment option. Surgical techniques used to treat patients with Dupuytren's fall into two major groups: fasciotomy, including needle aponeurotomy, which is simply cutting or puncturing the Dupuytren's cord without cord removal and fasciectomy, which is removing the cords of the diseased tissue. Since its launch in the first quarter of 2010, XIAFLEX use has grown, comprising 29% of Dupuytren's procedures in the third quarter of 2012, while, over that same time period, the percentage of Dupuytren's procedures performed by surgery and needle aponeurotomy has decreased, as demonstrated below:

GRAPHIC


Source: IMS/SDI claims database

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    Surgery and Needle Aponeurotomy shares are based on procedure totals reported in the IMS/SDI claims database, Oct 2012

    Due to specialty pharmacy sales and subsequent under-reporting of XIAFLEX procedures in the IMS/SDI claims database, XIAFLEX share is calculated based on actual vial sales divided by 1.1 vials per procedure

        Reimbursement for XIAFLEX.    In November 2011, the Center for Medicare and Medicaid Services ("CMS") released payment rates for the 2012 Current Procedural Terminology ("CPT®") codes to be used with XIAFLEX for the treatment of adult Dupuytren's patients with a palpable cord beginning January 1, 2012. The CPT codes apply to the procedures only, and leave in place the separate XIAFLEX specific J code for reimbursement of the product that became effective January 1, 2011. Medicare payment rates for the CPT codes will vary based on geographical adjustments. The CPT codes, 20527 for the XIAFLEX injection procedure and 26341 for the finger extension or manipulation procedure, and J code, J0775, are used by physicians to identify XIAFLEX when billing to Medicare, Medicaid and commercial health plans for reimbursement.

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        Broad prescription coverage.    Our internal estimates indicate that 99% of insured lives in the U.S. currently have access to XIAFLEX.

        Regulation.    As a condition of approval for XIAFLEX for Dupuytren's, the FDA required a REMS. The goal of the REMS is to inform and train healthcare providers about the risks of tendon rupture, serious adverse reactions affecting the injected extremity, and the potential risk of serious hypersensitivity reactions (including the potential for anaphylaxis) associated with XIAFLEX. The REMS consists of a medication guide, a communication plan, and a timetable for submission of assessments of the REMS. The communication plan includes a Dear Healthcare Provider Letter and educational materials (i.e., training guide and procedure training video).

DEVELOPMENT PIPELINE

    Testosterone

        We expect to commence clinical studies in 2013 for our high concentration testosterone gel product.

    XIAFLEX Potential Future Indications

    Peyronie's

        Disease state and market.    Peyronie's is characterized by a subdermal plaque or hard lump that occurs on the shaft of the penis. This plaque is primarily subtypes of collagen that we believe can be digested by the collagenases contained in XIAFLEX. It begins as a localized inflammation, which progresses to a hardened scar on the shaft of the penis that reduces flexibility and causes the penis to bend during erection. This may cause pain on erection and a deformity that may prevent sexual intercourse altogether. Our market research indicates that, aside from the physical consequences, depression and loss of self-esteem are common in men with Peyronie's. The prevalence of Peyronie's has been increasing during the last 30 years and we believe its prevalence with some degree of curvature is now approximately 5% of adult men. However, the actual prevalence may be higher because of patients' reluctance to report this embarrassing condition to their physicians. The pathogenesis of Peyronie's appears to be multifactorial, with an interplay of genetic predisposition, trauma and tissue ischemia. Generally, Peyronie's is treated by urologists. To date, no medical therapy has been proven effective and received FDA approval for the treatment of Peyronie's. Surgical treatment may be an option for some patients, although complications such as erectile dysfunction as well as loss of penile girth and length can occur. Administration of XIAFLEX, if approved, could be an in-office procedure in which the product is injected directly into the plaque that causes the penile curvature.

        Current treatment options.    To date, no medical therapy has been proven effective and received FDA approval for the treatment of Peyronie's. However, a number of medical therapies have been used to treat Peyronie's including Vitamin E, Colchicine, Potassium Aminobenzoate (Potaba) (which has been classified by the FDA via a Drug Efficacy Study Implementation as possibly effective in the treatment of Peyronie's), Tamoxifen, Interferon a2a and Corticosteroids. Current surgical therapies include the following procedures: plication (which involves gathering tissue on the outer side of the bend usually resulting in shortening and straightening of the penis), graft techniques (which involve replacing scar tissue with grafts of tissue from another site) and, for patients with severe erectile dysfunction, prosthetic implants (which involve synthetic cylinders implanted in the penis to produce a functional erection).

        R&D status.    In November 2012, we filed an sBLA with the FDA for XIAFLEX for the potential treatment of Peyronie's. On December 27, 2012, the FDA accepted for filing and granted standard review status to this sBLA. The FDA has notified us that it is not presently planning to take this

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application to an Advisory Committee meeting; however, we can offer no assurance that the FDA will not require an Advisory Committee meeting in the future. Under PDUFA, the FDA is expected to take action on this application by September 6, 2013.

        The sBLA submission is based on data from the clinical studies known by the acronym IMPRESS—The Investigation for Maximal Peyronie's Reduction Efficacy and Safety Studies—and other controlled and uncontrolled clinical studies, in which over 1,000 Peyronie's disease patients were enrolled and received over 7,400 injections of XIAFLEX (also known as collagenase clostridium histolyticum or "CCH"). IMPRESS is our late stage global development plan for CCH and it consists of four clinical studies. There are two randomized, double-blind, placebo-controlled phase III studies, which enrolled over 800 patients combined at 64 sites in the U.S. and Australia in less than five months, with a 2:1 ratio of CCH to placebo. There is also one open label study, which enrolled at least 250 patients, at approximately 30 sites in the U.S., EU and New Zealand, and one pharmacokinetic study, which enrolled approximately 20 patients who were then enrolled into the open label study. CCH was administered two times a week every six weeks for up to four treatment cycles (2 × 4). Each treatment cycle was followed by a penile modeling procedure. Patients were followed for 52 weeks post-first injection in the double-blind studies and were followed for 36 weeks in the open label and pharmacokinetic trials.

        The trials' co-primary endpoints are percent improvement from baseline in penile curvature deformity compared to placebo and the change from baseline (improvement) in the PD bother domain of the Peyronie's Disease Questionnaire ("PDQ") compared to placebo. The PDQ also has two additional domains as secondary endpoints, which include severity of psychological and physical symptoms of PD, and penile pain. Safety measurements include adverse event monitoring and clinical labs. Immunogenicity testing was also performed.

        The PDQ is a 15-question assessment of the impact of PD on a subject using 3 domains: PD bother, psychological and physical symptoms of PD, and penile pain (administered at screening, week 24, and week 52). The PDQ is a proprietary questionnaire that Auxilium developed with the FDA, starting in 2004, and evolved through the CCH clinical PD studies into a validated tool for measuring PD bother.

        Statistical significance for the co-primary endpoints and two families of secondary endpoints was determined by a multiple comparison algorithm based on gate keeping strategies designed to control the overall family-wise type 1 error rate to be less than or equal to 0.05. In IMPRESS I and II individually, the two co-primary endpoints each required a p-value less than or equal to 0.05, while the algorithm for the first family of secondary endpoints was equivalent to requiring a p-value less than or equal to 0.0167 and the algorithm for the second family required a p-value less than or equal to 0.0042. In both IMPRESS I and II, first family secondary endpoints (improvement from baseline in percentage of global responders, PDQ psychological and physical symptoms, and IIEF (International Index for Erectile Function) overall satisfaction) and second family secondary endpoints (percentage of composite responders, improvement in penile length, plaque consistency, and penile pain) were measured in CCH-treated men compared with placebo.

        In the two phase III double-blind placebo-controlled IMPRESS studies, CCH demonstrated statistically significant improvement in the co-primary endpoints of improvement in penile curvature deformity and improvement in patient-reported bother versus placebo. In IMPRESS I at 52 weeks, the co-primary endpoints met statistical significance with a 37.6% mean reduction in penile curvature deformity for CCH subjects (p=0.0005) and a 3.3 point improvement in the Peyronie's Disease Questionnaire (PDQ) bother domain for CCH subjects (p=0.0451). In IMPRESS II at 52 weeks, the co-primary endpoints met statistical significance with a 30.5% mean improvement in penile curvature deformity for CCH subjects (p=0.0059) and a 2.4 point improvement in the PDQ bother domain for CCH subjects (p=0.0496).

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        The secondary endpoint results were as follows:

    IMPRESS I

    Improvement from baseline in percentage of global responders and the percentage of composite responders showed statistical significance vs. placebo.

    Improvement from baseline in the PDQ psychological and physical symptoms and IIEF overall satisfaction, showed trends toward improvement vs. placebo.

    IMPRESS II:

    Improvement from baseline in percentage of global responders showed statistical significance vs. placebo.

    Improvement from baseline in PDQ psychological and physical symptoms, IIEF overall satisfaction, percentage of composite responders, plaque consistency, and penile length showed trends toward improvement vs. placebo.

        A post-hoc meta-analysis was performed to increase the statistical power for evaluation of these secondary endpoints as each IMPRESS study was not individually powered to meet statistical significance for the secondary endpoints. In the meta-analysis, the algorithm for calculating p-values for the co-primary and first family of secondary endpoints was essentially the same as that observed in the two individual studies. The results of the post-hoc meta-analysis were as follows:

        Combination of Identical IMPRESS I and II Studies:

    Co-primary endpoints maintain statistical significance

    The following secondary endpoints met statistical significance, compared to placebo, based on the multiple comparison algorithm within the meta-analysis:

    Percentage of global responders

    Improvement in Peyronie's physical and psychological symptom domain

    Improvement in IIEF overall satisfaction domain

    Percentage of composite responders

    Improvement in penile plaque consistency

    Improvement in penile length and penile pain were not statistically different from placebo

        CCH was generally well-tolerated. The most common adverse events reported in the double-blind, placebo-controlled IMPRESS phase III trials were hematoma, pain and swelling at the treatment site. These adverse events were comparable to the previous trials: most adverse events were mild or moderate in severity and resolved within 14 days.

        There were three serious adverse events of corporal rupture (penile fracture) and three serious adverse events of hematomas related to CCH reported in IMPRESS I and II. All three corporal ruptures resolved following intervention and two of three hematomas resolved with intervention, with the third hematoma resolving without intervention.

        Although >98% of patients developed positive AUX I or II antibodies in the IMPRESS studies, there have been no systemic hypersensitivity events reported in the phase III trials or any of the previous CCH PD clinical studies to date. Including data from all CCH PD clinical studies, over 7,500 XIAFLEX injections have been administered to more than 1,050 PD patients.

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    Frozen Shoulder Syndrome

        Disease state and market.    Frozen Shoulder syndrome is a disorder of diminished shoulder motion, characterized by restriction in both active and passive range of motion of the shoulder joint. Frozen Shoulder syndrome usually affects patients aged 40 to 70 years. It is estimated that 3% of the population develops Frozen Shoulder syndrome over its lifetime and that women tend to be affected more frequently than men. The condition may affect both shoulders, either simultaneously or in sequence, in up to 16% of patients. Recurrence of Frozen Shoulder syndrome is common within five years of the onset of the disorder. A higher incidence of Frozen Shoulder syndrome exists among patients with diabetes (10-20%) compared to the general population (2-5%) and incidence among patients with insulin-dependent diabetes is even higher (36%), with an increased frequency of bilateral shoulder involvement.

        Current treatment options.    The most common treatment for Frozen Shoulder syndrome is extensive physical therapy, corticosteroids and/or arthroscopy. Drugs are used to manage pain, but none have been demonstrated to have an impact on Frozen Shoulder syndrome.

        R&D status.    BioSpecifics Technologies Corp. ("BioSpecifics"), from whom we have licensed exclusive worldwide rights to develop, market and sell certain products containing the collagenase enzyme, has conducted a phase II clinical trial using CCH for the treatment of Frozen Shoulder syndrome. Three different doses of the enzyme were compared to placebo in this prospective, randomized, 60-subject trial. The results from this trial suggest that local injection of the enzyme is well-tolerated and may be effective in patients suffering from Frozen Shoulder syndrome.

        We commenced a phase IIa escalation trial in December 2011 to assess the safety and efficacy of CCH in the treatment of Frozen Shoulder syndrome in comparison to an exercise-only control group. This study involved two doses (0.29 mg and 0.58 mg) of CCH given under ultrasound guidance and involves approximately 50 subjects across 4 cohorts. Up to three injections were given 21 days apart and the subjects are being followed for 90 days. The endpoint will be range of motion parameters for the affected shoulder. We expect to announce top-line results of this trial in the first quarter of 2013.

    Cellulite

        Disease state and market.    Cellulite, also known medically as edematous fibrosclerotic panniculopathy ("EFP"), describes a pathologic inflammatory condition, in which lobules of subcutaneous adipose tissue extend into the dermal layer. These changes can visibly affect the shape of the epidermis and resemble an orange peel-like dimpling of the skin. In the normal subcutaneous fat layer directly under the skin, there are both perpendicular columnar and net-like fibrous connective tissue called septae. These fibrous septae, made of types I and III collagen, connect the epidermis to the dermis and create a network of compartmentalized adipose deposits. Women tend to have a higher proportion of columnar septae that are perpendicular to the epidermis, while men tend to have more of the net-like system. In cellulite, the subcutaneous fat cells swell and push upwards. As a result, the skin between the septae is pushed up and the perpendicular septae act as an anchor to pull the epidermis downwards and form the classic cellulite dimple. The surrounding adipose tissue forms small bulges under the epidermis around the dimple that can give skin an orange peel-like texture. Cellulite has been reported to occur in 85 to 98% of post-pubertal females and rarely in men. The condition is prevalent in women of all races.

        Current treatment options.    Current treatments for cellulite include creams, light-based procedures or liposuction. None has been demonstrated to have a significant impact on eliminating cellulite.

        R&D Status.    BioSpecifics has granted us an exclusive license to research, develop, manufacture and use CCH in connection with the treatment of EFP, more commonly known as cellulite, and we had the exclusive option, upon completion of such early stage development and upon our payment to

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BioSpecifics of a one-time $500,000 license fee, to add the treatment of cellulite to our licensed indications under the BioSpecifics Agreement (defined below). On January 4, 2013, we exercised this exclusive option under the BioSpecifics Agreement to expand the field of our license for CCH to include the potential treatment of adult patients with cellulite. As a result of this exercise, our exclusive, worldwide license has now been expanded, subject to the terms of the BioSpecifics Agreement, to include all research, development, use, commercialization, marketing, sales and distribution rights for CCH for the potential treatment of cellulite.

        We filed an Investigational New Drug ("IND") with the FDA in November 2011.

        A phase Ib clinical trial designed to assess the safety and efficacy of XIAFLEX in the treatment of cellulite commenced in the first quarter of 2012. The phase Ib study is a single site, open-label dose-escalation study that enrolled 99 women between 21 and 60 years of age. The objectives of the study are to assess the safety and effectiveness of CCH for the treatment of EFP at 30, 60 and 90 days following a single dose, as well as evaluation of pharmacokinetics, to determine if a path forward exists into a later phase of development. To qualify for the study participants must have had EFP in the posterolateral thighs and/or buttocks for at least 12 months prior to a screening visit. Following screening and determination of eligibility, study participants were assigned to one of eleven groups that varied in treatment dose, injection concentration and volume. Subjects received 10 concurrent injections (0.1 or 0.5 mL per injection) of CCH via a standardized template over a targeted area (8 cm × 10 cm) of EFP. The template included a targeted centralized dimple. The total dose of CCH that was administered into the targeted area ranged between 0.0029 mg and 0.464 mg; these doses represent between 0.5% and 80% of the dose used in a single injection for Dupuytren's (0.58 mg). Safety will be evaluated through the collection of adverse events, as well as a targeted assessment of local reactions to the treatment through 90 days. The treatment effectiveness will be evaluated by investigator and patient assessments, as well as 3-D photographic imaging techniques.

        On December 13, 2012, we announced top-line 30-day data from the phase Ib study. Across all dosing arms, 60 patients (63%) who were treated experienced some improvement in the volume of their target cellulite dimple at Day 30. Overall, 17% of patients had a greater than or equal to 30% improvement in their target dimple at Day 30; however, multiple CCH dosing arms had more than 40 percent of patients experience an improvement greater than or equal to 30% in their target dimple at Day 30. We plan to initiate a phase IIa trial in the second half of 2013.

    Other

        Under our agreement with BioSpecifics, we have exclusive worldwide rights to develop, market and sell products containing XIAFLEX, other than dermal formulations labeled for topical administration. We may expand our agreement with BioSpecifics, at our option, to cover other indications as they are developed by us or BioSpecifics. We plan to prioritize our development of additional pipeline indications for XIAFLEX. In addition to the indications mentioned above, other areas of interest could include canine and human lipomas, which BioSpecifics is developing.

STRATEGIC RELATIONSHIPS

        We have entered into agreements for the licensing of technology and products. We intend to pursue other licensing agreements and collaborations in the future. We have secured collaboration partners for the sale of products in geographic locations where we do not have our own sales force. We may pursue other collaborations in the future.

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    Testim

    License from FCB

        In May 2000, Bentley Pharmaceuticals, Inc. ("Bentley") granted us an exclusive, worldwide, royalty-bearing license to make and sell products incorporating its patented transdermal gel formulation technology that contains testosterone (the "May 2000 License"). We produce Testim under the May 2000 License. The term of the May 2000 License is determined on a country-by-country basis and extends until the later of patent expiration in a country or 10 years from the date of first commercial sale. Under this agreement, we were required to make up-front and milestone payments upon contract signing, the decision to develop the underlying product, and the receipt of FDA approval. In June 2008, CPEX Pharmaceuticals, Inc. ("CPEX") was spun out of Bentley and became the assignee of certain Bentley assets, including the license agreement governing the May 2000 License and patents we licensed under that agreement. In April 2011, CPEX was acquired by FCB I Holdings Inc. ("FCB"), a newly formed company which is controlled by Footstar Corporation, and the licensed patents were assigned to FCB. The rights and obligations under the license agreement described above inure to FCB and continue to be effective, as will our rights and obligations thereunder. FCB is an indirect majority owned subsidiary of Xstelos Holdings, Inc. Xstelos is a holding company formed for the purpose of holding the assets of CPEX Pharmaceuticals, Inc., an indirect, majority owned subsidiary of Xstelos, and the predecessor owner of the FCB patents. See "Patents and Proprietary Rights" for a discussion of the patents we license from FCB.

        Under the May 2000 License, we are obligated to make quarterly royalty payments to FCB based on tiered percentages of the annual net sales of Testim. For net sales of Testim in countries in which FCB holds an applicable enforceable patent, the royalty percentage is within the range of 5-15% for annual net sales per country in the U.S. and Canada and, in all other countries, is equal to a single digit percentage plus a portion of certain additional payments received by us for the sale of Testim. For net sales of Testim in countries in which FCB does not hold an applicable enforceable patent, the royalty percentage is a single digit percentage, the precise value of which is dependent upon whether FCB holds any applicable enforceable patents in other countries at the applicable time of sale.

        Each party may terminate the May 2000 License as a result of the other party's bankruptcy, provided that FCB may not so terminate the May 2000 License so long as it continues to receive royalty payments from us under the May 2000 License. We may terminate the May 2000 License as a result of FCB's breach or dissolution or cessation of operations. FCB may terminate the May 2000 License as a result of material non-payment by us that continues for thirty days after FCB provides notice of such non-payment.

    License to Ferring

        In November 2008, we entered into a distribution and license agreement with Ferring (the "Ferring Agreement"). Pursuant to the Ferring Agreement, we appointed Ferring as our exclusive distributor of Testim in Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, the U.K. and all other EU countries where Ferring obtains marketing authorization (the "Ferring Territory"). Ferring gained approval in July 2012 to distribute Testim in the following additional territories: Bulgaria, Cyprus, Czech Republic, Estonia, France, Hungary, Lichtenstein, Latvia, Lithuania, Malta, Poland, Romania, Slovenia and the Slovak Republic. We also granted Ferring an exclusive, royalty-bearing license to import, market, sell and distribute Testim in the Ferring Territory. Ferring is required to purchase all Testim supply from us and to make certain sales milestone and royalty payments. In addition, Ferring was required to make certain up-front and milestone payments to us related to the transfer to Ferring of the marketing authorizations in each country within the Ferring Territory. The initial term of the Ferring Agreement expires on a country-by-country basis ten years after the first commercial sale of Testim in each such

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country, subject to automatic five-year renewal terms unless either party elects not to renew at least one year prior to the expiration of the then current term. Either party may terminate the Ferring Agreement as a result of the other party's breach or bankruptcy. We may terminate the Ferring Agreement on a country-by-country basis if Ferring fails to meet specified commercial targets or if Ferring or its affiliates commercializes a competing product in any country of the Territory. We may also terminate the Ferring Agreement in the event of the termination of the May 2000 License or in the event of unauthorized sales of Testim by Ferring outside of the Ferring Territory. Ferring may terminate the Ferring Agreement on a country-by-country basis upon specified regulatory or intellectual property events. Ferring may also terminate the Ferring Agreement upon specified supply disruptions.

        Under the Ferring Agreement, Ferring paid us $6,200,000 in upfront and milestone payments, and may pay us up to an aggregate of $30,000,000 in additional milestone payments based on the initial achievement of specified increasing annual net sales milestones. In addition, under the Ferring Agreement, Ferring is obligated to make quarterly royalty payments to us based on a single digit percentage of net sales of Testim on a country-by-country basis. The precise applicable royalty percentage is greater for net sales in countries where Testim is covered by an applicable valid patent.

    License to Paladin

        We entered into a license and distribution agreement with Paladin in December 2006 (the "Paladin Agreement"). We granted Paladin an exclusive license to use and sell Testim in Canada. The terms of the Paladin Agreement require Paladin to purchase all Testim supply from us. The initial term of the Paladin Agreement expires on the later of 15 years from its effective date and the expiration of the last valid patent covering Testim in Canada, subject to automatic three-year renewal terms. Either party may terminate the Paladin Agreement as a result of the other party's breach or bankruptcy. We may terminate the Paladin Agreement if Paladin fails to meet specified commercial targets or make specified payments in lieu thereof. We may also terminate the Paladin Agreement if Paladin sells competitive products in Canada or in the event of material unauthorized sales of Testim by Paladin outside of Canada. Paladin may terminate the Paladin Agreement upon specified regulatory or intellectual property events or upon specified supply disruptions.

        Under the Paladin Agreement, Paladin paid us $1,000,000 in upfront and milestone payments, and may pay us up to an aggregate of $5,000,000 in additional milestone payments based on the initial achievement of specified increasing annual net sales milestones. In addition, under the Paladin Agreement, Paladin is obligated to make quarterly royalty payments to us on net sales in Canada in an amount equal to the royalty payments we are obligated to make to FCB under the terms of the May 2000 License.

    Co-promotion Agreement with GlaxoSmithKline LLC

        On May 18, 2012, we and GSK entered into a co-promotion agreement (the "GSK Agreement"). Under the GSK Agreement, we granted to GSK the exclusive right to co-promote the sale of Testim in the U.S. and its territories and possessions (the "GSK Territory"). Subject to certain rights of early termination, the GSK Agreement shall terminate on September 30, 2015. GSK began promoting Testim using a sizeable established field sales force in the U.S. in mid-July 2012.

        On a quarterly basis, if net sales of Testim exceed a baseline established under the GSK Agreement, we pay GSK a promotional payment equal to a percentage of incremental net sales above that established baseline. If the GSK Agreement is not terminated prior to September 30, 2015, then, in addition to the promotional payments, we will, under certain circumstances, make post-expiration payments to GSK for up to the following two years. Our obligation to make post-expiration payments to GSK is significantly reduced or eliminated in the event of early termination of the GSK Agreement.

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        We are responsible, at our sole cost and expense, for the manufacture, fill, finish, supply, testing, labeling, packaging, release, storage and delivery of Testim, and we must use commercially reasonable efforts to manufacture or have manufactured and to supply or have supplied the quantities of Testim required to meet market demand in the GSK Territory during the term of the GSK Agreement. We determine pricing for Testim and record all sales of Testim. We are responsible for paying the costs for the marketing of Testim (but not GSK's sales force costs), in accordance with annual marketing budgets agreed upon by the parties, with the parties splitting costs in excess of those budgets. Each party bears the full cost of its respective sales force.

    XIAFLEX

    License from BioSpecifics

        In June 2004, we entered into a development and license agreement with BioSpecifics and amended this agreement in May 2005, December 2005, December 2008 and August 2011 (the "BioSpecifics Agreement"). Under the BioSpecifics Agreement, we have exclusive worldwide rights to develop, market and sell certain products containing the collagenase enzyme, which we refer to as XIAFLEX. Our licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration, and currently, our licensed rights cover the indications of Dupuytren's, Peyronie's, Frozen Shoulder syndrome and cellulite. We may further expand our rights under the BioSpecifics Agreement, at our option, to cover other indications as they are developed by us or BioSpecifics.

        The BioSpecifics Agreement extends, on a country-by-country and product-by-product basis, for the longer of any applicable patent life, the expiration of any regulatory exclusivity period or 12 years. Either party may terminate this agreement in the event of bankruptcy or insolvency by the other party. Additionally, either party may terminate this agreement if the other party is in material breach of its obligations under the agreement which continues for a period of 90 days following receipt of written notice of such material breach. We may terminate this agreement in its entirety, or on a country-by-country basis, on an indication-by-indication basis, or on a product-by-product basis, at any time upon 90 days prior written notice to BioSpecifics. If this agreement is properly terminated by us, we will retain a non-exclusive license for these rights. See "Patents and Proprietary Rights" below for a discussion of the patents we license from BioSpecifics.

        We are responsible, at our own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products.

        We have been, and will be, obligated to make contingent milestone payments to BioSpecifics upon the filing of regulatory applications and receipt of regulatory approval. We have paid BioSpecifics $22.8 million under the BioSpecifics Agreement, of which we paid $4.6 million in 2011and $0.6 million in 2012. The 2011 payments included a payment of approximately $3.8 million, which represented BioSpecifics's share of the net $41.1 million which Pfizer paid to us as milestone payments under the Pfizer Agreement (as described below). The 2011 payments also included a payment of approximately $0.8 million, which represented BioSpecifics's share of the $15 million which Asahi Kasei paid to us as milestone payments under the Asahi Agreement (as described below). In 2012, after we received the $10 million up-front payment and a subsequent $0.5 million milestone payment from Actelion under the Actelion Agreement (as described below), we made payments to BioSpecifics totaling $0.6 million. Additional milestone obligations will be due to BioSpecifics upon further acceptance of filings, approvals and achievement of certain sales levels by our partners. Also, we exercised our option to include cellulite as an additional indication by making a one-time license fee payment of $500,000 to BioSpecifics on January 4, 2013. Additionally, if we exercise an option to develop and license XIAFLEX for additional indications, an exercised indication fee will be due. Pursuant to the BioSpecifics Agreement, the exercised indication fee for each additional indication is $500,000.

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        In addition, under the BioSpecifics Agreement, we are obligated to make quarterly royalty payments to BioSpecifics based on a specified percentage within the range of 5-15% of net sales of XIAFLEX by us in the U.S., by Pfizer (or any successor or subsequent licensee) in the EU and certain Eurasian countries, and by Asahi Kasei in Japan. The royalty percentage decreases if a generic to XIAFLEX is marketed in these territories.

        In the event that we sublicense the right to sell XIAFLEX in any country outside of the U.S., the EU and certain Eurasian countries or Japan—as we did in February 2012 to Actelion for Australia, Brazil, Canada and Mexico—we must pay BioSpecifics a specified fraction of the royalty we receive from such sublicense (which payment to BioSpecifics is capped at a specified percentage—within the range of 5-15%—of net sales of XIAFLEX within the applicable country), and a specified mark-up on our cost of goods related to supply of XIAFLEX (which mark-up is capped at a specified percentage—within the range of 5-15%—of our cost of goods of XIAFLEX for the applicable country).

        Under the BioSpecifics Agreement, we have the exclusive right to manufacture any pharmaceutical product containing the collagenase enzyme as an active ingredient:

    for the indications of Dupuytren's, Peyronie's, Frozen Shoulder syndrome and cellulite (such indications, together with such indications that may be added under the terms of the BioSpecifics Agreement, the "Field"), and for any indications outside the Field which BioSpecifics elects not to pursue; and

    for early-stage development activities through phase II clinical trials for any indications.

        We have the non-exclusive right to manufacture any pharmaceutical product containing the collagenase enzyme as an active ingredient:

    for supply to BioSpecifics for in vitro development; and

    for post-phase II development (including submissions for regulatory approval) and commercialization of indications outside the Field which Auxilium elects not to pursue.

        BioSpecifics currently retains the right to manufacture:

    collagenase for use as a reagent for tissue disassociation;

    collagenase for performing in vitro research and development unless we elect to supply product for such purposes;

    collagenase for purposes of development and commercialization of any indications outside the Field which we elect not to pursue; and

    collagenase for any early-stage development activities conducted by BioSpecifics through phase II clinical trials for any indications outside the Field, but only if we fail to supply product, diluent or placebo for such purpose.

    License to Pfizer

        In December 2008, we entered into a development, commercialization and supply agreement with Pfizer. Under the Pfizer Agreement, we granted to Pfizer the right to develop and commercialize, with the right to sublicense, XIAPEX (EU tradename for XIAFLEX) for the treatment of Peyronie's and Dupuytren's upon receipt of the applicable regulatory approvals in the 27 member countries of the EU as it existed as of the effective date of the Pfizer Agreement (Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK), as well as Albania, Armenia, Azerbaijan, Belarus, Bosnia & Herzegovina, Croatia, Georgia, Iceland, Kazakhstan, Kirghiz Republic, Macedonia, Moldova, Montenegro, Norway,

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Serbia, Switzerland, Tajikistan, Turkey and Uzbekistan (the "Pfizer Territory"). Subject to each party's termination rights, the term of the Pfizer Agreement extends on a country-by-country and product-by-product basis from the date of the Pfizer Agreement until the latest of (i) the date on which the product is no longer covered by a valid claim of a patent or patent application in such country, (ii) the 15th anniversary of the first commercial sale by Pfizer of XIAPEX in a given country after the receipt of required regulatory approvals and (iii) a generic entry or competitive product containing the same active ingredient with respect to XIAPEX in such country.

        Pfizer received marketing authorization by the European Commission on February 28, 2011 and XIAPEX is now available in Austria, Denmark, Finland, Norway, Spain, Switzerland, Sweden, and the UK.

        On November 6, 2012, we and Pfizer entered into an amendment (the "Pfizer Amendment") to the Pfizer Agreement. As a result of the Pfizer Amendment, the Pfizer Agreement will terminate effective April 24, 2013 (the "Termination Date"). Prior to this mutual Termination Date (and, subject to the terms of the Pfizer Agreement, thereafter with respect to certain responsibilities), the Parties will continue to perform all of their obligations as described in the Pfizer Agreement. After the Termination Date, all rights held by Pfizer to commercialize XIAPEX (with certain exceptions) and the responsibility for regulatory activities for XIAPEX in the aforementioned countries will revert to us. In addition, Pfizer will have the right to sell its remaining XIAPEX inventory for the six-month period following the Termination Date so long as Pfizer continues to make the commercialization and royalty payments on such sales that were established pursuant to the Pfizer Agreement.

        Pfizer is obligated to pay certain regulatory and milestone payments to us as well as a specified royalty on net sales of XIAPEX in the Pfizer Territory. As of December 31, 2012, Pfizer had paid us $135 million in up-front and regulatory milestone payments under the Pfizer Agreement, net of certain development and regulatory costs amounting to $3.9 million that Pfizer was contractually allowed to recoup. Pfizer remains obligated to pay us up to an additional $350 million if certain specified additional regulatory and commercial milestones for XIAFLEX (on an indication-by-indication basis or for the product as a whole, as the case may be) are achieved prior to the mutual Termination Date. We are not expecting, however, that any additional milestone payments will be paid by Pfizer under the Pfizer Agreement prior to the mutual Termination Date. In addition, the Pfizer Agreement provides for quarterly royalty payments based on tiered, double-digit percentages of the aggregate annual net sales of XIAPEX in the Pfizer Territory. Subject to the requirement that Pfizer make certain specified minimum royalty payments, the royalty percentage tiers feature royalty percentages within the ranges of 30-40%, 35-45% and 40-50%. The applicable royalty percentage increases from tier to tier upon the achievement of a specified threshold of aggregate annual net sales of XIAPEX and decreases if a generic to XIAPEX is marketed in the Pfizer Territory.

