Amendment No. 7 to Form S-1

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

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. ¨

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

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

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

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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

We are offering 5,500,000 shares of our common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price to be between $10.00 and $12.00 per common share. We have applied to list our common stock on The NASDAQ Global Market under the symbol “HZNP.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

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

Certain of our existing stockholders have indicated an interest in purchasing an aggregate of approximately $15.0 million of shares of our common stock in this offering. However, because indications of interest are not binding agreements or commitments to purchase, our underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

Delivery of the shares of common stock is expected to be made on or about , 2011. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional 825,000 shares of our common stock to cover overallotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ and the total proceeds to us, before expenses, will be $ .

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus is only accurate on the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Until , 2011 (25 days after the date of this prospectus), all dealers that buy, sell, or trade in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” as well as our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Our Company

We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration, or FDA, approved DUEXIS^® (formerly HZT-501), a novel tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. We plan to launch DUEXIS in the U.S. in the fourth quarter of 2011. We submitted a Marketing Authorization Application, or MAA, for DUEXIS in the United Kingdom, the Reference Member State, through the Decentralized Procedure in October 2010 and we anticipate a decision on the MAA in the first half of 2012. Our other product, LODOTRA (NP-01), is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partner, Mundipharma International Corporation Limited, or Mundipharma. We have successfully completed multiple Phase 3 clinical trials of LODOTRA and we intend to submit a new drug application, or NDA, for LODOTRA to the FDA in the third quarter of 2011. We have worldwide marketing rights for DUEXIS and have retained exclusive marketing rights in the U.S. for all of our products. Our strategy is to commercialize our products in the U.S., to explore co-promotion opportunities for DUEXIS in the U.S., and to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S.

DUEXIS is a novel combination of 800 mg ibuprofen and 26.6 mg famotidine in a single pill and is indicated for the relief of signs and symptoms of rheumatoid arthritis, or RA, and osteoarthritis, or OA, and to decrease the risk of developing upper gastrointestinal, or GI, ulcers in patients who are taking ibuprofen for those indications. Ibuprofen is one of the most widely prescribed non-steroidal anti-inflammatory drugs, or NSAIDs, worldwide and famotidine is a well-established GI agent used to treat dyspepsia, gastroesophageal reflux disease, or GERD, and active ulcers. Prior to submitting our NDA for DUEXIS, we completed two pivotal Phase 3 clinical trials in a total of over 1,500 patients with mild to moderate pain or arthritis that demonstrated a statistically significant reduction in the incidence of NSAID-induced upper GI ulcers when treated with DUEXIS versus ibuprofen alone. In October 2010, we submitted an MAA in selected European countries requesting approval to market DUEXIS for the symptomatic relief of pain due to OA, RA and other selected rheumatologic conditions in patients with a previous history of, or who are at risk of developing, NSAID-induced GI ulcers and that require use of an NSAID. The MAA submission was subsequently validated by regulatory authorities in the United Kingdom, as the Reference Member State, along with regulatory authorities in France, Germany, Italy, Luxembourg, the Netherlands and Norway, as concerned member states, in January 2011. The statutory review period for an MAA is 210 days from the date of submission, excluding any periods when the review period is stopped.

significant results and met the primary endpoint in each of the two pivotal Phase 3 clinical trials and we intend to submit an NDA for LODOTRA to the FDA in the third quarter of 2011.

We are focusing our efforts and capital resources on commercializing and obtaining additional approvals for DUEXIS and LODOTRA. In addition to these products, we have a pipeline of earlier stage product candidates to treat pain-related diseases and chronic inflammation. We are currently evaluating the development pathway for these product candidates, but do not intend to develop them further until such time as we generate sufficient cash from our operations or other sources.