        Pfizer is required to obtain XIAPEX exclusively from us. We were primarily responsible for development activities prior to granting of product approval, and Pfizer has been primarily responsible for development activities in the Pfizer Territory since product approval. We control product development at all times outside of the Pfizer Territory. Pfizer is responsible for preparation of regulatory materials necessary for obtaining and maintaining regulatory approvals in the Pfizer Territory, and for the associated regulatory costs. Pfizer is solely responsible for commercializing XIAPEX in the Pfizer Territory during the term of the Pfizer Agreement and is solely responsible for costs associated with commercializing XIAPEX in the Pfizer Territory.

        As part of the Pfizer Agreement, we have received up front and milestone cash payments from Pfizer. Our agreement with our licensor for XIAFLEX, BioSpecifics, required that we pay a portion of this amount to them. These amounts were recorded as deferred revenues and deferred costs, respectively, on our balance sheet at the time paid and we were required under U.S. generally accepted accounting principles ("GAAP") to amortize the deferred revenues and deferred costs into our income

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statement over the course of the Pfizer collaboration agreement. We originally estimated that the life of the Pfizer Agreement would be 20 years. When the agreement to mutually terminate the collaboration was reached, with a termination date of April 24, 2013, the balance of the deferred revenues and costs that existed at that time on our balance sheet were required to be adjusted to record the cumulative impact of the revised, shorter life of the agreement.

        At September 30, 2012 the balance of deferred revenues related to the Pfizer Agreement was $103.4 million and the balance of the deferred costs was $9.3 million. In the fourth quarter of 2012 we recorded $93.6 million in revenue and $8.4 million in cost of goods sold as the amortization of these deferred revenues and costs, respectively. Had we not reached agreement with Pfizer to mutually terminate the Pfizer Agreement, we would have recognized $1.6 million and $0.1 million of revenue and costs, respectively. Therefore, the impact of this change in estimate of the life of the Pfizer Agreement was an increase in 2012 revenues of $92.0 million, cost of goods sold of $8.3 million and net income of $83.7 million, or $1.70 per share, fully diluted (representing the incremental $92.0 million in deferred revenues less the incremental $8.3 million in deferred costs). The remaining deferred revenue and deferred cost balances of $9.8 million and $0.9 million, respectively, will be amortized into our income statement by April 24, 2013, the date that the Pfizer collaboration terminates.

    License to Asahi Kasei

        On March 22, 2011, we entered into a development, commercialization and supply agreement with Asahi Kasei (the "Asahi Agreement"). Under the Asahi Agreement, we granted Asahi Kasei the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren's and Peyronie's in Japan upon receipt of the applicable regulatory approvals. We also granted Asahi Kasei the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in Japan during the term of the Asahi Agreement. Asahi Kasei paid us an up-front payment of $15 million in March 2011. In addition, Asahi Kasei may make up to $247 million in potential payments, with $37 million tied to development and regulatory milestones and $210 million tied to achievement of aggregate annual net sales thresholds. In addition, the Asahi Agreement provides for quarterly royalty payments based on tiered, double-digit percentages of the aggregate annual net sales of XIAFLEX in Japan. Subject to the requirement that Asahi Kasei make certain specified minimum royalty payments, the royalty percentage tiers feature royalty percentages within the ranges of 30-40% and 35-45%. The applicable royalty percentage increases from tier to tier upon the achievement of a specified threshold of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in Japan.

        Under the Asahi Agreement, Asahi Kasei will be responsible for all clinical development, regulatory and commercialization activities for XIAFLEX for the treatment of Dupuytren's and Peyronie's for the Japanese market and we will be reimbursed for all costs we may incur in connection with these activities. We will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for the Japanese market. Each party may terminate the Asahi Agreement as a result of the other party's breach or bankruptcy. In the event that, based on consultation with Japanese regulatory authorities, unexpected additional investment would be imposed on Asahi Kasei due to the necessity of expanding clinical studies beyond specified cost thresholds, Asahi Kasei may terminate the Asahi Agreement with respect to Peyronie's upon written notice following the third anniversary of the Asahi Agreement's effective date. In the event of termination, all licenses and rights granted to Asahi Kasei under the Asahi Agreement will revert, or be assigned, to us and Asahi Kasei will provide certain assistance with respect to transferring certain of Asahi Kasei's know-how. In the event of termination by Asahi Kasei, all licenses and rights granted to us under the Asahi Agreement will terminate. Subject to each party's termination rights, the term of the Asahi Agreement extends on a product-by-product basis from the date of the Asahi Agreement until the last to occur of (i) the date on which the product

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is no longer covered by a valid claim of a patent, (ii) the 15th anniversary of the first commercial sale of the product, or (iii) the entry of a generic to XIAFLEX in the Japanese market.

    License to Actelion

        On February 22, 2012, we entered into a collaboration agreement with Actelion (the "Actelion Agreement"). Under the terms of the Actelion Agreement, we granted Actelion exclusive rights to develop and commercialize XIAFLEX for the treatment of Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico upon receipt of the applicable regulatory approvals. We also granted Actelion the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in these countries during the term of the Actelion Agreement. Actelion paid us an up-front payment of $10 million in the first quarter of 2012. In July 2012, the Company was granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. As a result of this milestone, Actelion paid the Company $500,000.Actelion may make up to $58.0 million in potential payments, with $15.5 million tied to regulatory, pricing, and reimbursement milestones and $42.5 million tied to achievement of aggregate annual net sales thresholds. In addition, the Actelion Agreement provides for quarterly royalty payments based on tiered, double-digit percentages of the aggregate annual net sales of XIAFLEX in these countries. The royalty percentage tiers feature royalty percentages within the ranges of 15-25%, 20-30%, and 25-35%. The applicable royalty percentage increases from tier to tier upon the achievement of specified thresholds of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in these countries.

        Under the Actelion Agreement, Actelion will be responsible for all clinical development, regulatory and commercialization activities for XIAFLEX for the treatment of Dupuytren's and Peyronie's for Australia, Brazil, Canada and Mexico and Actelion will reimburse us for all out-of-pocket costs we may incur in connection with these activities. We will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for these countries. Each party may terminate the Actelion Agreement as a result of the other party's breach or bankruptcy. We may terminate the Actelion Agreement if Actelion fails to meet specified sales thresholds for specified time periods. After the second anniversary of the first commercial sale by Actelion of XIAFLEX, Actelion may terminate the Actelion Agreement (in whole or on a country-by-country basis) upon 180 days' prior written notice to us. Subject to each party's termination rights, the term of the Actelion Agreement extends on a product-by-product and country-by-country basis from the date of the Actelion Agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15th anniversary of the first commercial sale of the product, (iii) the achievement of a specified market share of generic versions of the product in such country or (iv) the loss of certain marketing rights or data exclusivity in such country.

MANUFACTURING

        We produce the active pharmaceutical ingredient of XIAFLEX, and we currently use, and expect to continue to depend on, contract manufacturers to manufacture Testim and handle certain aspects of the manufacture of XIAFLEX. We also may depend on contract manufacturers to manufacture any products for which we receive marketing approval and to produce sufficient quantities of our product candidates for use in preclinical and clinical studies. We and our contract manufacturers are subject to an extensive governmental regulation process. Regulatory authorities in our markets require that drugs be manufactured, packaged and labeled in conformity with current Good Manufacturing Practices ("cGMP"). The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. We have established an internal quality control and quality assurance program, including a set of standard operating procedures and specifications, that we believe is cGMP-compliant.

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    Testim

        DPT.    Testim is manufactured for us by DPT Laboratories, Ltd. ("DPT") pursuant to a manufacturing and supply agreement that expires on December 31, 2015, unless terminated earlier by either party. The manufacturing agreement automatically renews for 18-month periods unless either party gives written notice not to renew at least 18 months prior to the expiration of the initial term or any renewal term. During the term of this agreement, DPT is required to manufacture, and we are required to purchase, a specified percentage of our annual requirements for Testim.

        The manufacturing agreement may be terminated by either us or DPT upon: (1) the failure of either party to comply with its obligations under the manufacturing agreement, if such failure is not remedied within sixty (60) days after written notice; or (2) notice by either party to the other upon the insolvency or bankruptcy of the other party. In addition, we may terminate the manufacturing agreement immediately upon written notice, if: (1) a failure to supply the required product continues for more than ninety (90) days after the delivery date; (2) an applicable regulatory authority refuses to grant, or withdraws, marketing approval; (3) we decide to discontinue the marketing of the product in the U.S.; or (4) DPT's manufacturing license is revoked or suspended. In the event of termination under certain circumstances, we will be required to pay DPT for certain costs and accrued expenses.

        We have qualified Contract Pharmaceuticals Limited Canada ("CPL") as a secondary supplier under a contract that expires on July 31, 2014.

    XIAFLEX

        Horsham.    We lease a 50,000 square foot biological manufacturing facility in Horsham, Pennsylvania that we use to produce the active ingredient of XIAFLEX. The initial term of the lease expires on January 1, 2017. In 2009, we also leased approximately 56,000 square feet of laboratory, warehouse and office space in two other Horsham locations. We believe we have sufficient capacity to manufacture our commercial supply needs for the foreseeable future, and we have the ability to increase capacity at our Horsham facilities if needed.

        We currently are the sole supplier of the active pharmaceutical ingredient for commercial supply of XIAFLEX, but we are currently in the process of qualifying a new secondary manufacturer for XIAFLEX.

        Jubilant HollisterStier.    We use a contract manufacturer, Jubilant HollisterStier LLC ("JHS"), to fill and lyophilize the XIAFLEX bulk drug substance that we manufacture and produce sterile diluent. In June 2008, we entered into a supply agreement with JHS pursuant to which JHS provides these services. The initial term of the supply agreement was three years, and it automatically renews for subsequent two year terms, unless terminated earlier. We are currently in the first of the two subsequent renewal periods of the agreement.

        Catalent.    We use a contract packager, Catalent Pharma Solutions, LLC ("Catalent"), to label and package XIAFLEX.

DEPENDENCE ON CERTAIN CUSTOMERS

        We sell our products to wholesale drug distributors, specialty pharmacies, specialty distributors and chain drug stores who generally sell products to retail pharmacies, hospitals and other institutional customers. We do not promote our products to these customers, and they do not determine product demand. However, over 90% of our Testim product shipments during the period covered by this Report were to only three customers: AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation. Our business would be harmed if any of these customers refused to distribute our products or refused to purchase our products on commercially favorable terms to us.

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COMPETITION

    TRT Market Competition

        The TRT market is highly competitive. Our success will depend, in part, on our ability to grow our prescription volume and protect our share of the market from the competition. Potential competitors in North America, Europe and elsewhere include major pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies.

        AndroGel.    The primary competition for Testim in the TRT market is the AndroGel® franchise, which consists of AndroGel (testosterone gel) 1% CIII ("Androgel"), marketed by AbbVie, Inc. ("AbbVie") (previously part of Abbott Laboratories ("Abbott")) and AndroGel 1.62% CIII ("Androgel 1.62", and, collectively with Androgel, the "Androgel franchise") which was launched in the U.S in 2011. For the year ended December 31, 2012, the 1.62% formulation accounted for approximately 50% of the overall AndroGel franchise prescription volume. For the year ended December 31, 2012, the AndroGel franchise accounted for approximately 66% of the prescriptions in the gel TRT market.

        Axiron.    During the fourth quarter of 2010, Eli Lilly and Company received approval from the FDA for Axiron® (testosterone solution) 2% CIII. The product was launched in the U.S. in the first quarter of 2011. For the year ended December 31, 2012, Axiron accounted for approximately 12.8% of the prescriptions in the gel TRT market.

        Fortesta.    During the fourth quarter of 2010 Endo Pharmaceuticals Inc. ("Endo") received approval from the FDA for Fortesta® (testosterone gel) 2% CIII. The product was launched in the U.S. in the first quarter of 2011. For the year ended December 31, 2012, Fortesta accounted for approximately 3.5% of the prescriptions in the gel TRT market.

        Generic Competition.    Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe our patents or other proprietary rights. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of the patent rights that we in-license. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products or allow physicians to substitute AB-rated generics.

        In July 2003, Watson Pharmaceuticals, Inc. (now known as Actavis, Inc.) ("Watson") and Par Pharmaceutical Companies, Inc. ("Par") filed Abbreviated New Drug Applications ("ANDAs") with the FDA to be approved as generics for AndroGel 1%. In response to these ANDAs, Solvay Pharmaceuticals, Inc. and Abbott (predecessor-in-interest to AbbVie) filed patent infringement lawsuits against these two companies to block the approval and marketing of the generic products. In 2006, all the subject companies reached an agreement pursuant to which Watson and Par agreed not to bring a generic of AndroGel to the market until August 2015.

        In June 2009, Perrigo Israel Pharmaceuticals, Inc. ("Perrigo") filed an ANDA with a paragraph IV certification seeking the approval of a generic version of AndroGel 1% in the U.S., and the FDA subsequently rejected that ANDA as non-approvable. In the fourth quarter of 2011, Perrigo filed a 505(b)(2) New Drug Application (a "505(b)(2) application") with a paragraph IV certification seeking the approval of a 1% testosterone gel formulation in the U.S., and, in response, Abbott filed patent infringement litigation against Perrigo. Separately, in January 2011, Teva Pharmaceuticals USA Inc. ("Teva") filed a 505(b)(2) application with a paragraph IV certification seeking the approval of a 1% testosterone gel formulation in the U.S., and, in April 2011, Abbott filed patent infringement litigation against Teva. On December 28, 2011, Abbott and Perrigo, on the one hand, and Abbott and Teva, on

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the other hand, each jointly agreed to dismiss their respective litigations, presumably because they had all reached a collective settlement agreement. Perrigo's 505(b)(2) NDA for the 1% testosterone gel formulation was approved by the FDA on January 31, 2013. In February 2012, the FDA approved a testosterone gel (previously referred to as "Bio-T-Gel™") for male hypogonadism developed by BioSante Pharmaceuticals/Teva.

        In February 2013, Perrigo filed and ANDA with a paragraph IV certification seeking the approval of a generic version of Androgel 1.62. Later in February 2013, AbbVie filed suit against Perrigo in the U.S District Court for the District of Delaware, alleging patent infringement.

        The introduction of a generic version of AndroGel would likely have an adverse impact on the branded gel market, including taking a significant portion of branded AndroGel business. Although Testim has a BX rating, meaning that pharmacists are prohibited from substituting Testim with AndroGel, or a generic version of AndroGel, a less expensive generic testosterone gel product could still have a material adverse effect on Testim market share and/or Testim's formulary status, and therefore could have a material negative impact on our financial condition and results of operations.

        We are currently engaged in separate litigations in Federal courts in Delaware and New Jersey with Upsher-Smith Laboratories, Inc. ("Upsher-Smith") regarding Upsher-Smith's attempts to bring a generic testosterone gel product to market via an ANDA or NDA using Testim as its reference drug. We are also engaged in litigation in Federal court in New Jersey with Watson Laboratories, Inc. (NV), Watson Pharmaceuticals, Inc. and Watson Pharma, Inc. (collectively, "Watson") regarding Watson's attempts to bring a generic testosterone gel product to market via an ANDA.

        See "Legal Proceedings" in Part I, Item 3 below for discussion of these litigations and Upsher-Smith's and Watson's respective efforts to obtain approval of a generic version of Testim. An adverse outcome in any of these litigations or any other such legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ten FCB patents. The introduction of a generic version of Testim could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue to develop our product pipeline and therefore could have a material negative impact on our financial condition and results of operations.

        Other Delivery Options.    Testim also competes with other non-gel TRT products such as short-acting injectables, patches, orals, a buccal tablet and implantable pellets. Watson received approval from the FDA and subsequently launched a second generation Androderm transdermal patch in the fourth quarter of 2011. The impact from this product on the TRT market is expected to be nominal given the historically low adoption of patches in the U.S. In January 2012, Actient Pharmaceuticals LLC (maker of buccal formulation Striant®) acquired Slate Pharmaceuticals (maker of implantable pellet Testopel®) but this has not resulted in any major changes to the promotional support for either formulation. For the year ended December 31, 2012, non-gel TRT products comprised 34% of the TRT market on a prescription basis and 11% of the TRT market on a dollar sales basis.

    Future Delivery Options

        In addition to potential generic competition, several other pharmaceutical companies have TRT products in development that may be approved for marketing in the U.S. and the rest of the world. Based on publicly available information, we believe that these products are in the development phases noted below.

    Phase III

        Endo's current plans for AveedTM (known as "Nebido" outside of the U.S.) are unclear. In 2011, the FDA issued a complete response letter stating that the product was not approved. The regulatory

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pathway for Aveed remains unclear at this time. Since this is a response, we believe that FDA review will not follow standard drug approval timelines. Approval could be further delayed if the FDA asks for input from an Advisory Committee before making a final decision.

        Compleo™, in development by Trimel Pharmaceuticals Corporation ("Trimel"), is an intranasal delivery system. Compleo is a single daily application via nasal delivery, which involves a small amount of gel that is placed in each nasal cavity and is usually absorbed between eight to 10 minutes. The product is then absorbed by the patient quickly and delivered without the typical adverse side effects that are common with drugs delivered orally or topically. Compleo initiated phase III trials in September 2011 and in December 2012 announced that primary efficacy endpoints had been met. Trimel expects to file an NDA for the drug shortly after the final safety data are generated in the first quarter of 2013.

        Clarus Therapeutics, Inc. ("Clarus") is developing CLR-610 (previously referred to as "Oritex" and "Tuclar"), an oral testosterone (soft gelatin capsule). Phase III enrollment initiated in August 2011. Clarus reports that NDA submission is expected in the second half of 2013 with a potential launch in late 2014 or early 2015.

        Androxal® from Repros Therapeutics, Inc. ("Repros") is designed to restore normal testosterone production in males rather than externally replacing testosterone like the current alternatives. Androxal is an oral product in development and is expected to restore normal pituitary response in men resulting in normalization of testosterone and luteinizing hormone levels. During the fourth quarter of 2011, Repros reported positive top-line interim results from a placebo-controlled Phase II trial of Androxal in hypogonadal men with Type II diabetes. The results showed a statistically significant increase in testosterone levels and a reduction in HbA1c in the Androxal arms. Phase III topline data from the first pivotal study is expected in the third quarter of 2013 and NDA submission projected for mid-2014, with a potential launch in mid-2015.

        In August 2012, Ferring initiated a Phase III trial to evaluate the efficacy and safety of FE 999303 (testosterone gel). The trial is expected to be completed in April 2013.

        Lipocine Inc. ("Lipocine") is developing LPCN-1021, an oral form of testosterone, formulated using Lipocine's oral Lip'ral technology, as a potential androgen replacement therapy and for the potential treatment of male hypogonadism. Lipocine has received guidance and go-ahead for a pivotal Phase III study for LPCN 1021, which is currently in preparation. Lipocine has reported that the Phase II study results were positive.

    Phase II

        TesoRx Pharma, LLC initiated a Phase II Proof-of-Concept trial with TSX-002 which is expected to be completed in the first quarter of 2013. TSX-002 is a novel, proprietary formulation of testosterone. Oral administration of TSX-002 utilizes a patented technology to achieve desirable serum bioavailability levels of testosterone.

        Hormos Medical has a product candidate, fispemifene, which it reports has shown efficacy in a Phase II Proof-of-Concept trial.

    Other

        Merck & Co. Inc. has a product candidate, Andriol® Testocaps (MK-3033, testosterone undeconate) which is an oral testosterone formulation that has international registrations, including Canada and much of Europe, but not yet in the US, for the treatment of male hypogonadism.

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        Other new treatments are being sought for TRT, including a new class of drugs called Selective Androgen Receptor Modulators, as well as enhanced hydroalcoholic gel formulation of hydrotestosterone. These products are in development and their future impact on the treatment of testosterone deficiency is unknown.

    Competition for XIAFLEX for Dupuytren's

        Halozyme Therapeutics ("Halozyme") is researching HTI-501, a human lysosomal proteinase that degrades collagen and other proteins under certain physiologic conditions. According to Halozyme, HTI-501 may be useful in the treatment of both medical and aesthetic dermatologic conditions such as cellulite, Dupuytren's and Peyronie's, and pre-clinical investigations are ongoing.

        Also, although preliminary observations suggest that intralesional interferon gamma may reduce the size of Dupuytren's cords, further data are needed to assess whether it offers any clinical benefits.

        In March 2010, the Patient Protection and Affordable Care Act and the associated reconciliation bill ("PPACA") became law. Among other provisions, the new law includes provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA; however, any repeal or modification of the law may affect this biologics exclusivity. The new law also establishes an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX.

    Other Competition

        We face extensive competition in the acquisition or in-licensing of pharmaceutical products or small companies to enhance our portfolio of products. A number of more established companies, which have strategies to in-license or acquire products, may have competitive advantages, as may other emerging companies taking similar or different approaches to product acquisitions. In addition, a number of established research-based pharmaceutical and biotechnology companies may acquire products in late stages of development to augment their internal product lines. These established companies may have a competitive advantage over us due to their size, resources and experience.

GOVERNMENT REGULATION

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

    research and development;

    testing, manufacture, labeling and distribution;

    advertising, promotion, sampling and marketing; and

    import and export.

        All of our products require regulatory approval by government agencies prior to commercialization. Testim has been approved for marketing for the indication of male hypogonadism in the U.S., Canada, Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the UK. XIAFLEX has been approved for the treatment of adult Dupuytren's patients with a palpable cord in the U.S. and Canada and as XIAPEX in the EU (including Norway and Iceland) and Switzerland.

        Human therapeutic products are subject to rigorous preclinical and clinical trials to demonstrate safety and efficacy and other approval procedures of the FDA and similar regulatory authorities in

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foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, labeling, distribution, storage and record-keeping related to such products and their promotion and marketing.

    Regulation in the U.S.

        In the U.S., drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject a company to administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, and total or partial suspension of product marketing and/or approvals. In addition, non-compliance may result in the FDA's refusal to approve pending NDAs or BLAs or supplements to approved NDAs or BLAs or in the withdrawal of an NDA or BLA.

        The steps ordinarily required before a new pharmaceutical product containing a new chemical entity may be marketed in the U.S. include: (1) preclinical laboratory tests, preclinical studies in animals and formulation studies; (2) the submission to the FDA of a notice of claimed investigational exemption for a new drug, which must become effective before clinical testing may commence; (3) adequate and well-controlled clinical human trials to establish the safety and efficacy of the drug for each indication; (4) the submission of an NDA or BLA to the FDA; and (5) FDA review and approval of the NDA or BLA prior to any commercial sale or shipment of the drug. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice regulations. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 30-day period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expense.

        Clinical trials to support NDAs or BLAs are typically conducted in three sequential phases, but the phases may overlap. In phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to (1) assess the efficacy of the drug in specific, targeted indications, (2) assess dosage tolerance and optimal dosage and (3) identify possible adverse effects and safety risks. If a compound is found to be potentially effective and to have an acceptable safety profile in phase II evaluations, phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites.

        After successful completion of the required clinical testing, generally an NDA or BLA is submitted. FDA approval of the NDA or BLA is required before marketing may begin in the U.S. The FDA reviews all NDAs or BLAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA or BLA for filing. In such an event, the NDA or BLA must be resubmitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA or BLA. The FDA generally has 10 months in which to review the NDA or BLA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. In the last few years, FDA review times have

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lengthened. The FDA may refer the application to an appropriate Advisory Committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an Advisory Committee. If the FDA's evaluation of the NDA or BLA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or BLA or issue a not approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information. If FDA evaluations of the NDA or BLA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or a complete response letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA or BLA. When and if those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. Furthermore, approval may entail ongoing requirements for post-marketing studies, and marketed products, manufacturers and manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product.

        Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years. XIAFLEX for the treatment of Dupuytren's and Peyronie's has been granted orphan drug status.

        The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls, prescription and order form requirements and restrictions on prescription refills on some kinds of pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule I, II, III, IV or V substance, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest. Testosterone, the active drug substance in Testim, has been scheduled under the Controlled Substances Act as a Schedule III substance. All regular Schedule III drug prescriptions must be signed by a physician and may not be refilled. Furthermore, the amount of Schedule III substances we can obtain for clinical trials and commercial distribution is limited by the Drug Enforcement Agency ("DEA"), and our quota may not be sufficient to complete clinical trials or meet commercial demand, if any. In addition to federal scheduling, Testim is subject to state-controlled substance regulation and may be placed in more restrictive schedules than those determined by the DEA and the FDA. However, to date, with the exception of the State of New York, which has given testosterone a Schedule II classification, testosterone has not been placed in a more restrictive schedule by any state.

    Regulation Outside of the U.S.

        Outside the U.S., the ability to market a drug is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials and marketing authorizations vary widely from country to country. Currently, foreign marketing authorizations are applied for at a national level, although within the EU procedures are available to companies wishing to market a product in more than one EU member state. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above.

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        Furthermore, we must obtain pricing approval in addition to regulatory approval prior to launching the product in the approving country.

    Fraud and Abuse Laws

        We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws, false claims laws and physician self-referral laws. Violations of these laws are punishable by criminal, civil and/or administrative sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid and veterans' health programs. Because of the far-reaching nature of these laws, there can be no assurance that the occurrence of one or more violations of these laws would not result in a material adverse effect on our business, financial condition and results of operations.

        Anti-Kickback Laws.    Our operations are subject to federal and state anti-kickback laws. Certain provisions of the Social Security Act prohibit entities such as us from knowingly and willingly offering, paying, soliciting or receiving any form of remuneration (including any kickbacks, bribes or rebates) in return for the referral of items or services for which payment may be made under a federal health care program, or in return for the recommendation, arrangement, purchase, lease or order of items or services for which payment may be made under a federal health care program. Violation of the federal anti-kickback law is a felony, punishable by criminal fines and imprisonment for up to five years or both. In addition, the Department of Health and Human Services ("HHS") may impose civil penalties and exclude violators from participation in federal health care programs such as Medicare and Medicaid. Many states have adopted similar prohibitions against payments intended to induce referrals of products or services paid by Medicaid or other third party payors.

        Physician Self-Referral Laws.    We also may be subject to federal and/or state physician self-referral laws. Federal physician self-referral legislation (the "Stark law") prohibits, subject to certain exceptions, a physician from referring Medicare or Medicaid patients to an entity to provide designated health services, including, among other things, certain radiology and radiation therapy services and clinical laboratory services in which the physician or a member of his immediate family has an ownership or investment interest or has entered into a compensation arrangement. The Stark law also prohibits the entity receiving the improper referral from billing any good or service furnished pursuant to the referral. The penalties for violations include a prohibition on payment by these government programs and civil penalties for participation in a circumvention scheme. Various state laws also contain similar provisions and penalties.

        False Claims.    The federal False Claims Act imposes civil and criminal liability on individuals or entities who submit, cause the submission of, or conspire to file false or fraudulent claims for payment to the government. Violations of the federal False Claims Act may result in penalties equal to three times the damages that the government sustained, an assessment, civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs.

        The federal False Claims Act also allows a private individual to bring a qui tam suit on behalf of the government against an individual or entity for violations of the False Claims Act. In a qui tam suit, the private plaintiff is responsible for initiating a lawsuit that may eventually lead to the government recovering money of which it was defrauded. After the private plaintiff has initiated the lawsuit, the government must decide whether to intervene in the lawsuit and become the primary prosecutor. In the event the government declines to join the lawsuit, the private plaintiff may choose to pursue the case alone, in which case the private plaintiff's counsel will have primary control over the prosecution (although the government must be kept apprised of the progress of the lawsuit). In return for bringing the suit on the government's behalf, the statute provides that the private plaintiff is entitled to receive up to 30% of the recovered amount from the litigation proceeds if the litigation is successful plus reasonable expenses and attorneys' fees. Recently, the number of qui tam suits brought against entities

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in the health care industry has increased dramatically. In addition, a number of states have enacted laws modeled after the False Claims Act that allow those states to recover money which was fraudulently obtained from the state.

        Other Fraud and Abuse Laws.    The Health Insurance Portability and Accountability Act of 1996 created, in part, two new federal crimes: Health Care Fraud and False Statements Relating to Health Care Matters. The Health Care Fraud statute prohibits the knowing and willful execution of a scheme or artifice to defraud any health care benefit program. A violation of the statute is a felony and may result in fines and/or imprisonment. The False Statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.

        An increasing number of states are passing legislation requiring the reporting and disclosure of gifts or other value given to health care providers, the disclosure of certain advertising and promotion expenditures, the disclosure of product pricing information, the licensing of sales representatives, the adoption of codes of conduct that meet state requirements and the posting of our compliance plan on our Web site.

        The Federal Physician Payment Sunshine Provisions were passed as part of PPACA. The provisions require pharmaceutical manufacturers to report certain payments or transfer of value to a physician or teaching hospital to the federal government. This includes the cost of meals provided to a physician. It also includes fees and reimbursed expenses associated with contracted services such as speaker programs, advisory boards, and consulting and research related payments. The Federal Physician Payment Sunshine Provisions also require that companies report on drug samples distributed by the company. The first report is due on March 31, 2014. This report must capture all reportable physician and teaching hospital spending from August 1, 2013 through December 31, 2013. The statute requires the federal government to make reported information available to the public starting September 2014.

        We are required to report pricing information to the Federal and state governments as part of our participation in programs such as the Medicaid Drug Rebate Program, Medicare Part B, and programs run by the Public Health Service, and the Department of Defense. If these reports are not filed in a timely and accurate fashion, we could be subjected to fines and liability under the False Claims Act.

    Compliance Program

        The healthcare laws and fraud and abuse laws and various guidances applicable to our business are complex and subject to variable interpretations. We maintain certain compliance policies, education and training, monitoring and auditing and remediation as well as other programs to further our commitment to high standards of ethical and legal conduct and to minimize the likelihood that we would engage in conduct or enter into arrangements in violation of applicable authorities. For example, we have (i) established a compliance team consisting of a Chief Compliance Officer and our Internal Auditor, and our Chief Compliance Officer is currently building out the rest of her compliance staff; (ii) established a compliance hotline that permits our employees to report anonymously any compliance issues that may arise; and (iii) instituted other safeguards intended to help prevent any violations of the applicable fraud and abuse laws and healthcare laws, and to remediate any situations that could give rise to violations. We also review our transactions and agreements, both past and present, to help assure they are compliant. Through our compliance efforts, we constantly strive to structure our business operations and relationships with our customers to comply with all applicable legal requirements.

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THIRD-PARTY REIMBURSEMENT AND PRICING CONTROLS

        In the U.S. and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors increasingly are challenging the prices charged for medical products and services and implementing other cost containment mechanisms. It is, and will be, time consuming and expensive for us to go through the process of maintaining or seeking reimbursement to the consumer for our products from Medicaid, Medicare and private payors. Our products may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis, potentially resulting in contract changes with these major payors.

        Our representatives are supplemented with field-based reimbursement specialists and a reimbursement hotline available to assist physicians with reimbursement questions and issues. For patients who may have difficulty affording XIAFLEX, we established a patient assistance program and support a co-pay assistance foundation.

        In many foreign markets, including the countries in the EU, pricing of pharmaceutical products is subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control.

        For a discussion of the J code and CPT codes relating to XIAFLEX, see the discussion above under "MARKETED PRODUCTS—XIAFLEX for Dupuytren's—Reimbursement for XIAFLEX".

PATENTS AND PROPRIETARY RIGHTS

        Our success will depend in part on our ability to protect our existing products and the products we acquire or in-license by obtaining and maintaining a strong proprietary position both in the U.S. and in other countries. To develop and maintain such a position, we intend to continue relying upon patent protection, trade secrets, know-how, continuing technological innovations and licensing opportunities. In addition, we intend to seek patent protection whenever appropriate for any products or product candidates and related technology we develop or acquire in the future.

        The scope of the intellectual property rights held by pharmaceutical firms involves complex legal, scientific and factual questions and consequently is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a result, we do not know whether any of our currently pending patent applications, or the products or product candidates we develop, acquire or license will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be challenged, circumvented or invalidated. Because patent applications in the U.S. and some other jurisdictions are sometimes maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office ("USPTO") to determine priority of invention, or in opposition proceedings in a foreign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the patents, if issued and challenged, in a court of competent jurisdiction would be found valid or enforceable. An adverse outcome in any such proceeding, or a successful assertion of third-party rights could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology.

        Although we believe our issued and granted patents, owned or in-licensed, and our pending patent applications, if they issue as patents, will provide a competitive advantage, the patent positions of pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual

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questions. We may not be able to develop patentable products or processes and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In the U.S., issued patent claims may be broadened, narrowed, or even canceled as a result of post-issuance procedures instituted by us or third parties, including reissue, reexamination, and the new supplemental examination procedure enacted as part of the Leahy-Smith America Invents Act. In addition, any patents or patent rights we obtain may be circumvented, challenged or invalidated by our competitors.

        While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties' patents and proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights. Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third-parties may obtain other patents without our knowledge prior to the issuance of patents relating to our product candidates which they could attempt to assert against us.

        Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management's attention away from our core business and could also prevent us from marketing our products. To enforce patents issued to us or in-licensed or to determine the scope and validity of other parties' proprietary rights, we may also become involved in litigation or in interference proceedings, which could result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be litigation in our industry regarding patent and other intellectual property rights.

        We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets.

        It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

    Testim

        We have licensed the underlying technology for Testim from FCB under the May 2000 License described above. The patents and patent applications that we license from FCB for Testim cover methods, compositions and formulations for administering drugs, such as testosterone, across the skin and mucus membranes. In the U.S., the '968 Patent covers a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male using Testim and is listed in the Approved Drug Products with therapeutic Equivalence Evaluations (commonly known as the "Orange Book"). The '968 Patent expires in January 2025. Nine additional U.S. patents issued covering use of Testim between October 2009 and May 2012 and have been listed in the Orange Book. They expire in 2023.

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FCB also has filed continuation applications that are pending. In Canada, there are two patents covering Testim, one that expired in January 2010 and another that expires in April 2023. The patent issued by the European Patent Office covering Testim expires in April 2023. FCB also has filed a patent application in Japan that is awaiting examination. Patents have been granted in several countries world-wide, and patent applications in several other countries throughout the world are in various stages of prosecution. All of these patents and any patents that issue from the pending applications are included in the May 2000 License or are owned directly by us. Testosterone, the active ingredient in Testim, does not have patent protection and is included in competing TRT products.

        We are currently engaged in separate litigations in Federal courts in Delaware and New Jersey with Upsher-Smith Laboratories, Inc. ("Upsher-Smith") regarding Upsher-Smith's attempts to bring a generic testosterone gel product to market via an ANDA or NDA using Testim as its reference drug. We are also engaged in litigation in Federal court in New Jersey with Watson Laboratories, Inc. (NV), Watson Pharmaceuticals, Inc. and Watson Pharma, Inc. (collectively, "Watson") regarding Watson's attempts to bring a generic testosterone gel product to market via an ANDA.

        See "—Competition—TRT Market Competition—Generic Competition" above and "Legal Proceedings" in Part I, Item 3 below for discussion of these litigations and Upsher-Smith's and Watson's respective efforts to obtain approval of a generic version of Testim. An adverse outcome in any of these litigations or any other such legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ten FCB patents. The introduction of a generic version of Testim could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue to develop our product pipeline and therefore could have a material negative impact on our financial condition and results of operations.

    XIAFLEX

        We licensed the collagenase enzyme in XIAFLEX, our product for the treatment of Dupuytren's, and product candidate for the treatment of Peyronie's, Frozen Shoulder syndrome and cellulite and we also have the option upon certain conditions to license and other indications, from BioSpecifics. In addition to the marketing exclusivity which comes with its orphan drug status in the U.S. as a treatment for Dupuytren's and Peyronie's, use of the enzyme underlying XIAFLEX is covered by two use patents in the U.S., one for the treatment of Dupuytren's and one for the treatment of Peyronie's. The Dupuytren's patent expires in 2014, and the Peyronie's patent expires in 2019. Both patents are limited to the use of the enzyme for the treatment of Dupuytren's and Peyronie's, respectively, within certain dose ranges. On October 12, 2010, the U.S. Patent and Trademark Office issued U.S. Patent No. 7,811,560 (the "'560 Patent") covering XIAFLEX with independent claims that recite a drug product, a process for producing the drug product, and pharmaceutical formulations comprising the drug product. As a result, we expect XIAFLEX to have patent protection through 2028.

        On August 31, 2011, we and BioSpecifics entered into a settlement agreement (the "Settlement Agreement"), pursuant to which the parties settled all pending litigation and resolved other outstanding disputes between them. Pursuant to the Settlement Agreement, we reserve certain rights and the parties have agreed to certain clarifications as to intellectual property matters and amounts owed between the parties. As a result of this settlement, we and BioSpecifics are now co-owners of the '560 Patent.

        While XIAFLEX does not have orphan drug status for any indication in Europe, foreign patents cover these products in certain countries and, on approval of XIAFLEX for a first indication in Europe, we believe the product will benefit from ten years of market exclusivity and eight years of data exclusivity. We may obtain an additional year of market exclusivity if the regulatory authorities approve an additional indication that they determine to represent a significant clinical benefit.

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        In January 2005, a patent application was filed with regard to XIAFLEX for the treatment of Frozen Shoulder syndrome. If this patent is granted, it would expire in 2026 or later if patent term adjustments are granted.

        In October 2011, we filed a provisional U.S. patent application relating to the treatment of cellulite with XIAFLEX. If granted, this patent would expire in 2032 or later if patent term adjustments are granted. An international patent application under the Patent Cooperation Treaty ("PCT") was filed in October 2012.

        In January 2012, we filed a provisional U.S. patent relating to certain sequences of the collagenase enzyme used in XIAFLEX. If granted, this patent would expire in 2033 or later if patent term adjustments are granted. An international patent application under the PCT was filed in January 2013.

    Orphan Drug Status

        The Orphan Drug provisions of the Federal Food, Drug, and Cosmetic Act provide incentives to drug and biologics suppliers to develop and supply drugs for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the U.S. or, for a disease that affects more than 200,000 individuals in the U.S. where there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for such disease or condition will be recovered from its sales in the U.S. Under these provisions, a supplier of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. The marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug for the same indication except under limited circumstances. It would not prevent other drugs from being approved for the same indication.

        The FDA granted orphan drug status to XIAFLEX in the U.S. for each of the treatments of Dupuytren's and Peyronie's in 1996. The designations for the treatment of Dupuytren's and Peyronie's have been transferred to us. Orphan drug status means that, because XIAFLEX was the first product to receive FDA approval for the orphan indication of Dupuytren's, another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to seven years in the U.S. With an approval date of February 2, 2010, the orphan status exclusivity period for XIAFLEX for Dupuytren's would expire February 2, 2017.

    The Hatch-Waxman Act

        Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active ingredient. The Hatch-Waxman Act prohibits an ANDA where the applicant does not own or have a legal right of reference to all the data required for approval, to be submitted by another company for another version of such drug during the five-year exclusive period. Protection under the Hatch-Waxman Act will not prevent the filing or approval of another full NDA; however, the applicant would be required to conduct its own pre-clinical, adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new NDAs with new clinical trials for previously approved drugs and supplemental NDAs, for example, for new indications, dosages, or strengths of an existing drug, if new clinical investigations are essential to the approval. This three-year exclusivity covers only the new changes associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient or indications.

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        If an ANDA applicant were to file a paragraph IV certification under the Hatch-Waxman Act in connection with the submission to the FDA of an ANDA for approval of a generic version of any of our products for which we believed we held a valid patent, then we could initiate a lawsuit against the applicant claiming patent infringement and defending the relevant patent's validity and enforceability. Depending on the facts and circumstances, the FDA may stay the approval of the ANDA for a generic version of any of our products for 30 months so long as we initiate litigation against the filer of the ANDA within 45 days of receiving the paragraph IV certification. If a court found that one of our patents was invalid or not infringed, then the FDA would be permitted to approve the competitor's ANDA resulting in a competitive generic product. In the event that the FDA did not grant the 30 month stay, the FDA would be permitted to approve the competitor's ANDA; however, we could engage in legal proceedings, such as an injunction, to attempt to preclude the generic competitor from entering the market during the pendency of the patent litigation, but we may not prevail in which event the competitor could enter the market, despite the ongoing patent litigation.

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

EMPLOYEES

        We are a fully integrated company and had approximately 526 employees at the end of 2012, including approximately 287 employees in our commercial organization, 122 employees in manufacturing and quality, 60 employees in research and development and 57 employees providing administrative support. We believe that our relations with our employees are good, and we have no history of work stoppages. Generally, our employees are at-will employees. However, we have entered into employment agreements with certain of our executive officers.

RESEARCH AND DEVELOPMENT SPENDING

        Over the last three fiscal years, we have spent approximately $155.8 million on company-sponsored research and development activities. We spent $48.0 million in 2010, $61.9 million in 2011 and $45.9 million in 2012. For additional discussion on these activities, see "Results of Operations" in Part II, Item 7 below.

REVENUE FROM CUSTOMERS IN THE U.S. AND OUTSIDE THE U.S.

        The information under "Results of Operation—Years Ended December 31, 2012 and 2011—Net Revenues" and under "Results of Operation—Years Ended December 31, 2011 and 2010—Net Revenues" in Part II, Item 7 is incorporated herein by reference.

SEASONALITY

        The total volume of procedures to treat Dupuytren's has exhibited significant seasonality. Procedure volume is historically at its lowest in the second and third quarters and peaks in the fourth and first quarters. The rationale for this seasonality is uncertain but we believe it may be due in part to potential patients wishing to avoid the disruption of surgery and recovery during the spring and summer months and in part to patients attempting to exhaust flexible spending accounts near year-end or schedule procedures before co-pays and deductibles reset in a new year.

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        In the nearly three years since launch, sales of XIAFLEX have exhibited their strongest growth in the fourth quarters of 2010, 2011 and 2012; however, to date, sales of XIAFLEX have not shown the same significant ebbing and flowing seasonality as the historical trends of total volume of Dupuytren's procedures. We cannot predict whether XIAFLEX sales will begin to exhibit a similar seasonality in the future.

FINANCIAL INFORMATION

        The information under Part II, Item 8 is incorporated herein by reference.

AVAILABLE INFORMATION

        We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F. Street, N.E., Washington, DC 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. You may also obtain our SEC filings free of charge from the SEC's Internet Web site at www.sec.gov.

        Our Internet Web site address is www.auxilium.com. We make available free of charge through our Web site's "For Investors" page most of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information. These reports and information are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

        Our Board of Directors has various committees including an audit and compliance committee, compensation committee and nominating and corporate governance committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines and a Code of Conduct. Copies of these charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, can be obtained free of charge from our Web site. The references to our Web site and the SEC's Web site are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.

        In addition, you may request a copy of the foregoing filings, charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, at no cost by writing us at the following address or telephoning us at the following telephone number:

Auxilium Pharmaceuticals, Inc.
640 Lee Road
Chesterbrook, PA 19087
Attention: Investor Relations
Telephone: (484) 321-5900

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ITEM 1A.    Risk Factors

        In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business or financial position.

Risks Related to Commercialization

If medical doctors do not prescribe our products or the medical profession or patients do not accept our products, our ability to grow or maintain our revenues will be limited.

        Our business is dependent on market acceptance of our products and, if approved, our product candidates, including, without limitation, XIAFLEX for the potential treatment of Peyronie's, by physicians, healthcare payors, patients and the medical community. Medical doctors' willingness to prescribe, and patients' willingness to accept, our products depend on many factors, including:

    perceived safety and efficacy of our products;

    convenience and ease of administration;

    prevalence and severity of adverse side effects in both clinical trials and commercial use;

    availability of alternative treatments or products, including generics;

    cost effectiveness and the pricing of our products;

    the adequacy and effectiveness of our sales force and that of any co-promotion partner's or international partner's sales force;

    the adequacy and effectiveness of our production, distribution and marketing capabilities and those of our international partners;

    publicity concerning our products or competing products; and

    existence and level of third-party coverage or reimbursement for our products and, in the cases of XIAFLEX for the treatment of Dupuytren's and, if approved, XIAFLEX for the potential treatment of Peyronie's, the procedures performed by physicians while treating patients with XIAFLEX.

        Even though we have received regulatory approval for Testim for the treatment of hypogonadism and XIAFLEX for the treatment of adult Dupuytren's patients with a palpable cord, and even if we receive regulatory approval and satisfy the above criteria for any of our product candidates, including, without limitation, XIAFLEX for the treatment of Peyronie's, physicians may not prescribe, and patients may not accept, our products if we do not promote our products effectively. If any of our products or product candidates fails to achieve market acceptance, we may not be able to market and sell the products successfully, which would limit our ability to generate revenue and could harm our business.

Our products and any of our product candidates, if approved, and our competitors' branded products may face competition from lower cost generic or follow-on products and such generic competition could have a material adverse effect on our business.

        Testim is approved under the provisions of the U.S. Food, Drug and Cosmetic Act that renders it susceptible to potential competition from generic manufacturers via the ANDA procedure. Generic

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manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical companies who have incurred substantial expenses associated with the research and development of the drug product.

        The ANDA procedure includes provisions allowing generic manufacturers to challenge the effectiveness of the innovator's patent protection long before the generic manufacturer actually commercializes their products through the paragraph IV certification procedure. In recent years, generic manufacturers have used paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and we expect this trend to continue and to implicate drug products with even relatively small total revenues.

    Upsher-Smith Litigations

    ANDA Litigations with Upsher-Smith

        We are currently engaged in separate litigations in Federal courts in Delaware and New Jersey with Upsher-Smith regarding Upsher-Smith's attempts to bring a generic testosterone gel product to market via an ANDA using Testim as its reference drug. We refer to the litigation in Delaware as the "Delaware Upsher-Smith ANDA Litigation", the litigation in New Jersey as the "New Jersey Upsher-Smith ANDA Litigation", and both of them collectively as the "Upsher-Smith ANDA Litigations". A discussion of the Upsher-Smith Litigations is set forth below. For further discussion of the Upsher-Smith Litigations and Upsher-Smith's efforts to obtain approval of a generic version of Testim via an ANDA pathway, see:

    "Competition—TRT Market Competition—Generic Competition" in Part I, Item 1 above; and

    "Legal Proceedings—Upsher-Smith Litigation" in Part I, Item 3 below.

    Delaware

        In October 2008, we and our licensor, CPEX Pharmaceuticals, Inc. (FCB's predecessor in interest to Testim), received notice that Upsher-Smith filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the '968 Patent. Shortly after, we commenced the Delaware Upsher-Smith Litigation. Upsher-Smith will not be able to lawfully launch a generic version of Testim in the U.S. without the necessary approval from the FDA. Although it would seem unlikely based on the FDA's public statements in its responses to the Citizen's Petitions submitted by each of us and Abbott and Upsher-Smith's public stance that its generic product has different penetration enhancers than Testim, the FDA could approve the generic product proposed in Upsher-Smith's ANDA. With FDA approval, even if the Delaware Upsher-Smith Litigation remains pending, Upsher-Smith may nevertheless choose to launch this generic product, if approved, at risk of infringing the '968 patent. Although administratively closed in December 2011, the Delaware Upsher-Smith Litigation has not been dismissed or finally resolved and could also result in a finding that Upsher-Smith's proposed testosterone product does not infringe the '968 Patent or that the '968 Patent is invalid and/or unenforceable. All discovery obligations of the parties continue to be in effect. In April 2012, we and FCB received a notice from Upsher-Smith in connection with its ANDA advising us and FCB of Upsher-Smith's Paragraph IV certification relating to the eight additional patents listed in the Orange Book in addition to the '968 patent-in-suit, and asserting that Upsher-Smith does not believe that the product for which it is seeking approval infringes any of the Orange Book listed Testim patents and that those patents are invalid. A tenth U.S. patent issued to FCB on May 15, 2012 and was listed in the Orange Book.

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    New Jersey

        We and FCB learned on September 11, 2012 that Upsher-Smith had filed on September 10, 2012 in the United States District Court for the District of New Jersey a complaint for declaratory judgment seeking a declaration of non-infringement and/or invalidity of FCB's U.S. Patent Nos.: 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; 7,608,610; 7,935,690; and 8,063,029. All of the eight referenced patents cover our Testim® 1% testosterone gel, and the eight referenced patents are among the ten FCB patents covering Testim that are currently listed in the Orange Book. The referenced patents will expire between 2023 and 2025. We and FCB have filed a Motion to Dismiss this case or, in the alternative, to move the case to Delaware.

    505(b)(2) NDA Litigation

        On or about December 28, 2012, we and FCB became aware of a notice from Upsher-Smith that advised us and FCB of Upsher-Smith's filing of a 505(b)(2) NDA containing a Paragraph IV certification under 21 U.S.C. Section 314.52(c) for testosterone gel (the "Upsher-Smith NDA"). This Paragraph IV certification notice refers to the ten U.S. patents, covering Testim® 1% testosterone gel, that are listed in the Orange Book. These ten patents are owned by FCB and will expire between 2023 and 2025. Upsher-Smith may seek to have any drug approved under the Upsher-Smith NDA as a generic version of Testim. On January 28, 2013, we and FCB filed a lawsuit in the United States District Court of Delaware against Upsher-Smith for infringement of FCB's ten patents listed in the Orange Book as covering Testim® 1% testosterone gel. For further discussion of this matter, see "Legal Proceedings—Upsher-Smith Litigation" in Part I, Item 3 below.

    Watson Litigation

    ANDA Litigations with Watson

        On May 24, 2012, we and FCB filed a lawsuit against Watson for infringement of FCB's ten patents listed in the Orange Book as covering Testim® 1% testosterone gel (the "Watson Litigation"). The lawsuit was filed in the United States District Court for the District of New Jersey on May 23, 2012 in response to a notice letter, dated April 12, 2012, sent by Watson Laboratories, Inc. (NV) regarding its filing with the FDA of an ANDA for a generic 1% testosterone gel product. This letter also stated that the ANDA contained Paragraph IV certifications with respect to the nine patents listed in the Orange Book on that date as covering Testim. Our lawsuit filed against Watson involves those nine patents, as well as a tenth patent covering Testim that was issued on May 15, 2012 and is listed in the Orange Book. For further discussion of the Watson Litigation and Watson's efforts to obtain approval of a generic version of Testim via an ANDA pathway, see "Legal Proceedings—Watson Litigation" in Part I, Item 3 below.

        An adverse outcome in any of the Upsher-Smith Litigations, the Watson Litigation, or any other such legal action, could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the last to expire of the ten Orange Book patents relating to Testim in January 2025.

        In addition, we expect that a generic version of Androgel may potentially be introduced as early as August 2015. See "Competition—TRT Market Competition—Generic Competition" in Part I, Item 1 above for a discussion of Watson's various litigations involving the Androgel franchise. Since Testim and XIAFLEX for Dupuytren's are currently our only products, the introduction of a generic version to Testim or Abbot's AndroGel testosterone gel franchise could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue the commercialization of XIAFLEX for Dupuytren's.

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        In addition, PPACA, enacted in March 2010, includes provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA (although this could change as the regulations are enacted). PPACA also establishes an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX. As a result, we could face competition from other pharmaceutical companies that develop biosimilar versions of our biological product XIAFLEX that do not infringe our patents or other proprietary rights. Similar legislation has also been adopted in the EU.

Failure to accurately forecast demand for our products could result in additional charges for excess inventories, or future charges for excess or idle plant capacity.

        In planning for the market launch of XIAFLEX for Dupuytren's, we decided to ensure that we would not run out of stock during the launch. Prior to FDA approval, we produced finished packaged inventory sufficient to meet a significant demand. In 2010, we concluded that $3.9 million of this inventory may expire prior to its expected sale and charged this cost to Cost of goods sold for 2010. During 2011 and 2012, all of this reserve was utilized in the physical disposal of such expiring inventory.

        We continually evaluate the need for reserves for inventory on hand that is in excess of expected future demand or that is not expected to meet approved or anticipated specifications. Inventories expected to be utilized in the next 12-month period are classified as current, and inventories expected to be utilized beyond that period are classified as non-current. Such non-current inventories at December 31, 2012 represents XIAFLEX inventories which have long shelf lives. We continue to produce XIAFLEX in excess of current product demand in order to maintain manufacturing know-how and efficiencies. Based on our projections of continuing demand for XIAFLEX for Dupuytren's and the expected approval and market launch of XIAFLEX for Peyronie's, we believe that these inventories will be sold prior to their expiration. However, in the event that demand for XIAFLEX declines, demand does not meet our sales forecasts for Dupuytren's and Peyronie's or FDA approval of XIAFLEX for Peyronie's is delayed, we could have additional charges for excess inventories. In addition, if we reduce production levels as a result of these potential conditions, we may be required to record charges for excess or idle plant capacity. If we are required to recognize these types of charges, such charges could have a material adverse effect on our financial condition and results of operations.

We make business decisions based on forecasts of future sales of our products and product candidates that may be inaccurate.

        Our market estimates are based on many assumptions, including, but not limited to, reliance on external market research, our own internal research, population estimates, estimates of disease diagnostic rates, treatment trends, and market estimates by third parties. Any of these assumptions can materially impact our forecasts and we cannot assure you that the assumptions are accurate. If the market for any of our products or product candidates is less than this data would suggest, the potential sales for the product or product candidate in question could be adversely affected.

If third-party payors do not adequately reimburse customers for our products or any of our product candidates that are approved for marketing, they might not be used or purchased, and our revenues and profits will not grow.

        Our revenues and profits depend heavily upon the availability of adequate coverage and reimbursement for the use of our products, and any of our product candidates that are approved for marketing, from third-party healthcare and state and federal government payors, both in the U.S. and

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in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor's determination that the product is:

    competitively priced;

    safe, effective and medically necessary;

    appropriate for the specific patient;

    cost-effective; and

    neither experimental nor investigational.

        Since reimbursement approval for a product is required from third-party and government payors, seeking this approval, particularly when seeking approval for a preferred form of reimbursement over other competitive products, is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a basis similar or preferred to competitive products or at all. If reimbursement is approved, it may be at prices below that which we believe to be appropriate. Once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely or we may lose the similar or better reimbursement we receive compared to competitive products. As reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved.

        In November 2011, the CMS released payment rates for CPT codes to be used with XIAFLEX for the treatment of adult Dupuytren's patients with a palpable cord beginning January 1, 2012. The CPT codes apply to the procedures only, and leave in place the separate XIAFLEX specific J code for reimbursement of the product that was effective January 1, 2011. The CPT codes, 20527 for the XIAFLEX injection procedure and 26341 for the finger extension or manipulation procedure, and J code, J0775, are used by physicians to identify XIAFLEX when billing to Medicare, Medicaid and commercial health plans for reimbursement. Failure of the existence of the XIAFLEX-specific J code and CPT codes to spur demand may have a material adverse effect on our business. In addition, physicians may perceive the reimbursement levels associated with the XIAFLEX-specific J code and CPT codes to be inadequate, which could affect the use of such codes by physicians and have a material adverse effect on our business.

If product liability lawsuits are brought against us, we may incur substantial liabilities.

        The commercialization of our products and the clinical testing, manufacture and commercialization of our product candidates, if approved, involves significant exposure to product liability claims. We have products liability insurance that covers our products and the clinical trials of our product candidates that we believe is adequate in both scope and amount and has been placed with what we believe to be reputable insurers. This insurance has a self-insurance retention for the first $1.0 million of liability. Our product liability policies have been written on a claims-made basis. If any of our product candidates are approved for marketing, we may seek additional coverage. We cannot predict all of the adverse health events that our products or product candidates may cause. As a result, our current and future coverages may not be adequate to protect us from all the liabilities that we may incur. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, we may not be able to maintain our clinical trial insurance or product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses. If we are required to pay a product liability claim, we may not have sufficient financial resources and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liability litigation, such litigation could also consume substantial amounts of our financial and managerial resources, and might result in

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adverse publicity, all of which would impair our business. Additionally, we enter into various agreements where we indemnify third parties such as manufacturers, investigators and collaborative partners for certain product liability claims related to our products. These indemnification obligations may require us to pay significant sums of money for claims that are covered by these indemnifications.

Testim competes in a very competitive market, and if we are unable to compete effectively with the other companies that produce products for the treatment of urologic or sexual health disorders, our ability to generate revenues will be limited.

        The TRT market is highly competitive. Our success will depend, in part, on our ability to grow our prescription volume and protect our share of the market from the competition. Potential competitors in North America, Europe and elsewhere include major pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies. As competition has increased, access to managed care plans has also become more competitive in the TRT market. Pricing, rebate and discount strategies required to gain or maintain access or in some cases preferential access to certain managed care plans may have a material adverse effect on the revenue we derive from Testim. The loss of preferred status or any access at all for certain managed care plans may have a material adverse effect on Testim's share of the TRT market.

        Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe our patents or other proprietary rights, and, as a result, our business may be adversely affected. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of the patent rights that we in-license. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products. The strategies that we deploy to make Testim price-competitive with lower cost generic products may reduce our profit margins on Testim significantly. Consequently, increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in revenue from Testim and adversely affect our business.

        In addition to potential generic competition, Androgel 1% and Androgel 1.62%, two additional competing TRT products were launched in the U.S. in the first quarter of 2011 and several other pharmaceutical companies have TRT products in development that may be approved for marketing in the U.S. and the rest of the world.

        For a discussion of competition in the TRT market, see "Competition—TRT Market Competition" in Part I, Item 1 above.

If testosterone replacement therapies are perceived, or are found, to create health risks, our sales of Testim may decrease and our operations may be harmed.

        Publications have, from time to time, suggested potential health risks associated with TRT. Potential health risks are described in various articles, including a 2002 article published in Endocrine Practice and a 1999 article published in the International Journal of Andrology. The potential health risks detailed are fluid retention, sleep apnea, breast tenderness or enlargement, increased red blood cells, development of clinical prostate disease, including prostate cancer, increased cardiovascular disease risk and the suppression of sperm production. In April 2009, the FDA informed the Company that it had become aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer (known as transference) from adult males using testosterone gel drug products. The FDA considered this information to be "new safety information" and requested changes to the prescribing information

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for Testim, including a "boxed warning", which is used to highlight warning information that is especially important to the prescriber. The FDA also required a REMS that includes assessments and a Medication Guide to inform patients. It is possible that studies on the effects of TRT could demonstrate these or other health risks. This, as well as negative publicity about the risks of hormone replacement therapy, including TRT, could adversely affect patient or prescriber attitudes and impact Testim sales. These factors could adversely affect our business.

International commercialization of our products, including the continued commercialization of XIAPEX in the European Union, and our product candidates faces significant obstacles.

        We may commercialize some of our products, and product candidates, if approved, internationally on our own or through collaborative relationships with foreign partners. Our foreign regulatory, clinical and commercial resources are limited, and accordingly, our ability to expand our business outside of the U.S. on our own is limited. We may not be able to enter into collaboration agreements with appropriate partners for important foreign markets on acceptable terms, or at all. Future and current collaborations with foreign partners may not be effective or profitable for us. Any international commercialization may carry risks that we do not foresee due to our limited international resources.

        Pfizer currently markets XIAPEX (EU tradename for XIAFLEX) for the treatment of Dupuytren's contracture in the European Union and certain Eurasian countries. Pfizer also currently has development rights in this territory for XIAPEX for, if approved, the treatment of Peyronie's. This collaboration arrangement will terminate on April 24, 2013. Although we are currently committed to the continued commercialization of XIAPEX for the treatment of Dupuytren's and the continued development of XIAPEX, if approved, for the treatment of Peyronie's in this territory, we may not have adequate resources or capabilities to do so on our own, we may not be successful in entering into a new collaboration agreement with a new partner, and continued commercialization may not be profitable for us. Also, we may not be successful in completing all actions necessary for the transfer of the Marketing Authorization ("MA") to us.

Our ability to generate revenue is somewhat dependent upon the growth of the markets in which we sell our products. If these markets do not continue to grow, our ability to maintain our revenue and generate profits, if any, could be negatively impacted.

        Large pharmaceutical companies with greater resources than we have continue to enter the TRT market. As large pharmaceutical companies launch products that compete with Testim, the amount of promotional activities to increase awareness of the benefits of TRT therapies has increased significantly. We believe that the increase in promotional activities has been the primary driver of the growth of the overall TRT market. The amount of resources we devote to promotional activities is significantly less than that of our competitors. Consequently, we do not influence the growth of the TRT market in any material manner. If our competitors do not continue to devote significant resources to consumer awareness, advertising, promotional and other activities, the growth of the overall TRT market, and the gel segment of the TRT market specifically, would likely slow or decline. Any slowing or decline in the growth of the markets in which we sell our products, could negatively impact our ability to maintain our revenue and generate profits.

Risks Related to the Manufacture of XIAFLEX

We have limited experience in manufacturing pharmaceutical and biologic products and may encounter difficulties in the manufacture of the active ingredient of XIAFLEX at our facilities in Horsham, Pennsylvania which could materially adversely affect our results of operations or delay or disrupt manufacture of XIAFLEX.

        The manufacture of pharmaceutical and biologic products requires significant expertise and capital investment. Although we leased our facilities in Horsham in order to have direct control over the

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manufacturing of the active ingredient of XIAFLEX, for which we are the sole supplier, we have limited experience in manufacturing XIAFLEX or any other pharmaceutical product. Biologics, such as XIAFLEX, require processing steps that are highly complex and generally more difficult than those required for most chemical pharmaceuticals. We may encounter difficulties with the manufacture of the active ingredient of XIAFLEX, which could delay or disrupt our manufacture of XIAFLEX, require write-offs which may affect our financial results, result in product recalls or product liability claims or otherwise materially affect our results of operations. These problems with manufacturing may include:

    our ability to develop, implement and improve our internal manufacturing capability;

    difficulties with production and yields, including the viability of the working cell bank and cell growth at lower than expected levels, scale-up and achieving adequate capacity for such supply;

    adequately aligning production and inventory with sales;

    availability of raw materials and supplies at a commercially reasonable price or at all;

    contamination issues;

    equipment failures;

    issues with quality control and assurance;

    shortages of qualified personnel;

    compliance with strictly enforced federal, state and foreign regulations; and

    lack of capital funding.

        Furthermore, our manufacturing operations expose us to a variety of significant risks, including:

    product defects and potential product liability claims;

    contamination of product or product loss;

    environmental liabilities or claims resulting from our production process or contamination at our Horsham facilities;

    sudden loss of inventory;

    termination by any of our licensees of its license agreement for breach of contract; and

    inability to manufacture products at a cost that is competitive with third party manufacturing operations, below the prices at which we are contractually obligated to supply to our partners or consistent with our costs of goods expectations.

If we are unable to maintain regulatory approval for XIAFLEX, we may not have an alternate use for our Horsham facilities but will be required to make payments under our lease.

        We have entered into leases for our facilities in Horsham, the first of which expires on January 1, 2017. If we are unable to maintain regulatory approval for XIAFLEX for Dupuytren's or obtain regulatory approval for XIAFLEX for Peyronie's, we may not have an alternate use for the Horsham facilities but will be required to make payments under our leases. As of December 31, 2012, the total future minimum lease payments of these leases during their initial noncancellable terms are approximately $18.9 million.

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Our Horsham facilities and the facilities of the manufacturer who we are in the process of qualifying as a secondary manufacturer (such manufacturer, the "Proposed Secondary Manufacturer" and such facility, the "Proposed Secondary Facility") are subject to regulatory oversight, which may delay or disrupt our development and commercialization efforts for XIAFLEX.