Our Products and Product Candidates

Our current product portfolio consists of the following:


Products and Product Candidates	Disease	Phase of Development	Marketing Rights	Territory
DUEXIS	Signs and symptoms of osteoarthritis and rheumatoid arthritis	NDA approved April 23, 2011; MAA submitted October 2010	Horizon	Worldwide

LODOTRA	Rheumatoid arthritis	Approved and marketed in Europe; NDA submission planned for 3Q 2011	Horizon	Worldwide, excluding Europe and certain Asian and other countries
			Mundipharma	Europe (excluding Austria) and certain Asian and other countries

			Merck Serono	Austria

	Polymyalgia Rheumatica	Phase 2	Horizon	Worldwide, excluding Europe and certain Asian and other countries

	Severe asthma	Phase 2a	Horizon	Worldwide, excluding Europe and certain Asian and other countries

TRUNOC	Pain-related diseases	Preclinical*	Horizon	Worldwide

HZN-602	Mild to moderate pain and arthritis	Preclinical	Horizon	Worldwide

*	A description of prior clinical trials conducted by third parties is provided under the heading “Business—Other Product Candidates.”

Our Markets

Pain is a serious and costly public health concern affecting more people in the U.S. than diabetes, heart disease and cancer combined. In 2010, the U.S. National Center for Health Statistics reported that approximately 30% of U.S. adults 18 years of age and over reported recent symptoms of pain, aching or swelling around a joint within the past 30 days. Some of the most common and debilitating chronic inflammation and pain-related diseases are OA, RA and acute and chronic pain. According to National Health Interview Survey data analyzed by the Centers for Disease Control and Prevention, 50 million U.S. adults 18 years of age and over had reported being diagnosed with some form of arthritis. With the aging of the U.S. population, the prevalence of arthritis is expected to rise by approximately 40% by 2030, impacting 67 million people in the U.S. We believe that the large and growing population afflicted with pain and arthritis and the limitations of current treatment options create a growing market opportunity for us.

NSAIDs are very effective at providing pain relief, including pain associated with OA and RA; however, there are significant upper GI-associated adverse events which can result from such treatments. According to a 2004 article published in Aliment Pharmacology & Therapeutics, significant GI side effects, including serious ulcers, afflict up to approximately 25% of all chronic arthritis patients treated with NSAIDs for three months, and OA and RA patients are two to five times more likely than the general population to be hospitalized for NSAID-related GI complications. It is estimated that NSAID-induced GI toxicity causes over 16,500 related deaths in OA and RA patients alone, and over 107,000 hospitalizations for serious GI complications each year in the U.S. We believe that there is a serious need for a drug that provides the proven benefits of an NSAID with increased GI protection.

Common agents for the treatment of RA include NSAIDs, disease modifying antirheumatic drugs, or DMARDs, biologic agents and corticosteroids, a class of drugs based on hormones formed in the adrenal gland used to reduce inflammation. Physicians are increasingly supportive of prescribing combination therapy as some RA patients are able to achieve a clinical remission with a combination of treatments. A Medical Marketing Economics May 2008 study of 150 RA patients in the U.S., which we sponsored, showed that despite the use of a combination of currently available treatments for RA, over 90% of the patients reported suffering from morning stiffness.

According to Datamonitor, approximately 50% of RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom are prescribed combination therapy which often includes corticosteroids, with prednisone being one of the most common. While corticosteroids are potent and effective agents to treat patients with RA, they are usually used at high doses which can lead to long-term adverse side effects. An additional limitation of existing RA treatment with corticosteroids is related to the time of their administration in the morning hours (approximately 8:00 am), which does not synchronize with patients’ pro-inflammatory cytokines achieving peak levels in the early morning hours (approximately 2:00 am). It is impractical to expect patients to wake up every night at that hour to take prednisone. Therefore, we believe an optimal treatment would provide prednisone in the early morning hours without awakening a patient to reduce cytokine levels when they are at their peak.

Our Products

We believe that our products and product candidates address unmet therapeutic needs in arthritis, pain and inflammatory diseases. We have developed DUEXIS and LODOTRA to provide significant advantages over existing therapies.

DUEXIS

DUEXIS is a novel combination of 800 mg ibuprofen and 26.6 mg famotidine in a single pill. We believe that by combining ibuprofen and famotidine in a single pill, DUEXIS provides effective pain relief while decreasing stomach acidity, thus reducing the risk of NSAID-induced upper GI ulcers.