        We must ensure that all of the processes, methods, equipment and facilities employed in the manufacture of XIAFLEX at our Horsham facility and the Proposed Secondary Facility are compliant with the current cGMP requirements. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. Compliance with cGMP requires record keeping and quality control to assure that the clinical and commercial product meets applicable specifications and other requirements. If we or the Proposed Secondary Manufacturer fail to comply with these requirements, we may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them. Our manufacturing facilities and the Proposed Secondary Facility are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that there are deficiencies including non-compliance with regulatory requirements, we could be required to take remedial actions, stop production or close our Horsham facilities or the Proposed Secondary Facility, which would disrupt the manufacturing processes, limit the supplies of XIAFLEX and delay clinical trials and subsequent licensure.

        Future noncompliance with any applicable regulatory requirements may result in refusal by regulatory authorities to allow use of XIAFLEX made at our Horsham facilities or the Proposed Secondary Facility in clinical trials, refusal of the government to allow distribution of XIAFLEX for commercialization, criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts.

Risks Related to Our Dependence on Third-Party Manufacturers, Service Providers, Testing Laboratories and Suppliers

Since we currently rely on third-party manufacturers, suppliers and packagers, we may be unable to control the availability or cost of manufacturing and packaging our products, which could adversely affect our results of operations.

        We currently do not manufacture Testim or any of our product candidates, except for the active ingredient for XIAFLEX for which we are the sole source of supply. JHS fills and lyophilizes the XIAFLEX bulk drug substance that we manufacture and produces sterile diluent. Catalent packages and finishes the XIAFLEX products. Testim is manufactured for us by DPT, under a contract that expires on December 31, 2015, and also by CPL as a secondary supplier under a contract that expires on July 31, 2014. We are in the process of qualifying the Proposed Secondary Manufacturer for XIAFLEX. We also rely on third parties for certain packaging services for our products.

        The manufacture of pharmaceutical products requires significant expertise and capital investment. JHS, Catalent, DPT, CPL, the Proposed Secondary Manufacturer or any other third-party manufacturer or packager may encounter difficulties in production. These problems may include:

    difficulties with production costs and yields;

    availability of raw materials and supplies;

    issues with quality control and assurance;

    damage to, or complete loss of, raw materials, supplies or finished product;

    shortages of qualified personnel;

    compliance with strictly enforced federal, state and foreign regulations; and

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    lack of capital funding.

        JHS, Catalent, DPT, CPL, the Proposed Secondary Manufacturer or any of our other third-party manufacturers and packagers may not perform as agreed. Likewise, we may not perform as agreed under our contracts with these manufacturers and packagers. In either event, the applicable manufacturer or packager or we, as the case may be, may terminate the applicable agreement, which would adversely impact our ability to produce and sell our products or produce our product candidates for use in clinical trials. Also, any of our third-party manufacturers and packagers could become insolvent or cease operations. The number of third-party manufacturers with the expertise, required regulatory approvals and facilities to manufacture bulk drug substance on a commercial scale is limited, and it would take a significant amount of time to arrange and receive regulatory approval for alternative arrangements. We may not be able to contract for the manufacturing of our products or any of our product candidates on acceptable terms, if at all, which would materially impair our business.

        Any of these factors could increase our costs and result in our being unable to effectively commercialize or develop our products. Furthermore, if any third-party manufacturer fails to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices, we may be unable to meet the demand for our products and we may lose potential revenues.

Because we depend on third parties to conduct certain laboratory tests, clinical trials and other critical services, we have limited control and may encounter delays in our efforts to develop product candidates.

        We commonly rely on third parties to conduct laboratory tests, clinical trials and other critical services for us. If we are unable to obtain these services on acceptable terms, we may be unable to complete our product development efforts in a timely manner. Also, to the extent we will rely on third parties for laboratory tests and clinical trials, we will have limited control over these activities and may be unable to manage them appropriately. Communicating with third parties can also potentially lead to mistakes as well as difficulties in coordinating activities. Third parties may:

    have staffing difficulties;

    fail to comply with contractual obligations;

    experience regulatory compliance issues; or

    undergo changes in priorities or may become financially distressed.

        These third parties may not complete the tests or trials on our schedule, and the tests or trials may be methodologically flawed, may not comply with applicable laws or may be otherwise defective. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult. Our contracts with the contract research organizations on which we currently rely are generally terminable upon 30-days prior written notice. If we must replace any of these contract research organizations or any other contract research organization we may use in the future to conduct our clinical trials, our trials may have to be suspended until we find another contract research organization that offers comparable services. The time that it takes us to find alternative organizations may cause a delay in the commercialization of our product candidates or may cause us to incur significant expenses to replicate data that may be lost. Although we do not believe that the contract research organizations on which we rely offer services that are not available elsewhere, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

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Our third-party manufacturers are subject to regulatory oversight, which may delay or disrupt our development and commercialization efforts.

        Third-party manufacturers of our products or product candidates must ensure that all of the processes, methods and equipment are compliant with cGMP, and conduct extensive audits of vendors, contract laboratories and suppliers. If they fail to comply with these requirements, we also may be required to curtail the clinical trials of our product candidates, which are also supplied by these manufacturers, and may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them. Manufacturing facilities are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that there are deficiencies, third-party manufacturers could be required to take remedial actions, stop production or close the facility, which would disrupt the manufacturing processes and limit the supplies of Testim or our product candidates.

We currently rely on single source suppliers for certain raw materials and services for manufacturing XIAFLEX and for one of the primary ingredients for Testim, and on only two suppliers for another primary ingredient for Testim, and the loss of any of these suppliers could prevent us from selling XIAFLEX or Testim, which would materially harm our business.

        We rely on third-party suppliers for our supply of raw materials for the manufacture of the XIAFLEX bulk drug substance and for our supply of testosterone and cyclopentadecanolide ("CPD"), two key ingredients of Testim. Certain raw materials are available to us from only limited sources and are sole sourced. We rely on one supplier for lyophilization and sterile diluent and we rely on one other supplier for labeling and packaging of XIAFLEX drug product. Testosterone is available to us from only three sources, and we rely exclusively on two outside sources for our supply of CPD. We do not have supply agreements in place with all of our raw material suppliers, including our suppliers of testosterone and CPD. If any of the suppliers stops manufacturing, or if we are unable to procure raw materials or services on commercially favorable terms, or if we are not able to obtain them in a timely manner, we may be unable to continue to produce or sell XIAFLEX or Testim on commercially viable terms, if at all. In addition, the limited number of suppliers of these raw materials and services with whom we do not have supply agreements in place may provide such companies with greater opportunity to raise their prices. Any increase in price for these raw materials or services may reduce our gross margins.

Risks Related to Collaborators

We are dependent upon our collaborative relationships with third parties to further develop and commercialize XIAFLEX (or XIAPEX as it is known in the EU) outside of the U.S and to commercialize Testim outside of the U.S. There may be circumstances that delay or prevent any of these third parties' ability to develop and commercialize XIAFLEX or to commercialize Testim.

        We have entered into agreements with each of Pfizer, Asahi Kasei and Actelion under which we have granted them the right to develop and commercialize XIAFLEX in Europe and certain Eurasian countries, and in Japan, and in Australia, Brazil, Canada and Mexico, respectively. In addition, we may seek to enter into similar arrangements with other third parties with respect to the development and commercialization of XIAFLEX in the rest of the world. We have entered into agreements with Ferring and Paladin under which we have granted them the right to commercialize Testim in Europe and Canada, respectively. We are subject to a number of risks associated with our dependence on our collaborative relationship with these third parties, including:

    adverse decisions by a third party regarding the amount and timing of resource expenditures for the development and commercialization of XIAFLEX or Testim;

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    possible disagreements as to the timing, nature and extent of our development plans, including clinical trials or regulatory approval strategy;

    lack of alignment between specifications for product that we have agreed to provide to a third party and specifications that have or might be approved by regulatory authorities;

    the right of a third party to terminate its collaboration agreement with us on limited notice upon the occurrence of certain defined events;

    loss of significant rights if we fail to meet our obligations under the collaboration agreement;

    withdrawal of support by a third party following change of that third party's corporate strategy or due to competing priorities;

    changes in key management personnel at a third party that are members of the collaboration's various operating committees; and

    possible disagreements with a third party regarding the collaboration agreement or ownership of proprietary rights, including with respect to inventions discovered under the applicable collaborative agreement.

        Due to these factors and other possible disagreements with a third party, including disputes over intellectual property ownership, we may be delayed or prevented from further developing, manufacturing or commercializing XIAFLEX outside the U.S. or further commercializing Testim outside the U.S., or we may become involved in litigation or arbitration, which would be time consuming and expensive.

        If a third party were to unilaterally terminate its collaboration agreement with us, we would need to undertake development and marketing activities for XIAFLEX or marketing activities for Testim, as the case may be, in that third party's territory solely at our own expense and/or seek another partner for some or all of these activities in that territory. If we pursued these activities in that territory on our own, it would significantly increase our capital and infrastructure requirements, and might limit the indications we are able to pursue and could prevent us from effectively developing and commercializing XIAFLEX and could prevent us from effectively commercializing Testim, as the case may be. If we sought to find another pharmaceutical company partner for some or all of these activities, we may not be successful in such efforts, or they may result in a collaboration that has us expending greater funds and efforts than the relationship with the terminating third party.

        Pfizer currently markets XIAPEX (EU tradename for XIAFLEX) for the treatment of Dupuytren's contracture in the European Union and certain Eurasian countries. Pfizer also currently has development rights in this territory for XIAPEX for, if approved, the treatment of Peyronie's. This collaboration arrangement will terminate on April 24, 2013. Although we are currently committed to the continued commercialization of XIAPEX for the treatment of Dupuytren's and the continued development of XIAPEX, if approved, for the treatment of Peyronie's in this territory, we may not have adequate resources or capabilities to do so on our own, we may not be successful in entering into a new collaboration agreement with a new partner, and continued commercialization may not be profitable for us. Also, we may not be successful in completing all actions necessary for the transfer of the MA to us.

        In general, we cannot control the amount and timing that our third party partners may devote to our collaborations. We are relying on our third-party partners to obtain regulatory approvals for and successfully commercialize XIAFLEX in the relevant territories. If a third party fails to adequately market and promote XIAFLEX in its territory, we may be unable to obtain any remedy against that third party and sales of XIAFLEX may be harmed, which would negatively impact our business, results of operations, cash flows and liquidity due to reduced milestone and royalty payments under the applicable third party agreement.

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We do not control the actions of our collaborators, and breaches of our agreements by any of them could affect our business, our regulatory approvals or our reputation.

        We have agreements in place with our collaborators, including Pfizer, Asahi Kasei, Actelion and BioSpecifics, and we expect that any future collaborators would similarly be engaged under contract. We also have entered into agreements with Ferring and Paladin under which we have granted them the right to commercialize Testim in Europe and Canada, respectively. Nevertheless, for reasons that we may not have an ability to foresee or control, any of our collaborators may breach their respective agreements. Depending on its nature, a breach could affect our regulatory approvals for our products and could affect our reputation if the consequences of a breach are imputed to us. We may need to engage in costly litigation to enforce our rights, and we may not prevail in such litigation. A breach by one of our collaborators may lead to termination of the applicable agreement, which, in the case of a license agreement, may affect the scope of our license, such as modifying an exclusive license to a non-exclusive license. Any such breach and its consequences could have a material adverse effect on our business and financial condition.

We may not be able to license XIAFLEX for development and commercialization in the rest of the world on commercially reasonable terms or at all.

        Reaching agreement or agreements with one or multiple partners for development and commercialization of XIAFLEX in areas of the world outside the U.S. and the territories covered by our collaboration agreements with Pfizer, Asahi Kasei and Actelion is uncertain. We may not be able to timely find interested or suitable partners for such collaboration, and any such collaboration may not be as profitable as planned or profitable at all. If we are unable to license XIAFLEX for development and commercialization in areas of the world outside the U.S. and the territories covered by our current collaboration agreements with Pfizer, Asahi Kasei and Actelion on commercially reasonable terms of at all, it could have an adverse effect on our ability to commercialize XIAFLEX worldwide and on our financial condition.

Risks Related to Business Development

Our failure to successfully in-license or acquire additional technologies, product candidates or approved products could impair our ability to grow.

        We intend to in-license, acquire, develop and market additional products and product candidates so that we are not solely reliant on sales from our currently approved products for our revenues. The success of this strategy depends upon our ability to identify, select and acquire the right pharmaceutical product candidates, products and technologies. We have a limited number of product candidates in our development pipeline. We may not be able to acquire or in-license the rights to additional product candidates and approved products on terms that we find acceptable, or at all. We face extensive competition in the acquisition or in-licensing of pharmaceutical products or small companies to enhance our portfolio of products. A number of more established companies, which have strategies to in-license or acquire products, may have competitive advantages, as may other emerging companies taking similar or different approaches to product acquisitions. In addition, a number of established research-based pharmaceutical and biotechnology companies may acquire products in late stages of development to augment their internal product lines. These established companies may have a competitive advantage over us due to their size, resources and experience. If we are unable to in-license or acquire additional commercial products or product candidates, we may be reliant solely on sales of our currently approved products for revenues. As a result, our ability to grow our business or increase our profits could be severely limited.

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If we engage in any acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.

        If we undertake an acquisition, the process of integrating any newly acquired business, technology, service or product into our existing operations could be expensive and time consuming and may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons, such as an acquired product candidate proving to not be safe or effective in later clinical trials or not reaching its forecasted commercial potential. We may fund any future acquisition by issuing equity or debt securities, which could dilute our current stockholders' ownership percentage or limit our financial or operating flexibility as a result of restrictive covenants related to new debt. Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential acquisitions that are never completed. In pursuing our acquisition strategy, we may expend significant management time, consulting costs and legal expenses without consummating a transaction.

Risks Related to Regulatory Approval of Our Products and Product Candidates

If we do not receive regulatory approval to market XIAFLEX for the treatment of Peyronie's disease in a timely manner, or at all, we may not be able to expand our revenues for XIAFLEX and our business could be materially affected.

        In December 2012, the FDA accepted for filing our sBLA for XIAFLEX for the potential treatment of Peyronie's disease. The FDA has designated a PDUFA target action date of September 6, 2013. As the FDA is not bound by, and has in the past missed, its PDUFA goals, it is unknown whether the review of our sBLA will be completed within the FDA review goals or will be delayed.

        The FDA has broad discretion in the drug approval process. Even if we believe that we have demonstrated positive results from our preclinical and clinical trials of XIAFLEX for the treatment of Peyronie's disease, our results from these preclinical and clinical trials may not be sufficient, in the judgment of the FDA, to support marketing approval, or regulatory interpretation of our data and procedures may be unfavorable. The FDA may determine after review of our data for XIAFLEX for the treatment of Peyronie's disease that our application is insufficient, and decline to allow approval of XIAFLEX for the treatment of Peyronie's disease. Alternatively, the FDA might approve our application but with a restricted label, thus limiting who the drug may be marketed to.

        Obtaining approval of a sBLA is inherently uncertain. Even after completing clinical trials and other studies, XIAFLEX for the treatment of Peyronie's disease may not receive regulatory approval for many reasons, including the following:

    we may not be able to demonstrate to the satisfaction of the FDA that XIAFLEX for the treatment of Peyronie's disease is safe and effective;

    the FDA may disagree with the design or conduct of our clinical trials or other studies;

    the results of our clinical trials or other studies may not demonstrate that the clinical and other benefits of XIAFLEX for the treatment of Peyronie's disease outweigh its safety risks;

    the FDA's interpretation of the data from our clinical trials or other studies may be different than ours;

    the FDA may decide that the data collected from our clinical trials and other studies of XIAFLEX for the treatment of Peyronie's disease is not sufficient to support the approval of our sBLA;

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    the approval policies or regulations of the FDA may significantly change in a manner rendering our clinical and other study data insufficient for approval;

    government funding of the FDA;

    the FDA may determine that one of our investigator sites did not comply with Good Clinical Practices (GCP) regulations and that such site's data are dis-qualified, thus jeopardizing our approval; and

    an Advisory Committee, if eventually required by FDA, may delay or adversely affect approval or force a rejection of our sBLA.

        If the FDA does not approve our application, it may require that we conduct additional clinical or pre-clinical studies and submit that data before it will reconsider our application. Depending on the extent of these or any other studies, approval of any application that we subsequently submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be successful or considered sufficient by the FDA for approval or even to make our application approvable. As a result, we cannot predict when or whether regulatory approval will be obtained for our sBLA for XIAFLEX for the treatment of Peyronie's disease.

        Even if XIAFLEX for the treatment of Peyronie's disease receives regulatory approval from the FDA, any approvals that we obtain could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use, restricted label claims or the requirement that we implement a risk evaluation and mitigation strategy. In such an event, our ability to generate revenues could be greatly reduced and our business could be harmed.

        If we do not receive regulatory approval to market XIAFLEX for the treatment of Peyronie's disease in a timely manner, or at all, we may not be able to expand our revenues for XIAFLEX, inventories may become impaired and our business could be materially affected.

We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

        Our products and product candidates are subject to regulation by numerous governmental authorities in the U.S., Europe and the rest of the world. These regulations govern or affect the research and development, testing, manufacturing, labeling, distribution, safety, storage, record-keeping, approval, advertising, promotion, sampling, marketing and import and export of our products and our product candidates, as well as safe working conditions and the experimental use of animals. Noncompliance with any applicable regulatory requirements can result in refusal of the government to approve facilities for testing or manufacture of products as well as refusal to approve products for commercialization. Noncompliance with any applicable regulatory requirements also can result in criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. The FDA and comparable governmental authorities have the authority to withdraw product approvals that have been previously granted. Currently, there is a substantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made to the regulatory approval process in the U.S. In addition, the regulatory requirements relating to the manufacturing, testing, labeling, promotion, marketing and distribution of our products may change in the U.S. or the other jurisdictions in which we may have obtained or be seeking regulatory approval for our products or product candidates. Such changes may increase our costs and adversely affect our operations.

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        Additionally, failure to comply with, or changes to, the regulatory requirements that are applicable to our products or our other product candidates may result in a variety of consequences, including the following:

    restrictions on our products or manufacturing processes;

    warning letters from a governmental authority;

    withdrawal of a product or a product candidate from the market;

    voluntary or mandatory recall of a product or a product candidate;

    fines against us;

    suspension or withdrawal of regulatory approvals for a product or a product candidate;

    suspension or termination of any of our ongoing clinical trials of a product candidate;

    refusal to permit import or export of our products;

    refusal to approve pending applications or supplements to approved applications that we submit;

    denial of permission to file an application or supplement in a jurisdiction;

    product seizure; and

    injunctions, consent decrees, or the imposition of civil or criminal penalties against us.

        Testosterone is listed by the DEA as a Schedule III substance under the Controlled Substances Act of 1970. The DEA classifies substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Scheduled substances are subject to DEA regulations relating to manufacturing, storage, distribution, and physician prescription procedures. For example, all regular Schedule III drug prescriptions must be signed by a physician and may not be refilled. Furthermore, the amount of Schedule III substances we can obtain for clinical trials and commercial distribution is limited by the DEA and our quota may not be sufficient to complete clinical trials or meet commercial demand, if any. In addition to federal scheduling, Testim is subject to state-controlled substance regulation and may be placed in more restrictive schedules than those determined by the DEA and the FDA. However, to date, with the exception of the State of New York, which has given testosterone a Schedule II classification, testosterone has not been placed in a more restrictive schedule by any state.

        Entities must be registered annually with the DEA to manufacture, distribute, dispense, import, export and conduct research using controlled substances. State controlled substance laws also require registration for similar activities. In addition, the DEA requires entities handling controlled substances to maintain records, file reports, follow specific labeling and packaging requirements, and provide appropriate security measures to control against diversion of controlled substances. Failure to follow these requirements can lead to significant civil and/or criminal penalties and possibly even lead to a revocation of a DEA registration.

        Products containing controlled substances may generate public controversy. As a result, these products may have their marketing rights or regulatory approvals withdrawn. Political pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of our product candidates. For some scheduled substances or any product, the FDA may require us to develop a comprehensive risk management program to reduce the inappropriate use of our products and product candidates, including the manner in which they are marketed and sold, so as to reduce the risk of improper patient selection and diversion or abuse of the product. Developing such a program in consultation with the FDA may be a time-consuming process and could delay approval of any of our product candidates. Such a program or delays of any approval

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from the FDA could increase our product development costs and may allow our competitors additional time to develop or market competing products.

        In addition, in many foreign markets, including the countries in the EU, pricing of pharmaceutical products is subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. Failure to obtain pricing approval in a timely manner or approval of pricing which would support an adequate return on investment or generate a sufficient margin to justify the economic risk might delay or prohibit the commercial launch of the product in those countries.

As a condition for approval of XIAFLEX for Dupuytren's, we are required to comply with post-marketing requirements. Failure to comply with these requirements or any future post-marketing requirements, or the cost of compliance with such requirements, may harm our business.

        The FDA or, for products outside the U.S. for which we hold the regulatory approvals, international regulatory agencies can establish requirements for approved products with which we must comply. For example, the law allows the FDA to require us as the sponsor of a marketing application to conduct and report the results of certain studies or clinical trials for certain purposes ("post-marketing requirements") if the FDA makes certain findings required by the statute. Failure to report or conduct the studies is considered a violation and can result in enforcement action. Additionally, the FDA can request that we voluntarily conduct studies or clinical trials to address questions or concerns ("post-marketing commitments"). These studies or clinical trials could be time-consuming and costly and the results could have negative effects on our ability to market the product.

        As a condition of approval for XIAFLEX for Dupuytren's, the FDA required a single post-marketing requirement and several post-marketing commitments. The post-marketing requirement is to conduct a study to evaluate the potential for antibodies to XIAFLEX to interfere with certain other human proteins that are similar to the proteins in XIAFLEX. No new clinical studies are required as part of this evaluation. The post-marketing commitments are generally related to the manufacturing and testing of XIAFLEX. The results of the required and voluntary investigations could be time-consuming and costly and the results could have negative effects on our ability to market the product.

        After the MA for XIAPEX in the EU and certain Eurasian countries has been transferred to us after the mutual termination of the Pfizer Agreement, we will be required to comply with post-marketing requirements applicable to maintaining the approval of XIAPEX in those territories.

For XIAFLEX for Dupuytren's and Testim, we are required to implement a REMS. Failure to comply, or the cost of compliance with such REMS or any future REMS, may harm our business.

        The FDA is authorized to require us as the sponsor of an approved or unapproved marketing application to submit a proposed REMS if the FDA determines that a REMS is necessary to ensure that the benefits of a drug outweigh the risks of the drug. Failure to comply with the requirements of the approved REMS can render the drug misbranded. A violation of a REMS requirement is subject to civil penalties. Complying with the requirements of a REMS can be costly and time-consuming and adversely affect our operations.

        As a condition of approval for XIAFLEX for Dupuytren's, the FDA required a REMS. The goal of the REMS is to inform and train healthcare providers about the risks of tendon rupture, serious adverse reactions affecting the injected extremity, and the potential risk of serious hypersensitivity reactions (including the potential for anaphylaxis) associated with XIAFLEX. The REMS consists of a medication guide, a communication plan, and a timetable for submission of assessments of the REMS.

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The communication plan includes a Dear Healthcare Provider Letter and educational materials (i.e., training guide and procedure training video).

        On May 7, 2009, the FDA announced that it was requiring the manufacturers of two prescription topical testosterone gels, Solvay S.A. (since acquired by Abbott, which is now AbbVie) and Auxilium, to make changes to the prescribing information and develop REMS for the products. The FDA stated that it was requiring this action after it became aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer from adult males using testosterone gel drug products (known as transference). The FDA considered this information to be "new safety information." We believe that all topical testosterone gels have a potential for transference. Testim's prescribing information has described the risk and procedures for avoidance of transference since the product was launched in 2003. The changes to the prescribing information for Testim include a "boxed warning", which is used to highlight warning information that is especially important to the prescriber. The goal of the REMS is to inform patients about the serious risk of transference or secondary exposure associated with the use of Testim and Abbvie's AndroGel. The REMS includes assessments and a Medication Guide to inform patients. The revised prescribing information and REMS for Testim was approved in September 2009.

We may not be able to obtain or maintain orphan drug exclusivity for our products or product candidates, and our competitors may obtain orphan drug exclusivity prior to us, which could significantly harm our business.

        Some jurisdictions, including Europe and the U.S., may designate drugs intended to treat relatively small patient populations as orphan drugs. The FDA granted orphan drug status to XIAFLEX in the U.S. for the treatment of Dupuytren's and Peyronie's. Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation may not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the U.S., specific tax credits. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to ten years in Europe and for a period of seven years in the U.S. Maintaining orphan drug designations and orphan drug exclusivity for XIAFLEX for the treatment of Dupuytren's and Peyronie's may be critical to their success. Our competitors may obtain orphan drug exclusivity for products competitive with our product candidates before we do, in which case we would be excluded from that market. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it. For example, if a competitive product is shown to be different or clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product. In addition, even if we obtain orphan drug exclusivity for any of our product candidates, a viable commercial market may never develop and we may never derive any meaningful revenues from the sales of these products.

We may not be able to develop product candidates into viable commercial products, which would impair our ability to grow and could cause a decline in the price of our stock.

        The process of developing product candidates, such as XIAFLEX for the treatment of Peyronie's disease, Frozen Shoulder syndrome, cellulite and any other product candidates, involves a high degree of risk and may take several years. Developing product candidates is very expensive and will have a significant impact on our ability to generate profits. We recently submitted our sBLA for XIAFLEX for

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the potential treatment of Peyronie's disease. Product candidates may fail to reach the market for several reasons, including:

    clinical trials may show our product candidates to be ineffective or not as effective as anticipated or to have harmful side effects or any unforeseen result;

    our inability to enroll patients in clinical trials within the expected timeframes;

    our inability to obtain authorization from the FDA or other regulatory authority to initiate clinical trials within the expected timeframes;

    product candidates may fail to receive regulatory approvals required to bring the products to market;

    the FDA may not accept for review any applications for marketing approval that we submit;

    adverse events arising out of investigator initiated trials over which we do not exercise control;

    our ability to raise any additional funds that we need to complete our trials;

    manufacturing costs and delays and manufacturing problems in general, the inability to scale up to produce supplies for clinical trials or commercial supplies, or other factors may make our product candidates uneconomical;

    the proprietary rights of others and their competing products and technologies may prevent our product candidates from being effectively commercialized or obtaining exclusivity; and

    failure to meet one or more of management's target product profile criteria.

        Success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Any changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for our product candidates making further development uneconomical or impossible.

        Our product development efforts also could result in large and immediate write-offs, significant milestone payments, incurrence of debt and contingent liabilities or amortization of expenses related to intangible assets, any of which could negatively impact our financial results. Additionally, if we are unable to develop our product candidates into viable commercial products, we will be reliant solely on sales of our currently approved products for our revenues, potentially limiting our growth opportunities.

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

        Clinical trials that we may conduct, or that may be conducted by our partners, may not begin on time or may need to be restructured or temporarily suspended after they have begun. Clinical trials can be delayed or may need to be restructured for a variety of reasons, including delays or restructuring related to:

    changes to the regulatory approval process for product candidates in those jurisdictions, including the U.S., in which we may be seeking approval for our product candidates;

    obtaining an IND, or other regulatory approval to commence a clinical trial;

    timing of responses required from regulatory authorities;

    negotiating acceptable clinical trial agreement terms with prospective investigators or trial sites;

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    obtaining institutional review board, or equivalent, approval to conduct a clinical trial at a prospective site;

    recruiting subjects to participate in a clinical trial;

    competition in recruiting clinical investigators;

    shortage or lack of availability of clinical trial supplies from external and internal sources;

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

    failure to validate a patient-reported outcome questionnaire;

    the placement of a clinical hold on a study;

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

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

    manufacturing and/or distribution issues associated with clinical supplies.

        We have four projects currently in clinical development, specifically XIAFLEX for the treatment of Peyronie's, Frozen Shoulder syndrome, cellulite and a high concentration testosterone gel product. Completion of clinical trials for each product candidate will be required before commercialization. If we experience delays in, or termination of, clinical trials, or fail to enroll patients in clinical trials in a timely manner, or if the cost or timing of the regulatory approval process increases, our financial results and the commercial prospects for our product candidates will be adversely impacted. In addition, our product development costs would increase and our ability to generate additional revenue from new products could be impaired.

Risks Related to Intellectual Property

We have only limited patent protection for our products and our product candidates, and we may not be able to obtain, maintain or protect proprietary rights necessary for the development and commercialization of our products or our product candidates.

        Our business and competitive positions are in part dependent upon our ability to obtain and protect our proprietary position for our products and our product candidates in the U.S., Canada, Europe and elsewhere throughout the world. We attempt to protect our intellectual property position by filing, or obtaining licenses to, patents and patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.

        Our and our licensors' patents and patent applications may not protect our technologies and products because, among other things:

    there is no guarantee that any of our or our licensors' pending patent applications will result in issued patents;

    we may develop additional proprietary technologies that are not patentable;

    there is no guarantee that any patents issued to us, our collaborators or our licensors will provide us with any competitive advantage or cover our product candidates;

    there is no guarantee that any patents issued to us or our collaborators or our licensors will not be challenged, interfered with, circumvented or invalidated by third parties; and

    there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business.

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        If we fail to obtain adequate patent protection for our products, our ability to compete could be impaired.

        We may not control the patent prosecution, maintenance or enforcement of our in-licensed technology. Consequently, such licensed patents could be held invalid or unenforceable or could have claims construed in a manner adverse to our interests in litigation, which we would not control or to which we would not be a party. If any of the intellectual property rights of our licensors is found to be invalid, this could have a material adverse impact on our operations.

        Testosterone, the active ingredient in Testim, is off-patent and is included in competing TRT products. In the U.S., the '968 Patent covers a method for maintaining blood serum testosterone levels for treating a hypogonadal male using Testim and is listed in the Orange Book. The '968 Patent expires in January 2025. Nine additional U.S. patents issued between 2009 and 2012 covering the composition of Testim and methods of its use and have been listed in the Orange Book. They expire in April 2023. Our licensor, FCB, also has filed continuation applications that are currently pending.

        We are currently party to patent infringement litigations against each of Upsher-Smith and Watson relating to Upsher-Smith's and Watson's respective intentions to market a generic version of Testim prior to the expiration of the patents listed in the Orange Book covering Testim. Also, we have sued Upsher-Smith with respect to the Upsher-Smith NDA for a generic version of Testim. See "Competition—TRT Market Competition—Generic Competition" in Part I, Item 1 above for discussion of the Upsher-Smith Litigation. See also "Legal Proceedings" in Part I, Item 3 below for an update on the Upsher-Smith Litigations and a discussion of the Watson Litigation.

        An adverse outcome in any of the Upsher-Smith Litigations, the Watson Litigation, or any other such legal action, could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the last to expire of the ten Orange Book patents relating to Testim in January 2025. Since Testim and XIAFLEX for Dupuytren's are currently our only products, the introduction of a generic version to Testim or the potential 2015 introduction of a generic version to Abbvie's AndroGel franchise could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue to seek to expand the market of the commercial launch of XIAFLEX for Dupuytren's.

        The standards that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. Limitations on patent protection in some countries outside the U.S. and the differences in what constitutes patentable subject matter in these countries may limit the protection we seek outside of the U.S. In the U.S., issued patent claims may be broadened, narrowed, or even cancelled as a result of post-issuance procedures instituted by us or third parties, including reissue, re-examination, and the new supplemental examination procedure enacted as part of the Leahy-Smith America Invents Act. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the U.S. Also, some countries will not grant patents on patent applications that are filed after the public sale or disclosure of the material claimed in the patent application. Failure to obtain adequate patent protection for our proprietary product candidates and technology would impair our ability to be commercially competitive in these markets. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or others.

        We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and collaborators upon the commencement of a relationship with us. However, we may not obtain these agreements in all circumstances. Nor can we guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, or that we will have an adequate remedy for any such breach. In addition, adequate remedies may not exist in the event of unauthorized

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use or disclosure of this information. Others may have developed, or may develop in the future, substantially similar or superior know-how and technology. In addition, our research collaborators and scientific advisors may have contractual rights to publish our data and other proprietary information, subject to our prior review. Publications by our research collaborators and scientific advisors containing such information, either with our permission or in contravention of the terms of their agreements with us, may impair our ability to obtain patent protection or protect our proprietary information. The loss or exposure of our trade secrets, know-how and other proprietary information, as well as independent development of similar or superior know-how, could harm our operating results, financial condition and future growth prospects. Many of our employees and consultants were, and many of our consultants may currently be, parties to confidentiality agreements with other companies. Although our confidentiality agreements with these employees and consultants require that they do not bring to us, or use without proper authorization, any third party's proprietary technology, if they violate their agreements, we could suffer claims or liabilities.

If we breach any of the agreements under which we license development or commercialization rights to products or technology from others, we could lose license rights that are critical to our business.

        We are a party to a number of license and other agreements by which we have rights to use the intellectual property of third parties that are necessary for us to operate our business. In particular, we have obtained the exclusive right to develop and commercialize Testim pursuant to a license agreement with FCB. FCB may unilaterally terminate the agreement if we fail to make payments under this agreement and this failure continues for a period of 30 days following written notice to us by FCB. If the agreement is properly terminated by FCB, we may not be able to manufacture or sell Testim.

        We have also obtained exclusive worldwide rights from BioSpecifics to develop, market and sell products, other than dermal formulations labeled for topical administration, that contain BioSpecifics's enzyme, which we refer to as XIAFLEX, for the treatment of Dupuytren's, and, potentially, for the treatment of Peyronie's, Frozen Shoulder syndrome and cellulite. Either party may terminate this agreement in the event of bankruptcy or insolvency by the other party. Additionally, either party may terminate this agreement if the other party is in material breach of its obligations under the agreement which continues for a period of 90 days following receipt of written notice of such material breach. We may terminate this agreement in its entirety, or on a country-by-country basis, on an indication-by-indication basis, or on a product-by-product basis, at any time upon 90 days prior written notice to BioSpecifics. If this agreement is properly terminated by BioSpecifics, we may not be able to execute our strategy to commercialize XIAFLEX for Dupuytren's or to develop and potentially commercialize XIAFLEX for the treatment of Peyronie's, Frozen Shoulder syndrome, cellulite or future product candidates utilizing BioSpecifics' enzyme. If this agreement is properly terminated by us, we will retain a non-exclusive license for these rights.

        We expect to enter into additional licenses and other similar agreements in the future. These licenses and agreements may impose various development, commercialization, funding, royalty, diligence or other obligations on us. If we breach any of these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which could make it impossible for us to develop, manufacture or sell the products covered by the license.

        Disputes may arise with respect to our licensing and other agreements regarding manufacturing, development and commercialization of any products relating to our in-licensed intellectual property. These disputes could lead to delays in or termination of the development, manufacture and commercialization of our products or our product candidates or to litigation and could have a material adverse effect on our business.

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If our products or our future products infringe the intellectual property of our competitors or other third parties, we may be required to pay license fees or cease these activities and pay damages, which could significantly harm our business.

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

        Third parties may assert patent or other intellectual property infringement claims against us, or our licensors or collaborators, with respect to technologies used in potential product candidates. For example, we are aware of competing intellectual property relating to the TRT gel market. While we currently believe that we have freedom to operate in the TRT gel market, others may challenge our position in the future. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages. We may not have sufficient resources to effectively litigate these claims. Even if we were to prevail, any litigation could be costly and time-consuming and could divert the attention of our management and key personnel from business operations. In addition, any patent claims brought against our licensors or collaborators could affect their ability to carry out their obligations to us.

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

We may have to engage in costly litigation to enforce or protect our proprietary technology or to defend challenges to our proprietary technology by our competitors or collaborators, which may harm our business, results of operations, financial condition and cash flow.

        The pharmaceutical field is characterized by a large number of patent filings involving complex legal and factual questions, and, therefore, we cannot predict with certainty whether our licensed patents will be enforceable. Competitors or collaborators may have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests that may have been issued to others. Litigation may be necessary to protect our proprietary rights, and we cannot be certain that we will have the required resources to pursue litigation or otherwise to protect our proprietary rights.

        Competitors or collaborators may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement lawsuits, which are expensive and time-consuming. In any such proceeding, a court may decide that a patent of ours or one that we have licensed is not valid or is unenforceable, may narrowly interpret our patent claims or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. In particular, if a competitor were to file a paragraph IV certification under the Hatch-Waxman Act in connection with that competitor's submission to the FDA of an ANDA or a 505(b)(2) NDA for approval of a generic version of any of our products for which we believed we held a valid patent, then we could initiate a lawsuit against such competitor claiming

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patent infringement and defending the relevant patent's validity and enforceability. Depending on the facts and circumstances, the FDA may stay the approval of the ANDA or 505(b)(2) NDA for a generic version of any of our products for 30 months so long as we initiate litigation against the filer of the ANDA or 505(b)(2) NDA within 45 days of receiving the paragraph IV certification. If, prior to the expiration of the 30-month stay, a court found that one of our patents was invalid or not infringed, then, notwithstanding the 30-month stay, the FDA would be permitted to approve the competitor's ANDA or 505(b)(2) NDA resulting in a competitive generic product. In the event that the FDA did not grant the 30-month stay, the FDA would be permitted to approve the competitor's ANDA or 505(b)(2) NDA; however, we could engage in legal proceedings, such as seeking an injunction to attempt to preclude the generic competitor from entering the market during the pendency of the patent litigation, but we may not prevail in which event the competitor could enter the market, despite the ongoing patent litigation.

        For example, we are currently engaged in separate litigations in Federal courts in Delaware and New Jersey with Upsher-Smith regarding Upsher-Smith's attempts to bring a generic testosterone gel product to market via an ANDA or NDA using Testim as its reference drug. We also engaged in litigation in Federal court in New Jersey with Watson regarding Watson's attempts to bring a generic testosterone gel product to market via an ANDA. See "—Competition—TRT Market Competition—Generic Competition" in Part I, Item 1 above and "Legal Proceedings" in Part I, Item 3 below for discussion of these litigations and Upsher-Smith's and Watson's respective efforts to obtain approval of a generic version of Testim. An adverse outcome in any of these litigations or any other such legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ten FCB patents. The introduction of a generic version of Testim could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue to develop our product pipeline and therefore could have a material negative impact on our financial condition and results of operations.

Risks Related to Healthcare Reform

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably, may increase competition and may increase governmental oversight and compliance costs.

        In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare systems in ways that could impact our ability to sell our products profitably. In March 2010, PPACA and the associated reconciliation bill became law (collectively, the "Healthcare Reform Law"), and it includes a number of healthcare reform provisions and requires most U.S. citizens to have health insurance. Effective January 1, 2010, the Healthcare Reform Law increased the minimum Medicaid drug rebates for pharmaceutical companies, expanded the 340B drug discount program, and made changes to affect the Medicare Part D coverage gap, or "donut hole." The law Healthcare Reform Law also revised the definition of "average manufacturer price" for reporting purposes (effective October 1, 2010), which could increase the amount of our Medicaid drug rebates to states. The Healthcare Reform Law also imposed annual fees on companies that manufacture or import branded prescription drug and biological products, which began in 2011. Substantial new provisions affecting compliance were also added, which may require us to modify our business practices with healthcare practitioners.

        In addition, the Healthcare Reform Law included provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA (although this is subject to change as the regulations are enacted). The Healthcare Reform Law also established an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX. As a result, we could face

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competition from other pharmaceutical companies that develop biosimilar versions of our biological product XIAFLEX that do not infringe our patents or other proprietary rights.

        The full effects of the Healthcare Reform Law cannot be known until these provisions are fully implemented and CMS and other federal and state agencies issue applicable regulations or guidance. Furthermore, legislation repealing, replacing or modifying all or part of the Healthcare Reform Law may be enacted or courts may issue rulings suspending, interpreting or otherwise affecting all or part of the Healthcare Reform Law, and these changes could significantly alter any advantages or disadvantages to the Company currently stemming from the Healthcare Reform Law. Specifically, any repeal or modification of the exclusivity for biological products could have an adverse effect on our business. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products.

        The cost of pharmaceuticals continues to generate substantial governmental interest. We expect to experience pricing pressures in connection with the sale of our products due to the trend toward managed healthcare, the increasing influence of managed care organizations and additional legislative proposals. Our results of operations could be adversely affected by current and future healthcare reforms.

        Lastly, the Healthcare Reform Law provisions known as the "Physicians Payments Sunshine Act" require reporting to the federal government of all payments in excess of $10 or that aggregate to $100 annually that we make to physicians, including honoraria, consulting fees, payment for research, gifts, speakers' fees, entertainment, travel, education and royalties. Required data submission includes a recipient's name, address, medical specialty, amount received, date of payment, type of payment (cash, stock, items, or services), and if the payment is related to a specific drug or medical product. Several states currently have similar laws and more states may enact similar legislation. Reporting and potential public disclosure of these expenses may make it more difficult to recruit physicians for assistance with activities that would be helpful or necessary to our business. Tracking and reporting the required expenses may result in considerable expense.

Risks Related to Compliance

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.

        We are a relatively small company and we rely heavily on third parties to conduct many important functions. As a biopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly traded company we are subject to significant regulations, some of which have either only recently been adopted or are currently proposals subject to change. We cannot give assurances that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable federal, state, and foreign laws and regulations could lead to the imposition of fines, result in our exclusion from participation in state and federal healthcare programs, cause the value of our common stock to decline, impede our ability to raise capital or lead to the de-listing of our stock.

Our controls over external financial reporting may fail or be circumvented.

        We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under the Sarbanes-Oxley Act of 2002, as amended, to report annually on our internal control over financial reporting. If we, or our independent registered public accounting firm, determine that our internal control over financial reporting is not effective, this shortcoming could have an adverse effect on our business and financial results and the price of our common stock could be negatively affected. This reporting requirement could also make it more difficult or more costly for us to obtain certain types of insurance, including director and officer

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liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulation concerning control and procedures could have a material effect on our business, results of operations and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers.

We could be negatively impacted by future interpretation or implementation of federal and state fraud and abuse laws, including anti-kickback laws, false claims laws and federal and state anti-referral laws.

        We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws, false claims laws and physician self-referral laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Department of Defense and Veterans' health programs. To date, we have not been challenged by a governmental authority under any of these laws.

        However, because of the far-reaching nature of these laws, we may be required to alter one or more of our practices to be in compliance with these laws. Health care fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated. Any violations of these laws could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations.

        We could become subject to false claims litigation under federal or state statutes, which can lead to civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in federal health care programs. These false claims statutes include the federal False Claims Act, which allows any person and/or the government to bring suit alleging the false or fraudulent submission of claims for payment under federal programs or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action. We could also become subject to similar false claims litigation under state statutes. If we must defend any such action and/or if we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations.

        We are required to report pricing information to the Federal and state governments as part of our participation in programs such as the Medicaid Drug Rebate Program, Medicare Part B, and programs run by the Public Health Service, and the Department of Defense. If these reports are not filed in a timely and accurate fashion, we could be subjected to fines and liability under the False Claims Act.

We may be exposed to liability claims associated with the use of hazardous materials and chemicals.

        Our research and development activities and our commercial product, Testim, involve the use of testosterone and large amounts of alcohol which are classified as hazardous materials and chemicals. XIAFLEX, approved in the U.S., EU, Canada and certain Eurasian countries for the treatment of Dupuytren's, and in development for the treatment of Peyronie's, Frozen Shoulder syndrome and cellulite, is a biologic product. Biologic products may present a manufacturing health hazard due to risk of infection with the bacterial cell line used to produce the product or with potential bacteriophage

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contamination with the fermentation. Although we believe that our safety procedures for using, storing, handling, manufacturing and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business and financial condition. To our knowledge, we have not been the subject of any investigation by any agency or authority for failure to comply with any rules or regulations applicable to hazardous materials or chemicals. We do not maintain specific insurance for the handling of biological, hazardous and radioactive materials. We have contracts with third-party providers for the storage and disposal of hazardous waste and believe that any claims against us in these areas would be the responsibility of these third parties. However, we may be held responsible for these claims despite the fact that we have contracted with third parties for the storage and disposal of hazardous waste. If we are exposed to these types of claims, we could be held responsible for liabilities that exceed our financial resources, which could severely affect our operations.

Risks Related to Our Financial Results, Our Need for Additional Financing and Our Stock Price

We have incurred significant losses since our inception in July 1999 and, although we achieved initial year-end profitability for 2012, we may not remain profitable every quarter or every year.

        Prior to 2012, we have incurred significant losses since our inception. As of December 31, 2012, we had an accumulated deficit of $322.1 million. We achieved initial year-end profitability for 2012; however, it is possible that we will not be able to remain profitable in every quarter or year thereafter. If we fail to maintain profitability on a quarter-to-quarter or year-to-year basis, the value of our common stock may decline substantially.

        As a company that generates a small profit, or that may generate a small loss, the standard of materiality applied by our independent registered public accountants in reviewing our financial reporting is currently very low; consequently, an issue of relative insignificance in relation to the size and scope of our operations may very likely be given great weight for accounting purposes and could have negative consequences for our financial reporting. Issues that we do not believe would have risen to the level of a material accounting issue for us in prior reporting periods could now cause us to report significant deficiencies or, in certain cases, restate our financial statements, and such deficiencies or restatements could have a material adverse effect on us and our stock price.

Our future results are unpredictable, and therefore, our common stock is a highly speculative investment.

        Our future results are unpredictable and our success is dependent upon many factors. Accordingly, our stockholders and prospective stockholders must consider our prospects in light of the risks and difficulties we may encounter. Our stock price may be volatile and our stockholders may lose some or all of their investment. For the foreseeable future, if we are unable to grow sales of our products and out-licensing revenues, we will be unable to increase our revenues or maintain profitability and we may be forced to delay or change our current plans to develop our product candidates.

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Our results of operations and earnings may not meet guidance or expectations.

        We provide public guidance on our expected results of operations for future periods. This guidance is comprised of forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this Report on Form 10-K and in our other public filings and public statements, and is based necessarily on assumptions we make at the time we provide such guidance. Our actual results may not always be consistent with our guidance. If, in the future, our results of operations for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could decline significantly.

If our financial resources and sources of liquidity are not sufficient to satisfy our liquidity requirements or fund our anticipated operations, we may either need or choose to borrow money or issue additional equity or debt or we may be required to limit, scale back or cease our operations.

        Based on our current plans and expectations, we believe that our current financial resources and sources of liquidity will be adequate for the Company to fund our anticipated operations for the next twelve months. We may elect to raise additional funds in order to enhance our sales and marketing efforts for additional products we may acquire, commercialize any product candidates that receive regulatory approval, enhance our ability to acquire businesses or companies or acquire or in-license approved products or product candidates or technologies for development, and to maintain adequate cash reserves to minimize financial market fundraising risks. If additional funds are required, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business. If we are unable to obtain this additional financing, we may be required to:

    reduce the size or scope, or both, of our sales and marketing efforts for Testim, XIAFLEX or any of our future products;

    delay or reduce the scope of, or eliminate one or more of our planned development, commercialization or expansion activities;

    seek collaborators for our product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and/or

    relinquish, license or otherwise dispose of rights to technologies, product candidates or products that we currently market or would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available.

We may become subject to stockholder activism efforts that each could cause material disruption to our business.

        Certain influential institutional investors and hedge funds have taken steps to involve themselves in the governance and strategic direction of certain companies due to governance or strategic related disagreements between such companies and such stockholders. If we become subject to such stockholder activism efforts, it could result in substantial costs and a diversion of management's attention and resources, which could harm our business and adversely affect the market price of our common stock.

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Outstanding options could result in substantial dilution.

        At the end of the period covered by this Report, stock options to purchase 6,626,176 shares of common stock were outstanding. In addition, as of December 31, 2012, a total of 4,474,750 stock options are available for grant under our 2004 Equity Compensation Plan amended and restated as of June 21, 2012. A total of 966,730 of the outstanding options were "in the money" and exercisable as of December 31, 2012. "In the money" means that the current market price of the common stock is above the exercise price of the shares subject to the option. The issuance of common stock upon the exercise of these options could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.

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

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

    limitations on the removal of directors;

    advance notice requirements for stockholder proposals and nominations;

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

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

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

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

Risks Relating to Our Convertible Senior Notes and Related Hedge Transactions

We incurred significant indebtedness through the sale of our 1.5% convertible senior notes due 2018, and we may incur additional indebtedness in the future. The indebtedness created by the sale of the notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.

        We incurred $350.0 million of senior indebtedness in January 2013 when we sold $350.0 million aggregate principal amount of 1.5% convertible senior notes due 2018, or the 2018 Convertible Notes. We may also incur additional long-term indebtedness or obtain additional working capital lines of credit

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to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:

    increasing our vulnerability to adverse economic and industry conditions;

    limiting our ability to obtain additional financing;

    requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;

    limiting our flexibility in planning for, or reacting to, changes in our business; and

    placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

        We cannot assure stockholders that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the 2018 Convertible Notes, or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the 2018 Convertible Notes and such other indebtedness to accelerate the maturity of the 2018 Convertible Notes and such other indebtedness and could cause defaults thereunder. Any acceleration of the 2018 Convertible Notes or any indebtedness which we may incur in the future could have a material adverse effect on our business, results of operations and financial condition.

        In the event the conditional conversion features of the 2018 Convertible Notes are triggered, holders of the 2018 Convertible Notes will be entitled to convert the 2018 Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their 2018 Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the applicable conversion rate. If we are unable to satisfy any portion of such obligation, we would be in default. In addition, the expenditure of cash to satisfy such obligation could adversely affect our liquidity. In addition, even if holders do not elect to convert their 2018 Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2018 Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.

Provisions in the indenture for the 2018 Convertible Notes may deter or prevent a business combination.

        If a fundamental change occurs prior to the maturity date of the 2018 Convertible Notes, holders of the 2018 Convertible Notes will have the right, at their option, to require us to repurchase all or a portion of their 2018 Convertible Notes. In addition, if a fundamental change occurs prior to the maturity date of 2018 Convertible Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its 2018 Convertible Notes in connection with such fundamental change. In addition, the indenture for the 2018 Convertible Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the 2018 Convertible Notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to our stockholders.

The convertible note hedge and warrant transactions we entered into in connection with our 2018 Convertible Notes issuance may affect the trading price of our common stock.

        In connection with our offering of the 2018 Convertible Notes, we entered into convertible note hedge transactions with four financial institutions, or the hedge counterparties. We entered into these

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convertible note hedge transactions with the expectation that they will reduce the potential dilution to our common stock and/or offset potential cash payments in excess of the principal amount of the 2018 Convertible Notes, as the case may be, upon conversion of the 2018 Convertible Notes. In the event that the hedge counterparties fail to deliver shares to us or potential cash payments, as the case may be, as required under the convertible note hedge documents, we would not receive the benefit of such transactions. Separately, we also entered into warrant transactions with the hedge counterparties. The warrant transactions could separately have a dilutive effect from the issuance of common stock pursuant to the warrants.

        In connection with hedging these transactions, the hedge counterparties and/or their affiliates may enter into various derivative transactions with respect to our Common Stock, and may enter into, or may unwind, various derivative transactions and/or purchase or sell our Common Stock or other securities of ours in secondary market transactions prior to maturity of the 2018 Convertible Notes (and are likely to do so during any conversion period related to any conversion of the 2018 Convertible Notes). These activities could have the effect of increasing or preventing a decline in, or could have a negative effect on, the value of our Common Stock and could have the effect of increasing or preventing a decline in the value of our Common Stock during any cash settlement averaging period related to a conversion of the 2018 Convertible Notes.

        In addition, we intend to exercise options under the convertible note hedge transactions whenever the 2018 Convertible Notes are converted. Depending upon the method we elect to exercise such options, in order to unwind its hedge position with respect to the options we exercise, the hedge counterparties and/or their affiliates may sell shares of our Common Stock or other securities in secondary market transactions or unwind various derivative transactions with respect to our Common Stock during the cash settlement averaging period for the converted 2018 Convertible Notes. The effect, if any, of any of these transactions and activities on the trading price of our Common Stock or the 2018 Convertible Notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our Common Stock and the value of the 2018 Convertible Notes. The derivative transactions that the hedge counterparties and/or their affiliates expect to enter into to hedge these transactions may include cash-settled equity swaps referenced to our Common Stock. In certain circumstances, the hedge counterparties and/or their affiliates may have derivative positions that, when combined with the hedge counterparties' and their affiliates' ownership of our Common Stock, if any, would give them economic exposure to the return on a significant number of shares of our Common Stock.

The accounting method for convertible debt securities that may be settled in cash, such as the 2018 Convertible Notes, is the subject of recent changes that could have a material effect on our reported financial results.

        In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2018 Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the 2018 Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 2018 Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the 2018 Convertible Notes to their face amount over the term of the 2018 Convertible Notes. We will

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report lower net income in our financial results because ASC 470-20 will require interest to include both the current period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the 2018 Convertible Notes.

        In addition, convertible debt instruments (such as the 2018 Convertible Notes) that may be settled entirely or partly in cash are, where the issuer has the intent and policy to settle such instruments partly in a cash amount equal to the principal amount, currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the 2018 Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the 2018 Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 2018 Convertible Notes, then our diluted earnings per share would be adversely affected.

Future sales or issuances of our common stock in the public market, or upon settlement of the conditional conversion feature of the 2018 Convertible Notes, if triggered, would be dilutive to our common stockholders, could lower the market price for our common stock and could adversely impact the trading price of the 2018 Convertible Notes.

        In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options and upon conversion of the 2018 Convertible Notes. If the 2018 Convertible Notes are converted or if we settle in shares, there would be an issuance of substantial amounts of common stock, which could be dilutive to our common stockholders and could adversely affect the trading price of our common stock. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of the 2018 Convertible Notes and the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

ITEM 1B.    Unresolved Staff Comments

        None.

ITEM 2.    Properties

        Chesterbrook.    In anticipation of the December 31, 2013 expiration of the lease for our previous corporate headquarters in Malvern, PA (the "Malvern Lease"), we, on July 16, 2012, entered into an Agreement of Lease (the "New Lease") with Chesterbrook Partners, LP ("Landlord"), pursuant to which now lease a building located at 640 Lee Road, Wayne, Pennsylvania (the "Facility"). The Facility consists of approximately 74,516 rentable square feet. We moved into the Facility in January 2013 and it now serves as our new corporate headquarters. The initial term of the New Lease is 132 months. We will not be required to pay rent under the New Lease for the first year of its term, subject to our obligation to repay the unamortized portion of the abated first year's rent on terms specified in the New Lease if the New Lease or our right to possess the premises is terminated early, in either case, due to an uncured default by us.

        Horsham.    In Horsham, Pennsylvania, we lease an approximately 50,000 square foot biological manufacturing facility that we are using to produce the active ingredient of XIAFLEX. We also lease

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approximately 56,000 square feet of laboratory, warehouse and office space in two other Horsham locations. The initial terms of these leases end on January 1, 2017, March 31, 2017 and July 31, 2022, respectively. In general, our properties are well maintained, adequate and suitable for the purposes for which they are used.

ITEM 3.    Legal Proceedings

    Upsher-Smith Litigations

    ANDA Litigations with Upsher-Smith

        We are currently engaged in separate litigations in Federal courts in Delaware and New Jersey with Upsher-Smith regarding Upsher-Smith's attempts to bring a generic testosterone gel product to market via an ANDA using Testim as its reference drug. We refer to the litigation in Delaware as the "Delaware Upsher-Smith ANDA Litigation", the litigation in New Jersey as the "New Jersey Upsher-Smith ANDA Litigation", and both of them collectively as the "Upsher-Smith ANDA Litigations". A discussion of the Upsher-Smith Litigations is set forth below. For further discussion of the Upsher-Smith Litigations and Upsher-Smith's efforts to obtain approval of a generic version of Testim via an ANDA pathway, see "Competition—TRT Market Competition—Generic Competition" in Part I, Item 1 above.

    Delaware

        In October 2008, we and our licensor, CPEX Pharmaceuticals, Inc. (FCB's predecessor in interest to Testim), received notice that Upsher-Smith filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the '968 Patent. Shortly after, we commenced the Delaware Upsher-Smith Litigation. The lawsuit was filed in the United States District Court for the District of Delaware. We and FCB are seeking a judgment (1) declaring that Upsher-Smith's act of filing the Abbreviated New Drug Application seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the '968 Patent is an act of infringement, (2) declaring that the making, using or selling of the product for which Upsher-Smith is seeking approval infringes the '968 Patent, (3) ordering that the effective date of the FDA's approval of the product not be until the expiration of the '968 Patent, (4) enjoining Upsher-Smith from making, using or selling the product for which it seeks approval until the expiration of the '968 Patent, and (5) awarding Auxilium and FCB their costs and expenses in the action. Upsher-Smith has alleged that its proposed generic version of Testim would not infringe the '968 Patent, and that the '968 Patent is invalid. Upsher-Smith's Paragraph IV certification notice states that Upsher-Smith does not believe that the testosterone gel product for which it is seeking approval infringes the '968 Patent and that it seeks to market its generic product before the expiration of the '968 Patent. The '968 Patent is listed in the Orange Book, published by the FDA, and will expire in January 2025. The district court has issued a protective order prohibiting disclosure of confidential information relating to the litigation. On December 13, 2011, the district court issued an order administratively closing the case. This administrative closure has effectively stayed the case, but has not dismissed it. The 30-month stay under the Hatch-Waxman Act expired in April 2011. Although administratively closed in December 2011, the Delaware Upsher-Smith Litigation has not been dismissed or finally resolved and could also result in a finding that Upsher-Smith's proposed testosterone product does not infringe the '968 Patent or that the '968 Patent is invalid and/or unenforceable. All discovery obligations of the parties continue to be in effect.

        In April 2012, we and FCB received a notice from Upsher-Smith in connection with its ANDA advising us and FCB of Upsher-Smith's Paragraph IV certification relating to the eight additional patents listed at that time in the Orange Book in addition to the '968 patent-in-suit, and asserting that Upsher-Smith does not believe that the product for which it is seeking approval infringes any of the

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Orange Book listed Testim patents and that those patents are invalid. A tenth U.S. patent issued to FCB on May 15, 2012 and was listed in the Orange Book.

    New Jersey

        We and FCB learned on September 11, 2012 that Upsher-Smith had filed on September 10, 2012 in the United States District Court for the District of New Jersey a complaint for declaratory judgment seeking a declaration of non-infringement and/or invalidity of FCB's U.S. Patent Nos.: 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; 7,608,610; 7,935,690; and 8,063,029. All of the eight referenced patents cover our Testim® 1% testosterone gel, and the eight referenced patents are among the ten FCB patents covering Testim that are currently listed in the Orange Book. The referenced patents will expire between 2023 and 2025. We and FCB have filed a Motion to Dismiss this case or, alternatively, transfer the case to Delaware.

    505(b)(2) NDA Litigation

        On or about December 28, 2012, we and FCB became aware of a notice from Upsher-Smith that advised us and FCB of Upsher-Smith's filing of a 505(b)(2) NDA containing a Paragraph IV certification under 21 U.S.C. Section 314.52(c) for testosterone gel (the "Upsher-Smith NDA"). This Paragraph IV certification notice refers to the ten U.S. patents, covering Testim® 1% testosterone gel, that are listed in the Orange Book. These ten patents are owned by FCB and will expire between 2023 and 2025. Upsher-Smith may seek to have any drug approved under the Upsher-Smith NDA as a generic version of Testim. On January 28, 2013, we and FCB filed a lawsuit in the United States District Court of Delaware against Upsher-Smith for infringement of FCB's ten patents listed in the Orange Book as covering Testim® 1% testosterone gel. These ten patents are owned by FCB I LLC, an indirect majority owned subsidiary of Xstelos Holdings, Inc. ("Xstelos"), and are exclusively licensed to us. Xstelos holds the assets of CPEX Pharmaceuticals, Inc., the predecessor owner of the patents.

        Under the Hatch-Waxman Act, as a result of the patent infringement lawsuit filed against Upsher-Smith, final FDA approval of the Upsher-Smith NDA for its proposed generic version of Testim will be stayed until at least the earlier of 30 months from the date Upsher-Smith's notice letter was received (i.e., on or about June 28, 2015) or final resolution of the pending patent infringement lawsuit. Should Upsher-Smith receive tentative approval from the FDA for its generic version of Testim under the Upsher-Smith NDA before one of those events occurs, it would not be permitted to launch its generic product in the U.S. Upsher-Smith will also not be able to launch a generic version of Testim in the U.S. until it receives the necessary final approval of its 505(b)(2) NDA from the FDA.

    Watson Litigation

    ANDA Litigation with Watson

        In May 2012, we and FCB filed a lawsuit against Watson for infringement of FCB's ten patents listed in the Orange Book as covering Testim® 1% testosterone gel. The lawsuit was filed in the United States District Court for the District of New Jersey on May 23, 2012.

        We and FCB filed this lawsuit in response to a notice letter, dated April 12, 2012, sent by Watson Laboratories, Inc. (NV) regarding its filing with the FDA of ANDA No. 09-1073 for a generic 1% testosterone gel product. This letter also stated that ANDA No. 091073 contained Paragraph IV certifications, under 21 U.S.C. Section 355(j) of the Federal Food, Drug, and Cosmetic Act, with respect to the nine patents listed in the Orange Book on that date as covering Testim: U.S. Patent Nos. 7,320,968; 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; 7,608,610; 7,935,690; and 8,063,029. On May 15, 2012, a new composition patent covering Testim issued (U.S. Patent No. 8,178,518). This patent is now also listed in the Orange Book and was included in the patent infringement lawsuit that we filed against Watson. In total, ten Testim patents are now listed in the Orange Book and are

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expected to expire on various dates ranging from April 2023 through January 2025. Auxilium and FCB remain committed to protecting our intellectual property rights, including our patent protection for Testim.

        Under the Hatch-Waxman Act, as a result of the patent infringement lawsuit filed against Watson, final FDA approval of Watson's ANDA for its proposed generic version of Testim will be stayed until at least the earlier of 30 months from the date Watson's notice letter was received (i.e., October 13, 2014) or final resolution of the pending patent infringement lawsuit. Should Watson receive tentative approval from the FDA for its generic version of Testim before one of those events occurs, it would not be permitted to launch its generic product in the U.S. Watson will also not be able to launch a generic version of Testim in the U.S. until it receives the necessary final approval of its ANDA from the FDA.

    Other Matters

        We are also party to various other actions and claims arising in the normal course of business that we do not believe are material. We believe that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on our financial position or the manner in which we conduct our business. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While we do not believe that the amount of such excess loss could be material to our financial position, any such loss could have a material adverse effect on our results of operations or the manner in which we conduct our business in the period(s) during which the underlying matters are resolved.

ITEM 4.    Mine Safety Disclosures.

        Not applicable.


PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

        Our common stock is traded on The NASDAQ Global Market under the symbol "AUXL." The following table sets forth the high and low closing sales prices per share for our common stock for the periods indicated, as reported by The NASDAQ Global Market:

Year Ended December 31, 2012:
  High   Low  

First Quarter

  $ 20.45   $ 18.47  

Second Quarter

  $ 26.89   $ 17.27  

Third Quarter

  $ 27.52   $ 22.86  

Fourth Quarter

  $ 25.13   $ 17.57  

 

Year Ended December 31, 2011:
  High   Low  

First Quarter

  $ 24.15   $ 20.58  

Second Quarter

  $ 24.40   $ 18.92  

Third Quarter

  $ 20.84   $ 13.95  

Fourth Quarter

  $ 19.93   $ 14.21  

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Holders of Record

        As of February 22, 2013, there were approximately 60 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

Dividends

        We have never paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

        The information under the heading "Equity Compensation Plan Information" in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 1, 2013 to be filed with the SEC, is incorporated herein by reference.