According to IMS Health, in the U.S. alone, there were over 30 million prescriptions written for ibuprofen in 2009, and the high-dose prescriptions, 600 mg and 800 mg doses, accounted for approximately 90% of these prescriptions. In addition, ibuprofen’s flexible three times daily dosing allows it to be used for both chronic conditions such as OA, RA and chronic back pain as well as acute conditions such as sprains and strains. Famotidine, a potent acid reduction agent, was chosen as the ideal GI protectant to be combined with ibuprofen as it is a well studied drug with over 20 million patients treated worldwide.

Fixed-dose combination therapy can reduce the number of pills that each patient is taking, thereby increasing compliance and ensuring that the correct dosage of each component is taken at the correct time, and is often associated with better treatment outcomes. DUEXIS has been formulated to provide an optimal dosing regimen of ibuprofen and famotidine together in the convenience of a single pill.

LODOTRA

LODOTRA is a proprietary programmed release formulation of low-dose prednisone, a well-established drug used to inhibit the production of various pro-inflammatory cytokines, which are proteins associated with joint inflammation in RA. Prednisone is a corticosteroid that effectively reduces joint swelling and inflammation, but at high doses has the potential to cause significant long-term adverse side effects, such as osteoporosis, cardiovascular disease and weight gain. In addition, we believe current formulations, which are administered in the morning hours, are suboptimal because they fail to deliver prednisone at the time of most need to RA patients.

LODOTRA was developed utilizing a proprietary formulation technology enabling a programmed release of low-dose prednisone and is comprised of an active core containing prednisone, which is encapsulated by an inactive porous shell. The inactive shell acts as a barrier between the product’s active core and a patient’s GI fluids. At approximately four hours following bedtime administration of LODOTRA, water in the digestive tract diffuses through the shell, causing the active core to expand, which leads to a weakening and breakage of the shell and allows the release of prednisone from the active core. By synchronizing the prednisone delivery time with the patient’s peak cytokine levels in the early morning hours, LODOTRA exerts its effect at a physiologically optimal point to inhibit cytokine production and thus significantly reduces the signs and symptoms of RA. We believe that being able to deliver safe, low-dose prednisone at the time during which patients can recognize the greatest benefit represents a significant competitive advantage over existing therapies.

Our Strategy

Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of DUEXIS and, if approved by the FDA, LODOTRA in the U.S. market. We retain all U.S. commercialization rights for our products and have begun to build an internal sales and marketing organization to market these products in the U.S. to key specialists, such as rheumatologists, orthopedic surgeons and pain specialists, and top prescribing primary care physicians. We also plan to explore co-promotion opportunities in the U.S. with companies that have appropriate commercial platforms in our key markets. We intend to enter into licensing or additional distribution arrangements for commercialization of our products outside the U.S., such as our relationship with Mundipharma for the commercialization of LODOTRA in Europe and Asia. As part of our longer-term strategy, we anticipate we will further develop our product candidates and selectively in-license or acquire additional products and/or late stage product candidates that are synergistic with our commercial strategy.

Our Strategic Partnerships

We have entered into several strategic partnerships with respect to the manufacturing, distribution and marketing of LODOTRA. We entered into separate transfer, license and supply agreements with Merck Serono GmbH and Merck GesmbH for the commercialization of LODOTRA in each of Germany and

Austria, respectively, and we subsequently consented to Merck Serono’s assignment of the agreement with respect to Germany to Mundipharma Laboratories GmbH. We also entered into distribution agreements with Mundipharma for the exclusive distribution and marketing rights pertaining to LODOTRA for Europe (excluding Germany and Austria) and certain Asian and other countries, and a manufacturing and supply agreement with Mundipharma Medical Company, pursuant to which we supply LODOTRA to Mundipharma Medical Company. We have also entered into a manufacturing and supply agreement with Jagotec AG, an affiliate of SkyePharma AG, from whom we purchase LODOTRA.