Recent Sales of Unregistered Securities

        During the quarter ended December 31, 2012, we did not issue any unregistered shares of our common stock.

Issuer Purchases of Equity Securities

        The following table summarizes the Company's purchases of its common stock for the three months ended December 31, 2012:

Period
  Total Number of
Shares (or Units)
Purchased
  Average Price
Paid Per Share
(or Unit)
  Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
  Maximum
Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs

Oct. 1, 2012 to Oct. 31, 2012

    826   $21.01   Not applicable   Not applicable

Nov. 1, 2012 to Nov. 30, 2012

    None   Not applicable   Not applicable   Not applicable

Dec. 1, 2012 to Dec. 31, 2012

    None   Not applicable   Not applicable   Not applicable
                 

Total

    826(1)   $21.01   Not applicable   Not applicable
                 

(1)
Represents shares purchased from Alan Wills, Executive Vice President—Corporate Development of the Company, pursuant to the Company's 2004 Equity Compensation Plan to satisfy such individual's tax liability with respect to the vesting of resticted stock issued in accordance with Rule 16 b-3 of the Securities Exchange Act of 1934.

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Comparative Stock Performance Graph

        The graph below compares the cumulative total stockholder return on our common stock with the cumulative total stockholder return of (i) the NASDAQ Composite Index, and (ii) the NASDAQ Biotechnology Index, assuming an investment of $100 on December 31, 2007, in each of our common stock; the stocks comprising the NASDAQ Composite Index; and the stocks comprising the NASDAQ Biotechnology Index.


Comparison of Cumulative Total Return* Among Auxilium Pharmaceuticals, Inc.,
the NASDAQ Composite Index, and the NASDAQ Biotechnology Index

GRAPHIC


*
Total return assumes $100 invested on December 31, 2007 in our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index and reinvestment of dividends through fiscal year ended December 31, 2012.

 
  12/31/2007   12/31/2008   12/31/2009   12/31/2010   12/31/2011   12/31/2012  

Auxilium Pharmaceuticals, Inc. 

    100.00     94.83     99.97     70.36     66.46     61.82  

NASDAQ Biotechnology Index

    100.00     87.37     101.03     116.19     129.91     182.67  

NASDAQ Composite Index

    100.00     59.46     85.55     100.02     98.22     113.85  

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ITEM 6.    Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except share and per share data)

        The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this Report. The consolidated statements of operations data for the years ended December 31, 2012, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements, which are included elsewhere in this Report. The consolidated statement of operations data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010, 2009 and 2008 have been derived from audited financial statements which do not appear in this Report. The historical results presented are not necessarily indicative of results to be expected in any future period.

 
  Years Ended December 31,  
 
  2012(a)   2011   2010   2009   2008  

Consolidated Statement of Operations Data:

                               

Net revenues

  $ 395,281   $ 264,315   $ 211,429   $ 164,039   $ 125,377  
                       

Operating expenses(b):

                               

Cost of goods sold

    78,337     55,662     49,725     37,077     29,486  

Research and development

    45,932     61,948     48,005     51,398     54,497  

Selling, general, and administrative

    185,535     179,887     164,675     129,181     89,482  
                       

Total operating expensess

    309,804     297,497     262,405     217,656     173,465  
                       

Income (loss) from operations

    85,477     (33,182 )   (50,976 )   (53,617 )   (48,088 )

Other income (expense), net

    467     266     (255 )   160     1,801  
                       

Net income (loss) applicable to common stockholders

  $ 85,944   $ (32,916 ) $ (51,231 ) $ (53,457 ) $ (46,287 )
                       

Net income (loss) per common share:

                               

Basic

  $ 1.76   $ (0.69 ) $ (1.08 ) $ (1.22 ) $ (1.12 )
                       

Diluted

  $ 1.74   $ (0.69 ) $ (1.08 ) $ (1.22 ) $ (1.12 )
                       

Shares used to compute net income (loss) per common share(c)

                               

Basic

    48,770,229     47,886,672     47,426,849     43,650,775     41,272,557  
                       

Diluted

    49,277,570     47,886,672     47,426,849     43,650,775     41,272,557  
                       

(a)
includes the impact of the change in estimate of the life of the Pfizer Agreement amounting to net income of $83.7 million, or $1.70 per diluted share (representing the recognition of $92.0 million of revenue offset by $8.3 million of related cost).

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(b)
includes the following amounts of stock-based compensation expense:

Cost of goods sold

  $ 84   $ 65   $ 155   $   $  

Research and development

    2,919     3,184     2,698     5,048     3,140  

Selling, general and administrative

    12,004     14,029     15,109     12,852     8,602  
(c)
The increase in weighted average common shares outstanding is primarily the result of the issuances of common shares in the September 2009 public offering.

 
  As of December 31,  
 
  2012   2011   2010   2009   2008  

Consolidated Balance Sheet Data:

                               

Cash, cash equivalents and short-term investments

  $ 157,430   $ 154,257   $ 128,207   $ 181,977   $ 113,943  

Total assets

    327,392     300,971     243,904     260,564     171,187  

Total stockholders' equity

    199,888     84,398     94,443     120,519     35,266  

ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

        We are a specialty biopharmaceutical company, incorporated in Delaware on July 23, 1999. We focus on developing and marketing products to predominantly specialist audiences. We are a fully integrated company and had approximately 526 employees as of December 31, 2012, including approximately 287 employees in our commercial organization, approximately 122 employees in manufacturing and quality, approximately 60 employees in research and development and approximately 57 employees providing administrative support.

        We reported net revenues in 2012 of $395.3 million compared to $264.3 million reported in 2011. Our fourth quarter 2012 net revenues included $93.6 million related to previously received and deferred up-front and milestone payments related to our European collaboration with Pfizer, which were recognized as a result of our agreement to mutually terminate the collaboration effective April 24, 2013, as previously announced on November 7, 2012.

        We reported net income of $85.9 million, or $1.74 per share, fully diluted, compared to a net loss of ($32.9) million, or ($0.69) per share, fully diluted, reported for 2011. As a result of the agreement to mutually terminate the Pfizer European collaboration agreement, our fourth quarter 2012 net income included $85.2 million, reflecting the recognition of the $93.6 million in deferred revenues noted above, offset by the recording of $8.4 million in previously deferred expenses.

        As of December 31, 2012, we had $157.4 million in cash, cash equivalents and short-term investments and no debt. In January 2013, we raised $350 million through the issuance of the 2018 Convertible Notes. The net proceeds from the 2018 Convertible Notes offering were approximately $338.7 million after deducting underwriters' discounts and commissions and estimated offering expenses. We used approximately $28.5 million of the net proceeds from the offering to pay the cost of

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the note hedge transactions (after such cost was partially offset by the proceeds from the sale of the warrants) and we intend to use the remainder of the net proceeds from the offering for general corporate purposes, which may include the acquisition (including by merger, purchase, license or otherwise) of businesses, products, product rights or technologies.

        We currently market two products: Testim and XIAFLEX.

        Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim is approved in the U.S., Canada and much of Europe for the treatment of hypogonadism.

        Testim worldwide net revenues for 2012 were $237.5 million, a 14% increase over the $207.9 million recorded in 2011.

        We commercialize Testim in the U.S., while Ferring and Paladin market Testim on our behalf in certain European countries and Canada, respectively. Commencing in July 2012, GSK also markets Testim in the U.S. pursuant to a co-promotion agreement we and GSK entered into in May 2012. Testim provides a medically necessary clinical benefit to patients and represents an attractive and profitable revenue platform in the TRT market in the U.S., which was $2.1 billion in 2012 and exhibited growth of 31% as more large pharmaceutical companies launched products to this underserved market.

        XIAFLEX is a proprietary, injectable clostridial collagenase enzyme approved by the FDA for the treatment of Dupuytren's in adult patients with a palpable cord. Dupuytren's is a condition that affects the connective tissue that lies beneath the skin in the palm. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient's fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of Dupuytren's in the U.S. in March 2010, and currently field a sales force covering 62 territories and 20 reimbursement specialists. They are supported by a group of eight medical scientists.

        U.S. XIAFLEX net revenues increased 31% to $55.2 million in 2012, compared to $42.2 million in 2011, excluding the $1.8 million revenue benefit from a 2011 change in revenue recognition. Worldwide net revenues for XIAFLEX were $157.8 million for the year ended December 31, 2012, compared to $56.4 million for the year ended December 31, 2011. The 2012 net revenues include $93.6 million related to previously received and deferred up-front and milestone payments related to our European collaboration with Pfizer, which were recognized as a result of the mutual termination of the collaboration. Of the $93.6 million revenue recorded, $92.0 million represents the change in estimate recorded in the fourth quarter of 2012 to reflect the shortened term of the European collaboration contract.

        On December 27, 2012, the FDA accepted for filing and granted standard review status to our sBLA for XIAFLEX for the treatment of Peyronie's. The FDA has notified us that it is not presently planning to take this application to an Advisory Committee meeting; however, we can give no assurance that it will not require an Advisory Committee meeting in the future. Under the Prescription Drug User Fee Act (PDUFA), the FDA is expected to take action on this application by September 6, 2013.

        We have partnered with Pfizer for development and commercialization of XIAPEX for Dupuytren's and Peyronie's disease in Europe and certain Eurasian countries. On November 6, 2012, we and Pfizer mutually agreed to terminate this arrangement, effective April 24, 2013. We are currently evaluating all of our options for the continuing commercialization of XIAPEX for the treatment of Dupuytren's and for gaining approval for XIAPEX for the treatment of Peyronie's in the EU. We have

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partnered with Asahi Kasei for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Japan. We have also partnered with Actelion for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico. In July 2012, we were granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. The Marketing Authorization was subsequently transferred to Actelion and they expect to make XIAFLEX available to patients in Canada in the first half of 2013. We are seeking a partner or partners for development and commercialization in the rest of the world.

        Our current product pipeline includes:

    CCH

    Phase III:

    XIAFLEX for the treatment of Peyronie's with our sBLA having been accepted for filing in December 2012 with a PDUFA date scheduled for September 6, 2013

    Phase II:

    XIAFLEX for the treatment of Adhesive Capsulitis with top-line data expected in the first quarter of 2013

    XIAFLEX for the treatment of edematous fibrosclerotic panniculopathy with top-line data having been reported in the fourth quarter of 2012 and the initiation of a Phase IIa trial expected to commence in the second half of 2013

    Testosterone

        We expect to commence clinical studies in 2013 for our high concentration testosterone gel product.

        Our vision is to build a rapidly growing, profitable and sustainable biopharmaceutical company. To achieve this vision we plan to:

    maximize revenues of Testim and XIAFLEX in the currently approved indications;

    execute a successful launch of XIAFLEX for the treatment of Peyronie's, if approved by the FDA;

    deliver on our current product pipeline;

    build out our business and development pipeline in specialty therapeutic areas through corporate development and licensing activities; and

    continue our focus on financial discipline.

        In the short term, we plan to focus on commercial execution with respect to Testim and XIAFLEX for Dupuytren's, successfully launching XIAFLEX for Peyronie's, if approved by the FDA, bringing additional indications for XIAFLEX to market, and pursuing opportunities for growth through in-licensing or acquisition activities in our current or additional specialty therapeutic areas. We believe that we are well positioned to be a profitable and sustainable specialty biopharmaceutical company by executing on these core strategic initiatives. We believe that we can further leverage our sales forces and our expertise in clinical development and regulatory strategy with the addition of new products. We plan to be opportunistic and nimble with respect to corporate development and licensing opportunities. We will explore opportunities to add marketed products and/or product opportunities that we believe represent a good strategic fit and are fiscally responsible. Although we may seek products that have a

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therapeutic fit with XIAFLEX or Testim, we believe that the core competencies we have with respect to drug development and commercialization can be applied to a number of other specialty focused therapeutic areas.

        The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes several phases of nonclinical and clinical study to collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease indication. There are many difficulties and uncertainties inherent in research and development and the introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and incurs significant cost. Failure can occur at any point in the process, including after the product is approved based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. Consequently, it can be very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval, and which will be commercially viable and generate profits for the Company. Successful results in preclinical or phase I/II clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.

    Phase I Clinical Trials

        Phase I human clinical trials begin when regulatory agencies allow a request to initiate clinical investigations of a new drug or product candidate and usually involve small numbers of healthy volunteers or subjects. The trials are designed to determine the safety, metabolism, dosing and pharmacologic actions of a drug in humans, the potential side effects of the product candidates associated with increasing drug doses and, if possible, to gain early evidence of the product candidate's effectiveness. Phase I clinical studies generally take from 6 to 12 months or more to complete.

    Phase II Clinical Trials

        Phase II clinical trials are conducted on a limited number of patients with the targeted disease, usually involving no more than several hundred patients, to evaluate appropriate dosage and the effectiveness of a drug for a particular indication or indications and to determine the common short-term side effects and risks associated with the drug. An initial evaluation of the drug's effectiveness on patients is performed and additional information on the drug's safety and dosage range is obtained. Our Phase II clinical trials typically include up to 200 patients and may take approximately two years to complete.

    Phase III Clinical Trials

        Phase III clinical trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained. Phase III clinical trials are intended to gather additional information about the effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. They typically include controlled multi-center trials and involve a larger target patient population, typically including from several hundred to several thousand patients to ensure that study results are statistically significant. During Phase III clinical trials, physicians monitor patients to determine efficacy and to gather further information on safety. These trials are generally global in nature and are designed to generate data necessary to submit the product

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to regulatory agencies for marketing approval. Phase III testing varies and can often last from 2 to 5 years.

    Regulatory Review

        If a product successfully completes a Phase III clinical trial and is submitted to governmental regulators, such as the FDA in the United States or the EMA in the European Union, the time to final marketing approval can vary from six months (for a U.S. filing that is designated for priority review by the FDA) to several years, depending on a number of variables, such as the disease state, the strength and complexity of the data presented, the novelty of the target or compound, risk-management approval and the time required for the agency(ies) to evaluate the submission. There is no guarantee that a potential treatment will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.

Operational Highlights

    Corporate

        In January 2013, we issued $350 million aggregate principal amount of 1.50% Convertible Senior Notes Due 2018 in a public offering. The net proceeds from the offering were approximately $338.7 million after deducting underwriters' discounts and commissions and estimated offering expenses. We used approximately $28.5 million of the net proceeds from the offering to pay the cost of the note hedge transactions (after such cost was partially offset by the proceeds from the sale of the warrants) and we intend to use the remainder of the net proceeds from the offering for general corporate purposes, which may include the acquisition (including by merger, purchase, license or otherwise) of businesses, products, product rights or technologies.

        In July 2012, in anticipation of the December 31, 2013 expiration of the lease for our current corporate headquarters in Malvern, PA, we entered into the New Lease, pursuant to which we will lease a building located at 640 Lee Road, Wayne, Pennsylvania 19087 (the "Facility"). The Facility consists of approximately 74,516 rentable square feet. The Facility will serve as the Company's new corporate headquarters. We moved into the Facility in January 2013.

    XIAFLEX

        2012 sales of XIAFLEX in the U.S. represented approximately 18,600 vials of XIAFLEX compared to approximately 13,900 vials in 2011, an increase of approximately 34%.

        In January 2013, we expanded our exclusive license for XIAFLEX to include the potential treatment of cellulite as an additional indication for development.

        In December 2012, we announced top-line 30-day data from the XIAFLEX phase Ib study in cellulite.

        In November 2012, we submitted an sBLA to the FDA for XIAFLEX for the potential treatment of Peyronie's disease. In December 2012, the FDA accepted our sBLA. Under PDUFA, the FDA is expected to take action on the application by September 6, 2013.

        On November 6, 2012, we and Pfizer agreed to mutually terminate our European collaboration arrangement for the development and commercialization of XIAFLEX for Dupuytren's and, if approved, Peyronie's, effective April 24, 2013. We are currently evaluating all of our options for the continuing commercialization of XIAPEX for the treatment of Dupuytren's and for gaining approval for XIAPEX for the treatment of Peyronie's in the EU.

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        In the third quarter of 2012, we completed enrollment in our Frozen Shoulder phase IIa, and phase IV XIAFLEX Dupuytren's retreatment clinical trials. Top-line data from these studies is expected in the first quarter of 2013 and fourth quarter of 2013, respectively.

        In the third quarter of 2012, we began enrollment for a 600 patient study with XIAFLEX for the concurrent treatment of multiple palpable cords that, if successful, may allow us to seek FDA approval and expansion of the Dupuytren's label. Top-line data from the study is expected in the first half of 2014.

        In July 2012 we announced positive top-line data from our open-label phase IIIb trial evaluating XIAFLEX for the treatment of adult Dupuytren's contracture patients with multiple palpable cords.

        In June 2012, we announced positive top-line results from both phase III trials of XIAFLEX for the potential treatment of Peyronie's disease. XIAFLEX demonstrated statistically significant improvement in the co-primary endpoints of penile curvature deformity and patient-reported bother versus placebo.

        On February 23, 2012, we announced that we had granted Actelion exclusive rights to commercialize XIAFLEX for the treatment of Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico. Actelion will be primarily responsible for the clinical development, regulatory and commercialization activities for XIAFLEX in these markets. We received a $10 million up-front payment from Actelion in the first quarter of 2012, and paid our licensor, BioSpecifics, approximately $0.6 million of this up-front payment. In July 2012, we were granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. Our collaboration partner, Actelion, expects to make XIAFLEX available to patients in Canada in the first half of 2013.

        Beginning January 1, 2012, new XIAFLEX-applicable CPT codes became available for use in the U.S.

        For a discussion on XIAFLEX's competition, see "Competition—Competition for XIAFLEX for Dupuytren's" above.

    Testim

        Worldwide revenues for Testim were $237.5 million for the year ending December 31, 2012, up 14% over 2011. Testim U.S. revenues were up 14% over the prior year to a record $233.4 million. Testim U.S. prescriptions grew by 8% over 2011. Total prescriptions for the testosterone replacement gel market segment grew 32% in 2012. Testim's total prescription market share of the once daily gel segment at the end of December 2012 was 15%, compared to 20% at the end of December 2011.

        In May 2012, we and GSK entered into an agreement for the co-promotion of Testim, which is indicated for testosterone replacement therapy in adult males for conditions associated with a deficiency or absence of testosterone. GSK began promoting Testim using a sizeable established field sales force in the U.S. in mid-July 2012.

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        For a discussion on the competition in the TRT market, see "Competition—TRT Market Competition" above.

        For a discussion on the various litigations involving other companies' attempts to bring generic versions of Testim to market, see "Legal Proceedings" above.

    Healthcare Reform Legislation

        On March 23, 2010, PPACA was enacted in the United States, which contains several provisions that impact our business. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include:

    an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs;

    the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to Medicaid beneficiaries; and

    the expansion of the 340(B) Public Health Services (PHS) drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers.

        Beginning in 2011, PPACA required that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap, which is known as the "donut hole." Also, beginning in 2011, we were assessed our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization's percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and Veterans Administration and PHS discount programs) made during the previous year. This new legislation did not have a material effect on our results of operations or financial position for 2012 and, based on our current understanding, we expect that its impact for 2013 will also not be material. The U.S. government is currently drafting rules and regulations for provisions of the law which we believe will provide further guidance on the full effects of the new legislation.

        Section 6002 of PPACA, known as the "Physician Payment Sunshine Provision," requires reporting by pharmaceutical manufacturers to the federal government of certain payments and other transfers of value to physicians and teaching hospitals in excess of $10 or that aggregate to $100 per recipient annually. Examples of such payments or transfers of value include honoraria, consulting fees, payment for research, gifts, speakers' fees, fees paid for conducting clinical trials, entertainment, travel, education and royalties. Several states currently have similar laws and more states may enact similar legislation.

    Net revenues

        We record product sales net of allowances for prompt payment discounts, fees to wholesalers based on shipment activity under the terms of wholesaler service agreements, managed care contract rebates and government health plan charge backs, product coupons and product returns. To date, all of our net revenues have been generated by the sales and out-licensing of two products: Testim and XIAFLEX. We sell Testim in the U.S. to pharmaceutical wholesalers. We do not anticipate that sales of Testim outside of the U.S., pursuant to our current agreements for international distribution rights of Testim, will have a material impact on our revenues or profitability. We began selling XIAFLEX in the U.S. through a network of wholesalers, specialty distributors and specialty pharmacies in March 2010. In the first quarter of 2011, we began recognizing revenue at the time of shipment to these customers. Prior to 2011, we deferred the recognition of revenue and related product costs of XIAFLEX product shipments until the product was shipped to physicians for administration to patients.

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        Our revenues from product sales may fluctuate due to:

    market acceptance and pricing of XIAFLEX;

    market acceptance and pricing for Testim;

    regulatory approvals and market acceptance of new and competing products, including generics;

    government or private healthcare reimbursement policies for XIAFLEX and Testim; and

    promotional efforts of our competitors.

        We use a third-party logistics company, ICS, a division of AmerisourceBergen Corporation ("ABC") for commercial distribution of Testim and XIAFLEX. The majority of Testim sales in the U.S. are to pharmaceutical wholesalers that, in turn, distribute product to chain and other retail pharmacies, hospitals, mail-order providers and other institutional customers. All XIAFLEX sales in the U.S. are to a small network of third party specialty distributors and specialty pharmacies that will generally distribute XIAFLEX to hospitals and to physician practices. Over 90% of our product sales are to three customers: ABC, Cardinal Health, Inc. and McKesson Corporation.

        Outside of the U.S., we currently rely on third parties to market, sell and distribute our products. For Testim, we have an agreement with Paladin to market and distribute Testim in Canada. We also have an agreement with Ferring to market and distribute Testim in Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and the U.K. In December 2008, we entered into a development, commercialization and supply agreement with Pfizer (the "Pfizer Agreement") under which we sub-licensed our commercialization rights for Dupuytren's and Peyronie's for the 27 countries that at that time were included in the EU and 19 additional Eastern European and Eurasian countries (the "Pfizer Territory"). On November 6, 2012, the Company and Pfizer agreed to mutually terminate the Pfizer Agreement, effective April 24, 2013. In March 2010, we entered into a development, commercialization and supply agreement with Asahi Kasei (the "Asahi Agreement") under which we sub-licensed our commercialization rights for Dupuytren's and Peyronie's for the Japanese market. In February 2012, we entered into a collaboration agreement with Actelion (the "Actelion Agreement") for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico. In July 2012, we were granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. Our collaboration partner, Actelion, expects to make XIAFLEX available to patients in Canada in the first half of 2013. We are currently evaluating our options for continuing sales of XIAPEX in the Pfizer Territory, and for selling XIAFLEX in other indications and territories throughout the rest of the world.

        The up-front and milestone payments we have received under our out-licensing agreements are being amortized to revenue, net of associated transaction costs, over the estimated term of the related agreement. When a milestone payment is earned under the respective contract, we record as revenue a cumulative catch-up adjustment for the period of time since contract commencement through the date of the milestone and the remaining amount of the milestone is amortized over the remaining estimated term of the contract. These agreements also include payment of increasing, tiered royalties on all revenues recorded by the licensee in its territory. These royalty payments are recognized when earned as payment for the product supplied to the licensee. As a result of the agreement to mutually terminate the Pfizer Agreement, we recorded in the fourth quarter of 2012 the change in estimate of the term of the Pfizer Agreement by adjusting the deferred revenue and cost balances related to the Pfizer that were previously being amortized to income over the original estimated contract term of 20 years. The deferred revenue and deferred cost balances remaining at December 31, 2012 will be recognized in income in 2013 over the remaining term of the Pfizer Agreement.

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        Under contractual agreements, we pay a fee for service to our wholesaler, specialty distributor and specialty pharmacy customers based on shipment activity. The agreements also provide for targeted levels of required inventory. Otherwise, distributors independently manage their inventories with no intervention by us. Aside from the service fees required under these agreements, we do not offer incentives for wholesalers to take shipment of product.

    Cost of goods sold

        Costs of goods consist of the following types of costs:

    raw materials;

    fees paid to Testim and XIAFLEX contract manufacturers and related costs;

    costs of the operation of the Horsham manufacturing facilities that have been capitalized as the production cost of XIAFLEX bulk product, or recognized as a period cost due to underutilization of the plant, if any;

    provisions for damaged, obsolete and excess inventories;

    Testim royalty payments;

    XIAFLEX royalty payments and payments on license income to BioSpecifics discussed below;

    personnel costs associated with quality assurance and manufacturing oversight; and

    distribution costs, including warehousing, freight and product liability insurance.

        We do not anticipate any material changes in our gross margin rate on Testim sales in the U.S. In 2013, we anticipate our gross margins for Testim sales outside the U.S. will continue to be significantly lower than those seen in the U.S. This is due to a combination of factors, including the terms of our distribution agreements.

        As we continue to market XIAFLEX, we may experience variability in our gross margin rate and it is difficult to estimate when we will achieve a more predictable steady state. Factors influencing the gross margin on XIAFLEX will include the selling price per vial and the cost of product manufactured. Although we utilize a manufacturing resource planning system for production planning and inventory control, it is not uncommon in biologics manufacturing to experience unusual charges and write-offs in the initial years of commercial production. See "Risk Factors—Inventories produced during a launch period may not be needed and could result in additional charges for excess inventories" and "Risks Related to the Manufacture of XIAFLEX—We have limited experience in manufacturing pharmaceutical and biologic products and may encounter difficulties in the manufacture of the active ingredient of XIAFLEX at our facilities in Horsham, Pennsylvania which could materially adversely affect our results of operations or delay or disrupt manufacture of XIAFLEX."

        It is our policy to continually evaluate and provide reserves for inventory on hand that is in excess of expected future demand. In making this evaluation, we must make judgments concerning future product demand and monitor the expiration dates of our products. Prior to the approval and launch of XIAFLEX, we produced finished packaged inventories sufficient to meet a significant demand. In 2010, we concluded that $3.9 million of this inventory may expire prior to its expected sale and charged this cost to Cost of goods sold for 2010. During 2012 and 2011, this reserve was utilized in the physical disposal of such expiring inventory. While we believe that additional potential obsolescence was not probable as of December 31, 2012, it is possible that we may be required in future periods to record additional charges for additional excess inventories if demand for our products declines, demand does not meet our sales forecasts for Dupuytren's and Peyronie's or FDA approval of XIAFLEX for Peyronie's is delayed. It is also our policy to limit the amount of Horsham overhead costs capitalized as inventory to those amounts consistent with normal capacity levels and record as period costs those

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overhead costs that represent excess or idle capacity. To date, we have not experienced production below normal capacity levels. However, it is possible in the future that production could fall below normal capacity and result in recognition of period expense for excess or idle capacity. The incurrence of such costs would decrease overall XIAFLEX margins compared to those reported in 2012 and prior years since manufacturing overhead representing excess capacity will be immediately expensed as cost of goods sold.

        Under our license with BioSpecifics, we paid BioSpecifics 8.5% of the up-front and milestone payments received from Pfizer under the Pfizer Agreement and 5.0% of the up-front payment received under the Actelion Agreement and the Asahi Agreement. These payments to BioSpecifics are amortized as a cost of goods sold on a straight-line basis over the estimated life of the respective contract. When a milestone payment is earned, BioSpecifics's share of the milestone payment is recognized as cost of goods sold, or deferred costs, in proportion to the related amount revenue catch-up adjustment or deferral. In addition, as discussed above, we recorded an adjustment of the Pfizer Agreement deferred cost to reflect the revised term of the Pfizer Agreement.

        We are obligated to pay BioSpecifics 8.5% of all future milestone payments and XIAPEX sales under the Pfizer Agreement, a specified percentage (dependent on indication) of all future milestone payments and XIAFLEX sales under the Asahi Agreement and the Actelion Agreement, and, on a country-by-country and product-by-product basis, a specified royalty percentage of all other XIAFLEX sales.

    Research and development

        Our research and development expenses consist of:

    salaries and expenses for our development personnel;

    costs of the operation of the Horsham manufacturing facilities to the extent they are related to research activities taking place at this location.

    payments to consultants, investigators, contract research organizations and manufacturers in connection with our preclinical and clinical trials;

    costs of developing and obtaining regulatory approvals; and

    product license and milestone fees paid prior to regulatory approval.

        Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, the cost to complete projects in development cannot be reasonably estimated. XIAFLEX is in phase III of development for the treatment of Peyronie's disease, Phase IIa for Frozen Shoulder syndrome and Phase Ib for cellulite. Results from clinical trials may not be favorable. Further, data from clinical trials are subject to varying interpretation, and may be deemed insufficient by the regulatory bodies reviewing applications for marketing approvals. As such, clinical development and regulatory programs are subject to risks and changes that may significantly impact cost projections and timelines. See "Risk Factors—We may not be able to develop product candidates into viable commercial products, which would impair our ability to grow and could cause a decline in the price of our stock." Compared to spending in 2012, we expect our research and development expenses to increase in 2013 as we pursue new product formulations and additional indications of our current product pipeline. In addition, the current regulatory and political environment at the FDA could lead to increased data requirements, which could impact regulatory timelines and costs. We could also experience further significant increases in our expenditures to develop any other potential new product candidates that we would in-license or acquire.

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    Selling, general and administrative

        Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel, marketing and promotion costs, professional fees and facilities costs. We anticipate increases in selling, general and administrative expenses principally due to sales and marketing costs associated with Testim and XIAFLEX, and increases in information technology expense and other administrative activities.

Results of Operations

Years Ended December 31, 2012 and 2011

    Changes in XIAFLEX Revenue Recognition

        As part of the Pfizer Agreement, we have received up front and milestone cash payments from Pfizer. Our agreement with our licensor for XIAFLEX, BioSpecifics, required that we pay a portion of this amount to them. These amounts were recorded as deferred revenues and deferred costs, respectively, on our balance sheet at the time paid and we were required under U.S. generally accepted accounting principles ("GAAP") to amortize the deferred revenues and deferred costs into our income statement over the course of the Pfizer collaboration agreement. We originally estimated that the life of the Pfizer Agreement would be 20 years. When the agreement to mutually terminate the collaboration was reached, with a termination date of April 24, 2013, the balance of the deferred revenues and costs that existed at that time on our balance sheet was required to be adjusted to record the cumulative impact of the revised, shorter life of the agreement.

        At September 30, 2012 the balance of deferred revenues related to the Pfizer Agreement was $103.4 million and the balance of the deferred costs was $9.3 million. In the fourth quarter of 2012 we recorded $93.6 million in revenue and $8.4 million in cost of goods sold as the amortization of these deferred revenues and costs, respectively. Had we not reached agreement with Pfizer to mutually terminate the Pfizer Agreement, we would have recognized $1.6 million and $0.1 million of revenue and costs, respectively. Therefore, the impact of this change in estimate of the life of the Pfizer Agreement was an increase in 2012 revenues of $92.0 million, cost of goods sold of $8.3 million and net income of $83.7 million, or $1.70 per share, fully diluted (representing the incremental $92.0 million in deferred revenues less the incremental $8.3 million in deferred costs). The remaining deferred revenue and deferred cost balances of $9.8 million and $0.9 million, respectively, will be amortized into our income statement by April 24, 2013, the date that the Pfizer collaboration terminates.

        As discussed in Note 2 (e) to the consolidated financial statements contained herein, in the first quarter of 2011 we began recognizing revenue for XIAFLEX sales at the time of shipment to its specialty distributor, specialty pharmacy and wholesale customers. In 2010, we deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowances of $0.1 million) and the net loss for 2011 includes a benefit of $1.7 million, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

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        Net revenues.    Net revenues for the two years ended December 31, 2012 comprise the following:

 
  Years ended December 31,    
 
 
  2012   2011   Change   % Change  
 
  (in millions)
   
 

Testim revenues—

                         

Net U.S. product sales

  $ 233.4   $ 205.1   $ 28.4     14 %

International revenues

    4.0     2.8     1.2     42 %
                     

    237.5     207.9     29.6     14 %
                     

XIAFLEX revenues—

                         

Net U.S. product sales

    55.2     44.0     11.2     25 %

International revenues

    102.6     12.4     90.2     727 %
                     

    157.8     56.4     101.4     180 %
                     

Total net revenues

  $ 395.3   $ 264.3   $ 131.0     50 %
                     

Revenue allowances as a percentage of gross U.S. revenues

    32 %   28 %   4 %      
                     

        Net U.S. product sales shown in the above table represent the product sales of the Company within the U.S. net of allowances provided on such sales. International revenues represent the amortization of deferred up-front and milestone payments the Company has received through its out-licensing agreements, together with royalties earned on product sales by the licensees.

        During the first quarter of 2012, the Company recorded a correction of an error in its financial statements for the year ended December 31, 2011 that resulted from an understatement of the accrual for government health plan charge-backs. This correction reduced Net revenues and Net income reported for the nine months ended September 30, 2012 in the amount of $0.8 million. Management believes this adjustment is not material to the Company's results of operations for 2012 and 2011.

    Testim

        Total revenues for Testim for 2012 were $237.5 million compared to $207.9 million for the comparable period of 2011. Net U.S. product sales of Testim were $233.4 million compared to the $205.1 million for 2011. The increase in Testim net U.S. revenues for 2012 compared to 2011 resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing, partially offset by an increase in revenue allowances. According to NPA data from IMS, a pharmaceutical market research firm, Testim total prescriptions for 2012 grew 8% compared to 2011. We believe that Testim prescription growth in the 2012 period over the 2011 period benefited from overall market growth and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim net U.S. revenues for 2012 also benefited from an increase in the net selling price of 3%, consisting of gross price increases having a cumulative impact of 12% over 2011, offset in part by an increase in revenue allowances for managed care contract rebates and government health plan charge-backs. Testim international revenues for 2012 increased compared to 2011 as result of an increase in international product shipments.

    XIAFLEX

        Including the impact of the agreement to mutually terminate the Pfizer Agreement discussed above, total revenues for XIAFLEX for 2012 were $157.8 million compared to $56.4 million for the comparable period of 2011. Net revenues for 2012 include $55.2 million of net U.S. product sales of XIAFLEX compared to the $42.2 million for 2011, excluding the $1.8 million benefit of the 2011 change in revenue recognition. The increase in XIAFLEX international contract revenue for 2012

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compared to 2011 is primarily due to the incremental revenue amortization for the Pfizer Agreement and the Actelion Agreement.

    Revenue allowances

        Revenue allowances as a percentage of gross U.S. revenues for 2012 compared to 2011 increased due to higher levels of managed care contract rebates and government health plan charge-backs resulting from certain new managed care contracts for Testim acquired in mid-2011 and the $0.8 million prior period correction of government health plan charge-backs discussed above, partially offset by the higher mix of XIAFLEX U.S. revenues, which carries a lower revenue allowance percentage compared to that of Testim.

        Cost of goods sold.    Cost of goods sold were $78.3 million and $55.7 million for the years ended December 31, 2012 and 2011, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to our licensors, and the amortization of the deferred costs associated with the collaboration agreements with Actelion, Asahi and Pfizer. The increase in cost of goods sold in 2012 over 2011 was directly attributable to the increase in products sold and the cumulative adjustment of deferred costs related to Pfizer Agreement. The gross margin rate on our net revenues was 80% for 2012 compared to 79% for 2011. The increase in the gross margin rate is principally due to the cumulative adjustments of deferred revenue and related costs relating to termination of the Pfizer Agreement. Excluding this impact, the gross margin rate declined primarily due to costs incurred in 2012 for XIAFLEX manufacturing initiatives and the $1.9 million benefit recorded in 2011 for past claims from our licensor of XIAFLEX, offset in part by the impact of year-over-year net price increases on Testim U.S. product sales.

        Research and development expenses.    We currently have only two products in development, XIAFLEX and a high concentration testosterone gel product. A significant portion of the research and development expenses are for the internal personnel and infrastructure costs common to the support of these development efforts. Since we do not allocate these common costs to individual projects for external reporting purposes, we do not report research and development cost by project.

        Research and development expenses were $45.9 million and $61.9 million for the years ended December 31, 2012 and 2011, respectively. This decrease in expense results principally from a reduction in 2012 of activities related to development of a larger scale XIAFLEX production process and the completion of the phase III XIAFLEX clinical trials for Peyronie's disease in third quarter 2012, partially offset by spending in 2012 related to the Dupuytren's multi-cord study and new indications for XIAFLEX.

        Selling, general and administrative expenses.    Selling, general and administrative expenses were $185.5 million and $179.9 million for the years ended December 31, 2012 and 2011, respectively. This increase was primarily due to marketing spending for Dupuytren's and for the potential future launch of Peyronie's, increased business development and legal expenses, and costs incurred in 2012 related to the relocation of the Company's headquarters, offset in part by costs incurred in 2011 related to management changes.

        Investment income, net.    Interest income was $0.5 million in both 2012 and 2011 and relates primarily to interest earned on investment of available cash.

        Interest expense.    Interest expense relates to letters of credits and, for 2011, to the costs associated with the Company's two year $30 million revolving credit line that expired under its terms in August 2011. Future interest expense will reflect the cash interest and the amortization of the debt discount and issuance costs relating to the $350.0 million aggregate principal amount of 1.50% Convertible Senior Notes due 2018 we issued in January 2013.

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        Income Taxes.    At December 31, 2012, we had Federal tax return net operating loss carryforwards of approximately $126.3 million, which will expire in 2019 through 2030, if not utilized, and Federal Orphan Drug and research and development credits of approximately $53.4 million, which will expire in 2020 through 2032, if not utilized. In addition, we had overall state tax return net operating loss carryforwards of approximately $137.7 million, of which $86.6 million relate to Pennsylvania, which will expire 2013 through 2031 if not utilized. Future utilization of Pennsylvania net operating losses is limited to the greater of 20% of Pennsylvania taxable income or $3.0 million per year. The Tax Reform Act of 1986 (the "Act") provides for a limitation on the annual use of net operating loss and credit carryforwards following certain ownership changes (as defined in the Act) that could limit our ability to utilize these carryforwards. We have conducted a study to determine whether we have experienced any such ownership changes. Based on this study, we have concluded that we have undergone multiple ownership changes in previous years. Accordingly, our ability to utilize the aforementioned carryforwards will be limited on an annual basis. In addition, approximately $10.7 million and $9.4 million of Federal and state net operating loss carryforwards, respectively, may expire prior to utilization.

Years Ended December 31, 2011 and 2010

        Net revenues.    Net revenues for the two years ended December 31, 2011 comprise the following:

 
  Years ended December 31,    
 
 
  2011   2010   Change   % Change  
 
  (in millions)
   
 

Testim revenues—

                         

Net U.S. product sales

  $ 205.1   $ 189.9   $ 15.2     8 %

International revenues

    2.8     3.1     (0.3 )   -10 %
                     

    207.9     193.0     14.9     8 %
                     

XIAFLEX revenues—

                         

Net U.S. product sales

    44.0     14.1     29.9     212 %

International revenues

    12.4     4.3     8.1     170 %
                     

    56.4     18.4     38.0     206 %
                     

Total net revenues

  $ 264.3   $ 211.4   $ 52.9     25 %
                     

Revenue allowances as a percentage of gross U.S. revenues

    28 %   22 %   6 %      
                     

        Net U.S. product sales shown in the above table represent the product sales of the Company within the U.S. net of allowances provided on such sales. International revenues represent the amortization of deferred up-front and milestone payments the Company has received through its out-licensing agreements, together with royalties earned on product sales by the licensees.

    Testim

        Total revenues for Testim for 2011 were $207.9 million compared to $193.0 million for the comparable period of 2010. Net U.S. product sales of Testim were $205.1 million compared to the $189.9 million for 2010. The increase in Testim net U.S. revenues for 2011 compared to 2010 resulted primarily from growth in Testim prescriptions resulting from increased demand and increases in pricing, partially offset by an increase in revenue allowances. According to NPA data from IMS, a pharmaceutical market research firm, Testim total prescriptions for 2011 grew 9% compared to 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care

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physicians, as well as our tactics with select managed care organizations. Testim net U.S. revenues for 2011 also benefited from price increases having a cumulative impact of 9% over 2010. Testim international revenues for 2011 decreased compared to 2010 as result of lower international product shipments.

    XIAFLEX

        Including the change in revenue recognition in 2011 discussed above, total revenues for XIAFLEX for 2011 were $56.4 million compared to $18.4 million for the comparable period of 2010. Excluding the $1.8 million benefit of the change in revenue recognition, net U.S. product sales of XIAFLEX were $42.2 million compared to the $14.1 million for 2010. The increase in XIAFLEX international revenue for 2011 compared to 2010 is principally due to cumulative catch-up revenue adjustments aggregating $4.8 million related to the $45.0 million of regulatory milestones earned under the Pfizer Agreement during 2011, and incremental revenue amortization relating to these milestone payments and the $15.0 million up-front payment received under the Asahi Agreement.

    Revenue allowances

        Revenue allowances as a percentage of gross U.S. revenues for 2011 compared to 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs resulting from certain new managed care contracts for Testim acquired in 2011 and from 2011 price increases, partially offset by a lower revenue allowance percentage on XIAFLEX gross U.S. revenues.

        Cost of goods sold.    Cost of goods sold were $55.7 million and $49.7 million for the years ended December 31, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to our licensors, and the amortization of the deferred costs associated with the Pfizer Agreement and Asahi Agreement. The increase in cost of goods sold in 2011 over 2010 was directly attributable to the increase in products sold, offset in part by a non-recurring $3.9 million provision taken in 2010 for short dated XIAFLEX inventory. The gross margin rate on our net revenues was 79% for 2011 compared to 76% for 2010. The increase in the gross margin rate is principally due to the non-recurring $3.9 million inventory provision taken in 2010 and increased high margin XIAFLEX product sales in 2011, offset by the net negative impact of higher Testim rebates and year-over-year price increases on U.S. Testim revenues.

        Research and development expenses.    Research and development expenses were $61.9 million and $48.0 million for the years ended December 31, 2011 and 2010, respectively. This increase in expense results principally from activities related to the phase III XIAFLEX clinical trials for Peyronie's disease, phase IIa trial for Frozen Shoulder syndrome, planning for new XIAFLEX indications and costs related to development of a larger scale XIAFLEX production process.

        Selling, general and administrative expenses.    Selling, general and administrative expenses were $179.9 million and $164.7 million for the years ended December 31, 2011 and 2010, respectively. The increase in 2011 over 2010 was due primarily to selling and marketing expenses increasing by $13.6 million as a result of the promotional and training activity in support of the launch of XIAFLEX, and targeted XIAFLEX direct-to-consumer spending for Dupuytren's in the U.S. General and administrative expenses increased by $1.6 million as a result of termination costs related to management changes, offset in part by lower stock-compensation expense.

        Investment income, net.    Interest income was $0.5 million and $0.2 million for the years ended 2011 and 2010, respectively, and relates primarily to interest earned on investment of available cash.

        Interest expense.    Interest expense in 2011 and 2010 relates primarily to the costs associated with the Company's two year $30 million revolving credit line which expired under its terms in August 2011.

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Sources and Uses of Cash

        Cash provided by (used in) operations was $(2.3) million, $30.7 million, and $(48.9) million for 2012, 2011 and 2010, respectively. Cash used in operations in 2012 resulted primarily from the build in inventories, offset in part by the $10.5 million of up-front and milestone payments received from Actelion. Cash provided by operations for 2011 resulted primarily from the $15.0 million up-front payment received from Asahi Kasei and the $41.1 million of net milestone payments received from Pfizer, offset by BioSpecifics's share of these up-front and milestone payments which totaled $4.6 million, and operating losses (net of stock compensation expenses and other non-cash charges). Cash used in operations for 2010 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges. This cash usage reflects the build of inventory supporting the launch of XIAFLEX and an offsetting net cash receipt of approximately $13.7 million under our XIAFLEX license agreements, representing the $15 million European MAA milestone payment received from Pfizer and the associated payment of approximately $1.3 million to BioSpecifics for their share of this milestone.

        Cash used in investing activities was $12.4 million, $125.1 million, and $10.5 million for 2012, 2011 and 2010, respectively. The cash impact of investing activities in both 2012 and 2011 relates primarily to net purchases of short-term investments in marketable debt securities, investments in property and equipment, and the investment of $1.9 million to secure a letter of credit relating to the Horsham manufacturing facility. Investing activities in 2010 represent our investments in property and equipment, net of redemptions of investments. Our investments in property and equipment relate primarily to improvements made to our Horsham biological manufacturing facility and our information technology infrastructure for the production of XIAFLEX.

        Cash provided by financing activities was $13.0 million, $3.8 million, and $5.7 million in 2012, 2011 and 2010, respectively. Cash provided by financing activities for each year resulted primarily from cash receipts from stock option exercises, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers, and from Employee Stock Purchase Plan purchases.

Liquidity and Capital Resources

        We had approximately $157.4 million and $154.3 million in cash, cash equivalents and short-term investments as of December 31, 2012 and December 31, 2011, respectively. In January 2013, we issued $350.0 million aggregate principal amount of 1.50% Convertible Senior Notes due 2018 (the "2018 Convertible Notes") in a public offering. The net proceeds from the 2018 Convertible Notes offering were approximately $338.7 million after deducting underwriters' discounts and commissions and estimated offering expenses. We used approximately $28.5 million of the net proceeds from the offering to pay the cost of note hedge transactions (after such cost was partially offset by the proceeds from the sale of the warrants) and we intend to use the remainder of the net proceeds from the offering for general corporate purposes, which may include the acquisition (including by merger, purchase, license or otherwise) of businesses, products, product rights or technologies.

        We believe that our current financial resources, when combined with cash generated from operations, will be adequate for the Company to fund our anticipated operations for at least the next twelve months. We may, however, elect to raise additional funds to enhance our sales and marketing efforts for additional products we may acquire, commercialize any product candidates that receive regulatory approval, acquire or in-license approved products or product candidates or technologies for development and to maintain adequate cash reserves to minimize financial market fundraising risks. Insufficient funds may cause us to delay, reduce the scope of, or eliminate one or more of our development, commercialization or expansion activities. Our future capital needs and the adequacy of our financial resources will depend on many factors, including:

    our ability to successfully market sales in the U.S., or elsewhere, of XIAFLEX for Dupuytren's;

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    entry into the marketplace of competitive products, including a generic to Testim or a competing product;

    third-party payor coverage and reimbursement for our products;

    the cost of manufacturing, distributing, marketing and selling our products;

    the scope, rate of progress and cost of our product development activities;

    the costs of supplying and commercializing our products and product candidates;

    the effect of competing technological and market developments;

    the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including costs associated with the litigations with Upsher-Smith and the litigation with Watson (each as described further in Part I, Item 3 above) and the respective outcomes thereof; and

    the extent to which we acquire or invest in businesses and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

See "Risk Factors" for further discussion of the factors and risks that may adversely affect our financial resources and sources of liquidity.

        If additional funds are required, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

Contractual Commitments

        We are involved with in-licensing of products which are generally associated with payments to the partner from whom we have licensed the product. Such payments frequently take the form of:

    an up-front payment, the size of which varies depending on the phase of the product and how many other companies would like to obtain the product, which is paid very soon after signing a license agreement;

    milestone payments which are paid when certain parts of the overall development program are accomplished, or in some cases, when a patent issues;

    payments upon certain regulatory events, such as the filing of an IND, an NDA or BLA, approval of an NDA or BLA, or the equivalents in other countries;

    payments upon the commencement of sale;

    payments based on a percentage of sales; and

    payments for achievement of certain sales thresholds, such as a payment due the first year a product achieves a certain dollar value in sales.

        We may also out-license products, for which we hold the rights, to other companies for commercialization in other territories, or at times, for other uses. When this happens, the payments to us would also take the same form as described above.

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    Summary of Contractual Commitments

        The following summarizes our contractual commitments as of December 31, 2012 (in thousands):

 
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   5+ years  

Operating leases

  $ 42,346   $ 6,320   $ 12,553   $ 8,508   $ 14,965  
                       

        We may be obligated to pay $3.0 million of contingent milestone payments in the future, representing our milestone commitments to BioSpecifics. These contingent milestones relate primarily to filing of regulatory applications and receipt of regulatory approval. Through December 31, 2013, we expect to pay any additional $2.0 million of these contingent milestone payments.

        In addition, under the BioSpecifics Agreement, we are obligated to make quarterly royalty payments to BioSpecifics based on a specified percentage within the range of 5-15% of net sales of XIAFLEX by us in the U.S., by Pfizer (or any successor or subsequent licensee) in the EU and certain Eurasian countries, and by Asahi Kasei in Japan. The royalty percentage decreases if a generic to XIAFLEX is marketed in these territories. In the event that we sublicense the right to sell XIAFLEX in any country outside of the U.S., the EU and certain Eurasian countries or Japan—as we did in February 2012 to Actelion for Australia, Brazil, Canada and Mexico—we must pay BioSpecifics a specified fraction of the royalty we receive from such sublicense (which payment to BioSpecifics is capped at a specified percentage—within the range of 5-15%—of net sales of XIAFLEX within the applicable country), and a specified mark-up on our cost of goods related to supply of XIAFLEX (which mark-up is capped at a specified percentage—within the range of 5-15%—of our cost of goods of XIAFLEX for the applicable country).

Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We are subject to uncertainties that may cause actual results to differ from these estimates, such as changes in the healthcare environment, competition, legislation and regulation. We believe the following accounting policies, which have been discussed with our audit committee, are the most critical because they involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:

    revenue recognition;

    estimating the value of our equity instruments for use in stock-based compensation calculations; and

    inventory valuation.

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    Revenue Recognition.

        Revenue is recognized when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured.

    U.S. product sales—

        In the U.S., we sell XIAFLEX and Testim to pharmaceutical wholesalers. Our return policy permits product returns for Testim during a period from six months prior to the product's expiration date until 12 months subsequent to the expiration date and for XIAFLEX during a period from two months prior to the product's expiration date until six months subsequent to the expiration date. Accordingly, product revenue is recognized net of estimated product returns based on our historical experience. We accrue the contractual rebates per unit of product for each individual payor plan using the most recent historically invoiced plan prescription volumes, adjusted for each individual plan's prescription growth or contraction. In addition, we provide coupons to physicians for use with Testim prescriptions as promotional incentives and we established in September 2011 a co-pay assistance program for XIAFLEX prescriptions. We utilize a contract service provider to process and pay claims to patients for actual coupon usage and co-pay reimbursement applications. As our products become more widely used and as we continue to add managed care and PBMs, actual results may differ from our previous estimates. To date, differences between our estimates and actual experience have not resulted in any material adjustments to our operating results.

        We began selling XIAFLEX through a network of wholesalers, specialty distributors and specialty pharmacies in March 2010. As discussed in Note 1 (e) to the consolidated financial statements contained herein, in the first quarter of 2011 we began recognizing revenue for XIAFLEX sales at the time of shipment to these customers. In 2010, we deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowances of $0.1 million) and the net loss for 2011 includes a benefit of $1.7 million, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

    Collaboration and out-license agreements—

        The collaboration and out-license agreements we have entered into contain multiple elements. We evaluate all deliverables within an arrangement to determine whether or not each deliverable has stand-alone value to our partners. Based on this evaluation, deliverables are separated into units of accounting. Several deliverables may be combined into a single unit of accounting in order to establish stand-alone value. Arrangement consideration is allocated to each unit of accounting based on estimated selling price. For units of accounting for which delivery has been made and there is no further performance obligations, revenue is recognized when the related consideration is fixed and determinable and collectability is reasonably assured.

        Where we have continuing performance obligations, revenue is recognized over the performance period. In the case of license, development and marketing deliverables, such deliverables are normally combined into a single unit of accounting. The related consideration is recognized as revenue over the estimated term of the arrangement. In addition, unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected period of the arrangement during which we have continuing performance obligations. If the estimated term of the arrangement changes, a cumulative catch-up adjustment on the date of such change is recorded in order to reflect the revised contract term.

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        As part of the Pfizer Agreement, we have received up front and milestone cash payments from Pfizer. Our agreement with our licensor for XIAFLEX, BioSpecifics, required that we pay a portion of this amount to them. These amounts were recorded as deferred revenues and deferred costs, respectively, on our balance sheet at the time paid and we were required under U.S. generally accepted accounting principles ("GAAP") to amortize the deferred revenues and deferred costs into our income statement over the course of the Pfizer collaboration agreement. We originally estimated that the life of the Pfizer Agreement would be 20 years. When the agreement to mutually terminate the collaboration was reached, with a termination date of April 24, 2013, the balance of the deferred revenues and costs that existed at that time on our balance sheet was required to be adjusted to record the cumulative impact of the revised, shorter life of the agreement.

        At September 30, 2012 the balance of deferred revenues related to the Pfizer Agreement was $103.4 million and the balance of the deferred costs was $9.3 million. In the fourth quarter of 2012, we recorded $93.6 million in revenue and $8.4 million in cost of goods sold as the amortization of these deferred revenues and costs, respectively. Had we not reached agreement with Pfizer to mutually terminate the Pfizer Agreement, we would have recognized $1.6 million and $0.1 million of revenue and costs, respectively. Therefore, the impact of this change in estimate of the life of the Pfizer Agreement was an increase in 2012 revenues of $92.0 million, cost of goods sold of $8.3 million and net income of $83.7 million, or $1.70 per share, fully diluted (representing the incremental $92.0 million in deferred revenues less the incremental $8.3 million in deferred costs). The remaining deferred revenue and deferred cost balances of $9.8 million and $0.9 million, respectively, will be amortized into our income statement by April 24, 2013, the date that the Pfizer collaboration terminates.

        In addition, in the case of contingent consideration related to this single unit of accounting is earned during the performance period, we will record as revenue a cumulative catch-up adjustment on the date the contingent consideration is earned for the period of time since contract commencement through the date the milestone.

    Revenue allowances

        We record product sales net of the following allowances: (a) prompt payment discounts, (b) fees to wholesalers based on shipment activity under the terms of wholesaler service agreements, (c) product returns, (d) managed care contract rebates and government health plan charge backs, and (e) product coupons. The table below provides the balances of accruals relating to each of these allowances as of December 31, 2012 and 2011.

 
  December 31,  
 
  2012   2011  
 
  (in thousands)
 

Accounts receivable reserves:

             

Prompt pay discounts

  $ 1,375   $ 885  
           

Accrued liabilities:

             

Wholesaler service agreements

    4,037     3,611  

Product returns

    2,000     3,612  

Rebates and chargebacks

    30,569     23,863  

Product coupons and co-pay assistance

    1,260     908  
           

Subtotal

    37,866     31,994  
           

Total

  $ 39,241   $ 32,879  
           

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        The nature of each of these allowances and the methodology we use to determine the reserve accrual with respect to each allowance are described as follows:

    (a)
    Prompt pay discounts—Prompt payment discounts are offered to all wholesalers in return for payment within 30 days following the invoice date. Based on historical experience, which indicates that virtually all wholesaler payments reflect a deduction for prompt payment discounts, we record sales net of the discount amount. We adjust the reserve at the end of each reporting period to approximate the percentage discount applicable to the outstanding gross accounts receivable balances.

    (b)
    Wholesaler service agreements—Under contractual agreements with our wholesalers, we provide a fee for service based on shipment activity. The fee rates are set forth in the individual contracts. We track shipments to each wholesaler every period and accrue a liability relating to the unpaid portion of these fees by applying the contractual rates to such shipments.

    (c)
    Product returns—Our return policy permits product returns for Testim during a period from six months prior to the product's expiration date until 12 months subsequent to the expiration date and for XIAFLEX during a period from two months prior to the product's expiration date until six months subsequent to the expiration date. However, once dispensed, the product may not be returned. In order to estimate product returns, we monitor the remaining shelf life of the product when shipped to customers, actual product returns by individual production batches, NPA data for Testim (representing retail prescription information) obtained from IMS, and estimated inventory levels in the distribution channel. By analyzing these factors, we estimate potential product returns and record a return reserve.

    (d)
    Rebates and charge-backs—Managed care contract rebates and government health plan charge backs are rebates and payments provided by us under agreements with private and government health plans. We accrue the contractual rebates per unit of product for each individual plan using the most recent historically invoiced plan prescription volumes, adjusted for each individual plan's prescription growth or contraction and estimated inventory levels in our wholesale and retail channels. The accrual is continually validated through the payment process, typically within a three month cycle.

    (e)
    Product coupons and co-pay assistance—Product coupons are used for Testim promotion. These coupons offer patients the ability to receive free or discounted product through their prescribing physician, to whom we provide an inventory of coupons. In September 2011, we commenced a co-pay assistance program for XIAFLEX. We use a third party administrator who invoices us on a monthly basis for the cost of these programs in the period. Prior to the completion of the financial statements, we generally receive invoices for which the reserve was established. At the end of a reporting period, the accrual for these programs represents these unpaid invoice amounts and an estimate for unexpired Testim coupons (if any) outstanding and co-pay assistance claims in process. We base our estimates on historical redemption rates and data from comparable plans provided by our service provider. We maintain the accrual for unexpired Testim coupons and unprocessed XIAFLEX co-pay claims based on inventory in the distribution channel and the historical coupon usage, and adjust the accrual whenever changes in coupon usage rate occur.

        During 2012, we implemented a program to statistically measure inventory levels in our retail channel. As a result of the finding from this study, we recorded in 2012 revisions of the estimates of the reserves for product returns and rebates and charge-backs of approximately offsetting amounts.

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        The following table provides a roll-forward of the revenue allowances discussed above, in the aggregate, for the years ended December 31, 2012, 2011 and 2010.

 
  Year ended December 31,  
 
  2012   2011   2010  
 
  (in thousands)
 

Beginning balance

  $ 32,879   $ 19,799   $ 16,592  

Current estimate related to sales in current period

    123,740     83,537     53,246  

Current estimate related to sales in prior periods

    789     81     (759 )

Actual returns / credits in current period related to sales in current period

    (85,544 )   (53,949 )   (36,916 )

Actual returns / credits in current period related to sales in prior period

    (32,623 )   (16,589 )   (12,364 )
               

Ending balance

  $ 39,241   $ 32,879   $ 19,799  
               

    Valuation of Equity Instruments used in Stock-Based Compensation.

        We measure stock-based compensation cost for all share-based awards made to employees and directors, including stock options and employee stock purchases, at the grant date based on the fair value of the award. The fair value of stock options is estimated using the Black-Scholes option-pricing model. Pre-vesting forfeitures are estimated in the determination of total stock-based compensation cost based on Company experience. The value of the portion of the award that is ultimately expected to vest is expensed ratably over the requisite service period as compensation expense in the consolidated statement of operations. The determination of fair value of share-based payment awards on the grant date requires significant judgment. Assumptions concerning our stock price volatility and projected employee exercise behavior over the contractual life of the award can significantly impact the estimated fair value of an award. If our actual experience differs significantly from the assumptions used to compute stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little expense for our share-based payment awards.

    Inventory Valuation.

        Inventory is valued using the first-in, first-out method, assuming full absorption of direct and indirect manufacturing costs and normal capacity utilization of our internal manufacturing operations for XIAFLEX. Excess or idle capacity costs, resulting from the plant utilization below normal capacity are recognized as Cost of goods sold in the period incurred. Determination of excess or idle plant costs requires significant judgment in establishing what level of production should be considered normal. Through December 31, 2012, we have not incurred any excess or idle plant costs.

        We state inventories at the lower of cost or market. Inventory costs are based on our judgment of probable future commercial use and net realizable value. We continually evaluate and provide reserves for inventory on hand that is in excess of expected future demand or that is not expected to meet approved or anticipated specifications. These reserves are based on estimates of forecasted product demand and the likelihood of consumption in the normal course of business and forecasted consumption driven by the approval of new indications, considering the expiration dates of the inventories on hand, planned production volumes and lead times required for restocking of customer inventories. Although we make every effort to ensure that our forecasts and assessments are reasonable, changes to these assumptions are possible. In such cases, our estimates may prove inaccurate and result in an understatement or overstatement of the reserves required to fairly state such inventories.

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Recent Accounting Pronouncements

        See Note 2, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a full description of recent accounting pronouncements including the respective expected dates of adoption and the effects on the Consolidated Balance Sheets and Consolidated Statements of Income.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Our financial instruments consist of cash, cash equivalents, short-term investments, trade accounts receivable, long-term investments in auction rate securities ("ARS"), accounts payable and long-term obligations. We consider investments that, when purchased, have a remaining maturity of three months or less to be cash equivalents.

        We invest in marketable securities 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. The maximum allowable duration of a single issue is two years. Our investment policy permitted us to invest in ARS with maturities of greater than three months, provided that the interest reset and auction date for the ARS is less than three months. Since February 10, 2008, the auctions for these securities have failed. Since we are unable to predict when the market for these securities will recover, the investments we have in these securities are classified as non-current and are reported as "Long-term investments" at fair value of $1.4 million, which is $0.2 million below cost, in the Consolidated Balance Sheet at December 31, 2012. The decline in value of these investments is recorded as an unrealized loss in accumulated other comprehensive income. Our ability to access in the near term the funds invested in ARS is dependent on the success of future scheduled auctions, finding a buyer outside the auction process or a decision of the issuer of the securities to call the securities. If the uncertainties in the credit and capital market continue, these markets deteriorate further or there are ratings downgrades on any of the ARS we hold, we may be required to recognize an impairment charge to earnings, if the decline in the value of these securities is assessed to be other than temporary.

        Our investment portfolio is subject to interest rate risk, although limited given the nature of the investments, and will fall in value in the event market interest rates increase. All our cash, cash equivalents and short-term investments at December 31, 2012, amounting to approximately $157.4 million, were maintained in bank demand accounts, money market accounts, U.S. government obligations, U.S. government-backed securities and corporate notes. We do not hedge our interest rate risks, as we believe reasonably possible near-term changes in interest rates would not materially affect our results of operations, financial position or cash flows.

        Transactions relating to Auxilium UK, Limited are recorded in pounds sterling. Upon consolidation of this subsidiary into our consolidated financial statements, we translate the balance sheet asset and liability accounts to the U.S. dollar based on exchange rates as of the balance sheet date; balance sheet equity accounts are translated into the U.S. dollar at historical exchange rates; and all statements of operations and cash flows amounts are translated into the U.S. dollar at the average exchange rates for the period. Exchange gains or losses resulting from the translation are included as a separate component of stockholders' equity. In addition, we conduct clinical trials in Australia and certain European countries, exposing us to cost increases if the U.S. dollar declines in value compared to the Australian Dollar and the Euro. We do not hedge our foreign exchange risks, as we believe reasonably possible near-term fluctuations of exchange rates would not materially affect our results of operations, financial position or cash flows.

        In order to reduce the potential equity dilution that would result upon conversion of the 1.50% Convertible Senior Notes due 2018 (the "2018 Convertible Notes") we issued in January 2013, we entered into note hedge transactions with one or more of the underwriters of the 2018 Convertible

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Notes or their respective affiliates and other financial institutions. The note hedge transactions are expected generally to reduce the potential dilution to the Company's common stock and/or offset potential cash payments in excess of the principal amount upon any conversion of 2018 Convertible Notes in the event that the market value per share of the our common stock, as measured under the terms of the note hedge transactions, is greater than the strike price of the note hedge transactions (which corresponds to the initial conversion price of the 2018 Convertible Notes and is subject to certain adjustments substantially similar to those contained in the 2018 Convertible Notes). In addition, in order to partially offset the cost of the note hedge transactions, we issued warrants to purchase approximately 14.5 million shares of our common stock at a strike price of $27.36 to the hedge counterparties at a higher strike price. The warrants would separately have a dilutive effect to the extent that the market value per share of the Company's common stock exceeds the applicable strike price of the warrants. In addition, non-performance by the counterparties under the hedge transactions would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price.