Risks Associated with Our Business

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary, beginning on page 11. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include:

•

We are highly dependent on the success of DUEXIS and LODOTRA, which are subject to extensive regulation, and we may not be able to successfully commercialize these products or successfully obtain additional marketing approvals for DUEXIS in Europe or LODOTRA in the U.S.

•

Our ability to generate revenues from any approved products will be subject to attaining significant market acceptance among physicians, patients and healthcare payers.

•

Our current business plan is highly dependent upon our ability to successfully execute on our sales and marketing strategy for the commercialization of DUEXIS and LODOTRA. If we are unable to execute on our sales and marketing strategy, we may not be able to generate significant product revenues or execute on our business plan.

•

We may not be able to successfully obtain or protect intellectual property rights related to our products and product candidates, and we may be subject to claims that we infringe the intellectual property of third parties.

•

We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic products, and our operating results will suffer if we fail to compete effectively.

•

Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.

•

Reimbursement may not be available, or may be available at only limited levels, for DUEXIS, LODOTRA or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

•

We have incurred significant operating losses since our inception, including an accumulated deficit of $114.7 million as of March 31, 2011, and anticipate that we will continue to incur losses for the foreseeable future.

•

We rely on third parties to manufacture commercial supplies of DUEXIS and LODOTRA, and we intend to rely on third parties to manufacture commercial supplies of any additional approved product candidates. Our commercialization of any of our products could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

Recent Developments

In June 2011, we entered into a new debt facility with Oxford Finance LLC and Silicon Valley Bank, which we refer to as the Oxford facility, and borrowed $17.0 million under this facility. In connection with our entry into the Oxford facility, we repaid all $8.5 million outstanding (including principal and interest) under a previous debt facility. We also paid $1.4 million (1.0 million Euros) to Kreos Capital III (UK), or Kreos, and Horizon Pharma, Inc. assumed a like amount of debt under an existing debt facility between Kreos and Horizon Pharma AG.

Including the net proceeds from our recent borrowings under the Oxford facility, we had cash and cash equivalents of $4.9 million as of July 1, 2011 (unaudited).

Recapitalization and Nitec Acquisition

Corporate Information

We were incorporated as Horizon Pharma, Inc. in Delaware on March 23, 2010. As described above, on April 1, 2010, we became a holding company that operates primarily through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc., a Delaware corporation, and Horizon Pharma AG, a company organized under the laws of Switzerland. Horizon Pharma AG owns all of the outstanding share capital of its wholly-owned subsidiary, Horizon Pharma GmbH, a company organized under the laws of Germany and formerly known as Nitec Pharma GmbH, through which Horizon Pharma AG conducts most of its European operations.

Our principal executive offices are located at 1033 Skokie Boulevard, Suite 355, Northbrook, Illinois 60062, and our telephone number is (224) 383-3000. Our website address is www.horizonpharma.com. The information contained in or that can be accessed through our website is not part of this prospectus.

Unless the context indicates otherwise, as used in this prospectus, the terms “Horizon,” “Horizon Pharma,” “we,” “us” and “our” refer to Horizon Pharma, Inc., a Delaware corporation, and its subsidiaries taken as a whole. Also, unless the context indicates otherwise, for historical periods prior to April 1, 2010, the terms “Horizon,” “Horizon Pharma USA,” “we,” “us” and “our” refer to Horizon Therapeutics, Inc.

“Horizon Pharma,” “Horizon Therapeutics,” a stylized letter “H,” “DUEXIS” and “LODOTRA” are registered trademarks in the U.S. and/or certain other countries. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.

THE OFFERING

Common stock offered by us

5,500,000 shares

Overallotment option

We have granted the underwriters an option for a period of 30 days to purchase up to an additional 825,000 shares of common stock.

Common stock to be outstanding after this offering

19,146,982 shares

Use of proceeds

We intend to use the net proceeds from this offering to fund U.S. commercialization activities for DUEXIS and LODOTRA, to fund additional regulatory approvals of LODOTRA and DUEXIS, to fund development of LODOTRA for other indications and our other product candidates and for working capital, capital expenditures and general corporate purposes. Please read “Use of Proceeds” on page 43.