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ITEM 8.    Financial Statements and Supplementary Data

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

    101  

Consolidated Balance Sheets, December 31, 2012 and 2011

   
102
 

Consolidated Statements of Operations, Years ended December 31, 2012, 2011, and 2010

   
103
 

Consolidated Statements of Comprehensive Loss, Years ended December 31, 2012, 2011, and 2010

   
104
 

Consolidated Statements of Stockholders' Equity and Comprehensive Loss, Year ended December 31, 2012

   
105
 

Consolidated Statements of Stockholders' Equity and Comprehensive Loss, Year ended December 31, 2011

   
106
 

Consolidated Statements of Stockholders' Equity and Comprehensive Loss, Year ended December 31, 2010

   
107
 

Consolidated Statements of Cash Flows, Years ended December 31, 2012, 2011, and 2010

   
108
 

Notes to Consolidated Financial Statements

   
109
 

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Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders of Auxilium Pharmaceuticals, Inc.:

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Auxilium Pharmaceuticals, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, and on the Company's internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
February 26, 2013

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Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 
  December 31,  
 
  2012   2011  

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 35,857   $ 37,535  

Short-term investments

    121,573     116,722  

Accounts receivable, trade

    55,859     42,742  

Accounts receivable, other

    1,685     2,398  

Inventories, current

    22,134     23,864  

Prepaid expenses and other current assets

    3,762     2,643  
           

Total current assets

    240,870     225,904  

Inventories, non-current

    49,697     29,239  

Property and equipment, net

    29,220     29,623  

Long-term investments

    1,442     2,371  

Other assets

    6,163     13,834  
           

Total assets

  $ 327,392   $ 300,971  
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 3,565   $ 4,479  

Accrued expenses

    80,740     77,620  

Deferred revenue, current portion

    11,835     7,820  

Deferred rent, current portion

    936     1,153  
           

Total current liabilities

    97,076     91,072  
           

Deferred revenue, long-term portion

    26,288     120,117  
           

Deferred rent, long-term portion

    4,140     5,384  
           

Commitments and contingencies (Note 11)

         

Stockholders' equity:

             

Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued or outstanding

    0     0  

Common stock, $0.01 par value per share; authorized 120,000,000 shares; issued 49,419,104 and 48,236,137 shares at December 31, 2012 and 2011, respectively

    494     482  

Additional paid-in capital

    525,354     495,949  

Accumulated deficit

    (322,115 )   (408,059 )

Treasury stock, at cost; 136,405and 131,591 shares at December 31, 2012 and 2011, respectively

    (3,337 )   (3,239 )

Accumulated other comprehensive loss

    (508 )   (735 )
           

Total stockholders' equity

    199,888     84,398  
           

Total liabilities and stockholders' equity

  $ 327,392   $ 300,971  
           

   

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 
  Years Ended December 31,  
 
  2012   2011   2010  

Net revenues

  $ 395,281   $ 264,315   $ 211,429  
               

Operating expenses*:

                   

Cost of goods sold

    78,337     55,662     49,725  

Research and development

    45,932     61,948     48,005  

Selling, general and administrative

    185,535     179,887     164,675  
               

Total operating expenses

    309,804     297,497     262,405  
               

Loss from operations

    85,477     (33,182 )   (50,976 )

Investment income, net

    506     502     167  

Interest expense

    (39 )   (236 )   (422 )
               

Net income (loss)

  $ 85,944   $ (32,916 ) $ (51,231 )
               

Net income (loss) per common share:

                   

Basic

  $ 1.76   $ (0.69 ) $ (1.08 )
               

Diluted

  $ 1.74   $ (0.69 ) $ (1.08 )
               

Shares used to compute net income (loss) per common share:

                   

Basic

    48,770,229     47,886,672     47,426,849  
               

Diluted

    49,277,570     47,886,672     47,426,849  
               

*
includes the following amounts of stock-based compensation expense:

 

Cost of goods sold

 
$

84
 
$

65
 
$

155
 

 

Research and development

    2,919     3,184     2,698  

 

Selling, general and administrative

    12,004     14,029     15,109  

   

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 
  Year Ended December 31,  
 
  2012   2011   2010  

Net income (loss)

  $ 85,944   $ (32,916 ) $ (51,231 )
               

Other comprehensive income (loss):

                   

Unrealized gains on investments

    249     (237 )   314  

Foreign currency translation adjustment

    (22 )   (5 )   (26 )
               

Total

    227     (242 )   288  
               

Comprehensive income (loss)

  $ 86,171   $ (33,158 ) $ (50,943 )
               

   

See accompanying notes to consolidated financial statements.

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Consolidated Statement of Stockholders' Equity

Year Ended December 31, 2012

(In thousands, except share amounts)

 
  Common stock    
   
  Treasury stock   Accumulated
other
comprehensive
loss
   
 
 
  Additional
paid-in
capital
  Accumulated
deficit
   
 
 
  Shares   Amount   Shares   Cost   Total  

Balance, December 31, 2011

    48,236,137   $ 482   $ 495,949   $ (408,059 )   131,591   $ (3,239 ) $ (735 )   84,398  

Exercise of common stock options

    960,864     10     10,497     0     0     0     0     10,507  

Employee Stock Purchase Plan purchases

    153,260     2     2,522     0     0     0     0     2,524  

Issuance of restricted stock

    43,700     0     0     0     0     0     0     0  

Proceeds from Board of Directors stock purchases

    4,956     0     106     0     0     0     0     106  

Stock based compensation

    20,187     0     16,280     0     0     0     0     16,280  

Treasury stock acquisition

    0     0     0     0     4,814     (98 )   0     (98 )

Other comprehensive income

    0     0     0     0     0     0     227     227  

Net income

    0     0     0     85,944     0     0     0     85,944  
                                   

Balance, December 31, 2012

    49,419,104     494     525,354     (322,115 )   136,405     (3,337 )   (508 )   199,888  
                                   

See accompanying notes to consolidated financial statements.

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AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

Year Ended December 31, 2011

(In thousands, except share amounts)

 
  Common stock    
   
  Treasury stock   Accumulated
other
comprehensive
loss
   
 
 
  Additional
paid-in
capital
  Accumulated
deficit
   
 
 
  Shares   Amount   Shares   Cost   Total  

Balance, December 31, 2010

    47,904,563   $ 479   $ 472,665   $ (375,143 )   123,539   $ (3,065 ) $ (493 ) $ 94,443  

Exercise of common stock options

    270,453     3     2,907     0     0     0     0     2,910  

Employee Stock Purchase Plan purchases

    55,292     1     921     0     0     0     0     922  

Proceeds from Board of Directors stock purchases

    7,205     0     134     0     0     0     0     134  

Stock based compensation

    1,750     0     19,322     0     0     0     0     19,322  

Cancellation of restricted shares

    (3,126 )   0     0     0     0     0     0     0  

Treasury stock acquisition

    0     0     0     0     8,052     (174 )   0     (174 )

Other comprehensive loss

    0     0     0     0     0     0     (242 )   (242 )

Net loss

    0     0     0     (32,916 )   0     0     0     (32,916 )
                                   

Balance, December 31, 2011

    48,236,137   $ 482     495,949     (408,059 )   131,591     (3,239 ) $ (735 ) $ 84,398  
                                   

See accompanying notes to consolidated financial statements.

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AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

Year Ended December 31, 2010

(In thousands, except share amounts)

 
  Common stock    
   
  Treasury stock   Accumulated
other
comprehensive
income (loss)
   
 
 
  Additional
paid-in
capital
  Accumulated
deficit
   
 
 
  Shares   Amount   Shares   Cost   Total  

Balance, December 31, 2009

    47,317,602   $ 473   $ 446,876   $ (323,912 )   84,373   $ (2,137 ) $ (781 )   120,519  

Cashless exercise of common stock warrants

    78,875     1     (1 )   0     0     0     0     0  

Exercise of common stock options

    414,316     4     4,570     0     0     0     0     4,574  

Employee Stock Purchase Plan purchases

    98,908     1     1,884     0     0     0     0     1,885  

Issuance of restricted stock

    10,000     0     0     0     0     0     0     0  

Cancellation of resticted stock

    (21,006 )   0     0     0     0     0     0     0  

Proceeds from Board of Directors stock purchases

    5,868     0     143     0     0     0     0     143  

Stock based compensation

    0     0     19,193     0     0     0     0     19,193  

Treasury stock acquisition

    0     0     0     0     39,166     (928 )   0     (928 )

Other comprehensive income

    0     0     0     0     0     0     288     288  

Net loss

    0     0     0     (51,231 )   0     0     0     (51,231 )
                                   

Balance, December 31, 2010

    47,904,563   $ 479   $ 472,665   $ (375,143 )   123,539   $ (3,065 ) $ (493 ) $ 94,443  
                                   

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flow

(In thousands, except share and per share amounts)

(In thousands)

 
  Years Ended December 31,  
 
  2012   2011   2010  

Cash flows from operating activities:

                   

Net income (loss)

  $ 85,944   $ (32,916 ) $ (51,231 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                   

Depreciation and amortization

    18,089     8,002     5,905  

Stock-based compensation

    15,007     17,278     17,962  

Changes in operating assets and liabilities:

                   

Increase in accounts receivable

    (12,404 )   (11,607 )   (13,944 )

Increase in inventories

    (17,455 )   (12,256 )   (17,529 )

Decrease (increase) in prepaid expenses, other current assets and other assets

    (2,372 )   (4,926 )   1,017  

Increase (decrease) in accounts payable and accrued expenses

    2,185     25,754     (2,411 )

Increase (decrease) in deferred revenue

    (89,814 )   42,220     11,803  

Decrease in deferred rent

    (1,461 )   (850 )   (462 )
               

Net cash provided by (used in) operating activities

    (2,281 )   30,699     (48,890 )
               

Cash flows from investing activities:

                   

Purchases of property and equipment

    (8,762 )   (6,644 )   (11,228 )

Purchases of short-term investments

    (191,496 )   (156,370 )   0  

Purchases of other assets

    0     (1,900 )   0  

Redemptions of short-term investments

    186,723     39,372     0  

Redemptions of long-term investments

    1,100     400     700  
               

Net cash used in investing activities

    (12,435 )   (125,142 )   (10,528 )
               

Cash flows from financing activities:

                   

Employee Stock Purchase Plan purchases

    2,524     922     1,885  

Proceeds from exercise of common stock options

    10,507     2,910     4,574  

Proceeds from Board of Directors stock purchases

    106     134     143  

Purchases of treasury stock

    (98 )   (174 )   (928 )
               

Net cash provided by financing activities

    13,039     3,792     5,674  
               

Effect of exchange rate changes on cash

    (1 )   (21 )   (26 )
               

Decrease in cash and cash equivalents

    (1,678 )   (90,672 )   (53,770 )

Cash and cash equivalents, beginning of period

    37,535     128,207     181,977  
               

Cash and cash equivalents, end of period

  $ 35,857   $ 37,535   $ 128,207  
               

   

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(1) Organization and Description of Business

    (a) The Company

        Auxilium Pharmaceuticals, Inc. along with its subsidiaries, or the "Company" is a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences.

        The Company currently market two products: Testim® testosterone gel and XIAFLEX® (collagenase clostridium histolyticum (also known as "CCH" for development purposes)).

        Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim is approved in the U.S., Canada and much of Europe for the treatment of hypogonadism.

        The Company commercializes Testim in the U.S., while Ferring International Center S.A. and Paladin Labs Inc. market Testim on our behalf in certain European countries and Canada, respectively. Commencing in July 2012, GlaxoSmithKline LLC ("GSK") also markets Testim in the U.S. pursuant to a co-promotion agreement entered into in May 2012.

        XIAFLEX is a proprietary, injectable clostridial collagenase enzyme approved by the U.S. Food and Drug Administration ("FDA") for the treatment of Dupuytren's contracture ("Dupuytren's" or "DC") in adult patients with a palpable cord. Dupuytren's is a condition that affects the connective tissue that lies beneath the skin in the palm. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient's fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. The Company launched XIAFLEX for the treatment of Dupuytren's in the U.S. in March 2010.

        On December 27, 2012, the FDA accepted for filing and granted standard review status to our supplemental Biologics License Application ("sBLA") for XIAFLEX for the treatment of Peyronie's disease ("Peyronie's" or "PD"). The FDA has notified the Company that it is not presently planning to take this application to an Advisory Committee meeting; however, the Company can give no assurance that it will not require an Advisory Committee meeting in the future. Under the Prescription Drug User Fee Act (PDUFA), the FDA is expected to take action on this application by September 6, 2013.

        The Company has partnered with Pfizer Inc. ("Pfizer") for development and commercialization of XIAPEX® (EU tradename for XIAFLEX) for Dupuytren's and Peyronie's disease in Europe and certain Eurasian countries. On November 6, 2012, the Company and Pfizer mutually agreed to terminate this arrangement, effective April 24, 2013. The Company is evaluating all of our options for the continuing commercialization of XIAPEX for the treatment of Dupuytren's and for gaining approval for XIAPEX for the treatment of Peyronie's in the EU. The Company has partnered with Asahi Kasei Pharma Corporation ("Asahi Kasei") for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Japan. The Company has also partnered with Actelion Pharmaceuticals Ltd. ("Actelion") for development and commercialization of XIAFLEX for Dupuytren's and Peyronie's in Australia, Brazil, Canada and Mexico. In July 2012, the Company was granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

(1) Organization and Description of Business (Continued)

Dupuytren's contracture in adults with a palpable cord in Canada. Actelion expects to make XIAFLEX available to patients in Canada in the first half of 2013. The Company is seeking a partner or partners for development and commercialization in the rest of the world.

        The Company's current product pipeline includes:

    CCH

    Phase III:

    XIAFLEX for the treatment of Peyronie's with an sBLA having been accepted for filing in December 2012 with a PDUFA date scheduled for September 6, 2013

    Phase II:

    XIAFLEX for the treatment of Adhesive Capsulitis with top-line data expected in the first quarter of 2013

    XIAFLEX for the treatment of edematous fibrosclerotic panniculopathy with top-line data having been reported in the fourth quarter of 2012 and the initiation of a Phase IIa trial expected to commence in the second half of 2013

    TRT

    The Company expects to commence clinical studies in 2013 for its high concentration testosterone gel product.

    (b) Liquidity

        The Company commenced operations in the fourth quarter of 1999. The Company has been dependent upon external financing, including primarily private and public sales of securities, to fund operations. As of December 31, 2012, the Company had an accumulated deficit of approximately $322,115.

        While the Company believes that its current investment balances, the proceeds from the convertible notes offering in January 2013 discussed in Note 16, and expected cash inflows are sufficient for the Company to fund operations for the next twelve months, the Company may require additional financing in the future to execute its intended business strategy. There can be no assurances that the Company will be able to obtain additional debt or equity financing on terms acceptable to the Company, when and if needed. Failure to raise needed funds on satisfactory terms could have a material impact on the Company's business, operating results or financial condition.

(2) Summary of Significant Accounting Policies

    (a) Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of Auxilium Pharmaceuticals, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

have been eliminated in consolidation. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to current presentation.

    (b) Use of Estimates

        The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

    (c) Translation of Foreign Financial Statements

        The Company established a foreign subsidiary in the United Kingdom in 2000, which uses the pound sterling as its functional currency. Assets and liabilities of the Company's foreign subsidiary are translated at the year-end rate of exchange. The statements of operations and cash flows for this subsidiary are translated at the average rate of exchange for the year. Gains or losses from translating foreign currency financial statements are accumulated in other comprehensive income (loss) in stockholders' equity.

    (d) Fair Value of Financial Instruments

        The carrying amounts of the Company's financial instruments, including cash, cash equivalents, short-term investments, restricted cash deposits and long-term investments are stated at fair value. Due to their short-term maturity, the carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value.

    (e) Revenue Recognition

        Net revenues for the three years ended December 31, 2012 comprise the following:

 
  Years ended December 31,  
 
  2012   2011   2010  

Testim revenues—

                   

Net U.S. product sales

  $ 233,441   $ 205,061   $ 189,940  

International revenues

    4,039     2,842     3,054  
               

    237,480     207,903     192,994  
               

XIAFLEX revenues—

                   

Net U.S. product sales

    55,174     44,009     14,078  

International revenues

    102,627     12,403     4,357  
               

    157,801     56,412     18,435  
               

Total net revenues

  $ 395,281   $ 264,315   $ 211,429  
               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

        Net U.S. revenues shown in the above table represent the product sales of the Company within the U.S., net of allowances provided on such sales. International revenues represent the amortization of deferred up-front and milestone payments the Company has received on its out-licensing agreements, together with royalties earned on product sales by the licensees.

        Revenue is recognized when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured.

    U.S. product sales—

        In the U.S., XIAFLEX and Testim are sold to pharmaceutical wholesalers. The return policy of the Company permits product returns for Testim during a period from six months prior to the product's expiration date until 12 months subsequent to the expiration date and for XIAFLEX during a period from two months prior to the product's expiration date until six months subsequent to the expiration date. Accordingly, product revenue is recognized net of estimated product returns based on historical experience of the Company. The Company accrues the contractual rebates per unit of product for each individual payor plan using the most recent historically invoiced plan prescription volumes, adjusted for each individual plan's prescription growth or contraction. In addition, the Company provides coupons to physicians for use with Testim prescriptions as promotional incentives and the Company established in September 2011 a co-pay assistance program for XIAFLEX prescriptions. A contract service provider is utilized to process and pay claims to patients for actual coupon usage. As products of the Company become more widely used and as the Company continues to add managed care and PBMs, actual results may differ from the Company's previous estimates. To date, differences between Company estimates and actual experience have not resulted in any material adjustments to its operating results.

        In the first quarter of 2012, the Company recorded a correction of an error in its financial statements for the year ended December 31, 2011 that resulted from an understatement of the accrual for government health plan charge-backs. This correction reduced Net revenues and Net income reported for the year ended December 31, 2012 in the amount of $820. Management believes this adjustment is not material to the Company's results of operations for 2012 and 2011.

        In the first quarter of 2011, the Company began recognizing revenue for XIAFLEX product shipments at the time of delivery of XIAFLEX to the Company's U.S. customers, which are primarily a limited number of wholesalers, specialty pharmacies and specialty distributors who ship the product on an as needed basis to individual healthcare providers. In contrast, during 2010 the recognition of revenue and related product costs for XIAFLEX product shipments was deferred until those wholesalers, specialty pharmacies and specialty distributors shipped product to physicians for administration to patients because the Company could not initially assess the flow of XIAFLEX through its distribution channel as it was new to the marketplace. As a result of this change in revenue recognition, net revenues for the year ended December 31, 2011 include a benefit of $1,804 (representing revenue previously deferred, net of allowances of $59) and the net loss for the year ended December 31, 2011 includes a benefit of $1,743, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

    Collaboration and out-license agreements—

        International contract revenues shown in the above table represent the amortization of deferred up-front, milestone payments and royalty payments previously received under the collaboration and out-licensing agreements. These agreements contain multiple elements. The Company evaluates all deliverables within an arrangement to determine whether or not each deliverable has stand-alone value to its partners. Based on this evaluation, deliverables are separated into units of accounting. Several deliverables may be combined into a single unit of accounting in order to establish stand-alone value. Arrangement consideration is allocated to each unit of accounting based on estimated selling price. For units of accounting for which delivery has been made and there is no further performance obligations, revenue is recognized when the related consideration is fixed and determinable and collectability is reasonably assured. Where the Company has continuing performance obligations, revenue is recognized over the performance period. In the case of license, development and marketing deliverables, such deliverables are normally combined into a single unit of accounting. The related consideration is recognized as revenue over the term of the arrangement. In addition, unless evidence suggests otherwise, revenue from consideration received is recognized on a straight-line basis over the expected period of the arrangement during which continuing performance obligations exist. If the estimated term of the arrangement changes, a cumulative catch-up adjustment on the date of such change is recorded in order to reflect the revised contract term.

        As part of the Pfizer Agreement, the Company received up front and milestone cash payments from Pfizer. The agreement with the Company's licensor for XIAFLEX, BioSpecifics, required that the Company pay a portion of this amount to them. These amounts were recorded as deferred revenues and deferred costs, respectively, on the Company's balance sheet at the time paid and the Company was required under U.S. generally accepted accounting principles ("GAAP") to amortize the deferred revenues and deferred costs into its income statement over the course of the Pfizer collaboration agreement. The Company originally estimated that the life of the Pfizer Agreement would be 20 years. When the agreement to mutually terminate the collaboration was reached, with a termination date of April 24, 2013, the balance of the deferred revenues and costs that existed at that time on the Company's balance sheet was required to be adjusted to record the cumulative impact of the revised, shorter life of the agreement.

        At September 30, 2012 the balance of deferred revenues related to the Pfizer Agreement was $103,404 and the balance of the deferred costs was $9,311. In the fourth quarter of 2012 the Company recorded $93,601 in revenue and $8,429 in cost of goods sold as the amortization of these deferred revenues and costs, respectively. Had the Company not reached agreement with Pfizer to mutually terminate the Pfizer Agreement, it would have recognized $1,593 and $143 of revenue and costs, respectively. Therefore, the impact of this change in estimate of the life of the Pfizer Agreement was an increase in 2012 revenues of $92,008, cost of goods sold of $8,285 and net income of $83,723, or $1.70 per share, fully diluted (representing the incremental $92,008 in deferred revenues less the incremental $8,285 in deferred costs). The remaining deferred revenue and deferred cost balances of $9,803 and $883, respectively, will be amortized into the Company's income statement by April 24, 2013, the date that the Pfizer collaboration terminates.

        In addition, in the case of contingent consideration related to this single unit of accounting is earned during the performance period, the Company will record as revenue a cumulative catch-up

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(2) Summary of Significant Accounting Policies (Continued)

adjustment on the date the contingent consideration is earned for the period of time since contract commencement through the date the milestone.

    Customer concentration—

        The following individual customers each accounted for at least 10% of total product shipments for any of the respective periods:

 
  Years Ended
December 31,
 
 
  2012   2011   2010  

AmerisourceBergen Corporation

    23 %   23 %   20 %

Cardinal Health, Inc. 

    34 %   35 %   37 %

McKesson Corporaton

    34 %   33 %   35 %
               

    91 %   91 %   92 %
               

    (f) Cash Equivalents, Short-term and Long-term Investments

        Investments classified as Cash equivalents, Short-term investments and Long-term investments are considered to be "available for sale". Cash equivalents include only securities having a maturity of three months or less at the time of purchase. These investments are carried at fair value and unrealized gains and losses on them are recorded as a separate component of Stockholders' equity in Accumulated other comprehensive loss. All realized gains and losses on these investments are recognized in results of operations.

    (g) Accounts Receivable

        Accounts receivable, trade consist of amounts due from wholesalers for the purchase of Testim and XIAFLEX. Ongoing credit evaluations of customers are performed and collateral is generally not required.

        Accounts receivable, trade are net of allowances for cash discounts, actual returns and bad debts of $1,384 and $913 at December 31, 2012 and 2011, respectively.

        The following individual customers each accounted for at least 10% of accounts receivable, trade on either of the respective dates:

 
  December 31,  
 
  2012   2011  

AmerisourceBergen Corporation

    35 %   13 %

Cardinal Health, Inc. 

    23 %   28 %

McKesson Corporaton

    34 %   33 %
           

    92 %   74 %
           

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

    (h) Inventories

        Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventory costs for the Company's internal manufacturing operations assume full absorption of direct and indirect manufacturing costs and normal capacity utilization. Excess or idle capacity costs, resulting from the plant utilization below normal capacity are recognized as Cost of goods sold in the period incurred. To date, there have been no excess or idle capacity charges. Testim inventory, the production of which is outsourced, is also valued using the first-in, first-out method.

        Inventory costs are based on the Company's judgment of net realizable value considering probable future commercial use and net realizable value. Inventories produced prior to approval are expensed unless management believes it is probable that the inventory will be salable. The Company continually evaluates and provides reserves for inventory on hand that is in excess of expected future demand or that is not expected to meet approved or anticipated specifications. Inventories expected to be utilized in the next 12-month period are classified as current, and inventories expected to be utilized beyond that period are classified as non-current. To conform to this presentation, the December 31, 2011 balance sheet has been revised to correctly present $29,239 of inventories as non-current, the impact of which management believes was not material to the balance sheet. In determining the classification of inventory, the Company considers a number of factors, including historical sales experience and trends, wholesaler inventory levels, estimates of future sales growth and forecasts of demand provided by the Company's collaboration partners.

    (i) Concentration of Supply

        The Company has limited sources of supply for raw materials for its products. The Company attempts to mitigate the risk of supply interruption by maintaining adequate safety stock of raw materials and by scheduling production runs to create safety stock of finished goods. The Company evaluates secondary sources of supply for all its raw materials and finished goods. The Company does not have any long-term minimum commitments for finished goods production or raw materials (see Note 11).

    (j) Property and Equipment

        Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred, and costs of improvements are capitalized. Depreciation is recognized using the straight-line method based on the estimated useful life of the related assets. Amortization of leasehold improvements is recognized using the straight-line method based on the shorter of the estimated useful life of the related assets or the remaining lease term.

    (k) Long-Lived Assets

        The Company reviews long-lived assets, such as property and equipment, for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2012, the Company has not revised the remaining useful lives of any significant assets.

        Included in Other assets as of December 31, 2012 and 2011 is the unamortized balance of the license agreement payment to BioSpecifics, associated with the up-front and milestone payments received under the out-licensing agreements with Actelion, Asahi Kasei and Pfizer (see Note 8). These payments are being amortized over the estimated life of the related agreement. In addition, as discussed Note 2 (e) above and Note 8, we recorded in 2012 a change in estimate of the Pfizer Agreement deferred cost to reflect its revised term.

    (l) Research and Development Costs

        Research and development costs include salaries and related expenses for development personnel and fees and costs paid to external service providers. These costs also include certain costs of operation of the Horsham manufacturing facilities for development of a larger scale manufacturing process and other projects. Costs of external service providers include both clinical trial costs and the costs associated with non-clinical support activities such as toxicology testing, manufacturing process development and regulatory affairs. External service providers include contract research organizations, contract manufacturers, toxicology laboratories, physician investigators and academic collaborators. Research and development costs, including the cost of product licenses prior to regulatory approval, are charged to expense as incurred.

    (m) Income Taxes

        Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period such tax rate changes are enacted. Interest and penalties related to uncertain tax positions are classified as income tax expense.

    (n) Stock-Based Compensation

        The Company measures the compensation costs for all share-based awards made to the Company's employees and directors, including stock options and employee stock purchases under the Company's employee stock purchase plan, based on fair values on the date of grant. The fair value of stock options is estimated using the Black-Scholes option-pricing model. Pre-vesting forfeitures are estimated in the determination of total stock-based compensation cost based on Company experience. The value of the portion of the award that is ultimately expected to vest is expensed ratably over the requisite service period as compensation expense in the consolidated statement of operations. For awards that limit performance requirements to continuing service, the Company uses the straight-line method to

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

amortize compensation cost for the full award to expense over their vesting period. For awards with other performance requirements, the graded vesting method of amortization is utilized under which the cost of each vesting tranche of an award is amortized to expense over the period from grant to vesting date.

    (o) Comprehensive Income (Loss)

        Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. The Company's comprehensive income (loss) is presented in Consolidated Statements of Comprehensive Income (Loss).

    (p) Net Income (Loss) Per Common Share

        Basic income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. Common stock equivalents are measured using the treasury stock method.

        The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted income per common share.

 
  Years Ended December 31,  
Basic income (loss) per share:
  2012   2011   2010  

Numerator:

                   

Net income (loss)

 
$

85,944
 
$

(32,916

)

$

(51,231

)
               

Denominator:

                   

Weighted-average common shares outstanding

    48,802,870     47,913,012     47,523,413  

Weighted-average unvested restricted common shares

   
32,641
   
26,340
   
96,564
 
               

Shares used in calculating basic net income (loss) per common share

    48,770,229     47,886,672     47,426,849  
               

Basic net income (loss) per common share

  $ 1.76   $ (0.69 ) $ (1.08 )
               

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

 
  Years Ended December 31,  
Diluted income (loss) per share:
  2012   2011   2010  

Numerator:

                   

Net income (loss)

 
$

85,944
 
$

(32,916

)

$

(51,231

)
               

Denominator:

                   

Weighted-average common shares outstanding

    48,802,870     47,913,012     47,523,413  

Weighted-average unvested restricted common shares

   
32,641
   
26,340
   
96,564
 

Incremental shares from assumed conversions of stock compensations plans

    507,341     0     0  
               

Shares used in calculating diluted net income (loss) per common share

    49,277,570     47,886,672     47,426,849  
               

Diluted net income (loss) per common share

  $ 1.74   $ (0.69 ) $ (1.08 )
               

        The weighted-average number of stock options and restricted stock units that were antidilutive and, therefore, excluded from the computation of diluted net income per common share for the year ended December 31, 2012 was 5,983,597.

    (q) Segment Information

        The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas and does not have separately reportable segments.

    (r) Advertising Costs

        Advertising costs, included in selling, general and administrative expenses, are charged to expense as incurred. Advertising expenses for the years ended December 31, 2012, 2011 and 2010 were $16,877, $17,669 and $14,568, respectively.

    (s) New Accounting Pronouncements

        In May 2011, the Financial Accounting Standards Board (the "FASB") amended the fair value measurement guidance in order to achieve common measurement and disclosure requirements between U.S. generally accepted accounting principles and the International Financial Reporting Standards. These amendments are also intended to provide increased transparency around valuation inputs and investment categorization and, for the Company, are effective for 2012 reporting. The Company adopted this new guidance in the first quarter of 2012 and the adoption did not have a material effect on the Company's financial statements.

        In June 2011, the FASB amended the guidance on the presentation of comprehensive income. Specifically, the new guidance eliminates the current option to report other comprehensive income

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(In thousands, except share and per share data)

(2) Summary of Significant Accounting Policies (Continued)

within the statement of changes in equity and requires an entity to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or alternatively in two, but consecutive, statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For the Company, the new guidance is effective for 2012 reporting. The Company adopted this new guidance as of March 31, 2012 and presents its consolidated statements of comprehensive loss as a separate statement.

        In February 2013, the FASB issued an amendment to the accounting guidance on reporting amounts reclassified out of accumulated other comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassed is required under United States GAAP to be reclassified in its entirety to net income. For other amounts that are not required under United States GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under United States GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

        In December 2011, the FASB issued an amendment to the accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires an entity to disclose both gross and net information about financial instruments and derivative instruments that are eligible for offset in the consolidated balance sheet or subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB clarified that this guidance applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the accounting guidance or subject to a master netting arrangement or similar agreement. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

(3) Fair Value Measurement

        The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

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(In thousands, except share and per share data)

(3) Fair Value Measurement (Continued)

        As of December 31, 2012, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company's fair value hierarchy for these financial assets as of December 31, 2012 and 2011:

 
  December 31, 2012  
 
  Fair Value   Level 1   Level 2   Level 3  

Cash and cash equivalents

  $ 35,857   $ 35,857   $ 0   $ 0  

Short-term investments

   
121,573
   
31,459
   
90,114
   
0
 

Long-term investments:

                         

Auction rate securities

    1,442     0     0     1,442  
                   

Total financial assets

  $ 158,872   $ 67,316   $ 90,114   $ 1,442  
                   

 

 
  December 31, 2011  
 
  Fair Value   Level 1   Level 2   Level 3  

Cash and cash equivalents

  $ 37,535   $ 37,535   $ 0   $ 0  

Short-term investments

   
116,722
   
24,156
   
92,566
   
0
 

Long-term investments:

                         

Auction rate securities

    2,371     0     0     2,371  
                   

Total financial assets

  $ 156,628   $ 94,937   $ 92,566   $ 2,371  
                   

        Fair value for Level 1 is based on quoted market prices. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources including market participants, dealers and brokers. The securities classified as Level 3 are auction rate securities that are not actively traded. The fair value of these securities is based on a discounted cash flow model which incorporated a discount period, coupon rate, liquidity discount and coupon history. In determining the fair value of the auction rate securities, the Company also considered the rating of the securities by investment rating agencies and whether the securities were backed by the United States government.

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(In thousands, except share and per share data)

(3) Fair Value Measurement (Continued)

        The following table summarizes the changes in the financial assets measured at fair value using Level 3 inputs for the years ended December 31, 2012 and 2011 (in thousands):

 
  Years ended
December 31,
 
Long-term investments
  2012   2011  

Beginning balance