Risk factors

You should read the “Risk Factors” section of this prospectus beginning on page 11 and all of the other information set forth in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market symbol

We have applied for listing of our common stock on The NASDAQ Global Market under the symbol “HZNP.”

The number of shares of our common stock that will be outstanding after this offering is based on 13,646,982 shares outstanding as of March 31, 2011, and excludes:

•

1,317,534 shares of common stock issuable upon the exercise of outstanding options under our 2005 stock plan as of March 31, 2011, having a weighted average exercise price of $14.06 per share;

•

2,512,046 shares of common stock reserved for future issuance under our 2011 equity incentive plan and 2011 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering (which number includes 448,021 shares of common stock currently reserved for future issuance under our 2005 stock plan which will become part of the shares reserved under our 2011 equity incentive plan upon its effectiveness);

•

346,047 shares of common stock issuable upon the exercise of outstanding warrants as of March 31, 2011, having a weighted average exercise price of $9.30 per share; and

•

100,075 shares of common stock issuable upon the exercise of outstanding warrants issued after March 31, 2011, having a weighted average exercise price of $6.38 per share.

Unless otherwise noted, the information in this prospectus assumes:

•

a 1-for- 2.374 reverse stock split of our common stock effected in July 2011;

•

the issuance by us of an aggregate of 1,636,273 shares of common stock upon the completion of this offering upon an assumed conversion of outstanding convertible promissory notes in the aggregate principal amount of $10.0 million (plus interest accrued thereon) that we issued in July 2010, or the 2010 notes, convertible promissory notes in the aggregate principal amount of $5.0 million (plus interest accrued thereon) that we issued in January 2011, or the January 2011 notes, and convertible promissory notes in the aggregate principal amount of $1.7 million (plus interest accrued thereon)

that we issued in April 2011, or the April 2011 notes, assuming a conversion price of $11.00 per share and assuming a conversion date of June 29, 2011;

•

the conversion of all of our outstanding shares of preferred stock into an aggregate of 10,514,431 shares of common stock upon the completion of this offering;

•

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws upon the completion of this offering; and

•

no exercise of the underwriters’ overallotment option.

Entities affiliated with Atlas Venture, Essex Woodlands Health Ventures, Scale Venture Partners, NGN Biomed, Sutter Hill Ventures, Global Life Science Ventures and TVM Life Science Ventures, each of which is a current stockholder, have indicated an interest in purchasing an aggregate of approximately $15.0 million of shares of our common stock in this offering, to be allocated pro rata among them based on each such stockholder’s current beneficial ownership of our outstanding capital stock. However, because indications of interest are not binding agreements or commitments to purchase, our underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize our consolidated financial data. We have derived the following summary of our statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 2010 and 2011 and the balance sheet data as of March 31, 2011 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state our financial position as of March 31, 2011 and results of operations for the three months ended March 31, 2010 and 2011. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary of our financial data set forth below should be read together with our financial statements and the related notes to those statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus.


	Actual									Pro Forma			Actual
	Year Ended December 31,												Three Months Ended March 31,
	2008			2009			2010			2010			2010			2011
	(in thousands, except share and per share data)
Statement of Operations Data:
Revenues
Sales of goods	$	—		$	—		$	2,376		$	2,654		$	—		$	1,763
Contract revenue		—			—			—			175			—			30

Total revenues		—			—			2,376			2,829			—			1,793
Cost of goods sold		—			—			4,263			5,524			—			1,839

Gross profit (loss)		—			—			(1,887	)		(2,695	)		—			(46	)
Operating expenses
Research and development		22,295			10,894			17,697			19,741			2,826			2,729
Sales and marketing		1,337			2,072			5,558			7,794			259			1,117
General and administrative		3,235			5,823			18,612			24,232			4,533			3,098

Total operating expenses		26,867			18,789			41,867			51,767			7,618			6,944

Loss from operations		(26,867	)		(18,789	)		(43,754	)		(54,462	)		(7,618	)		(6,990	)
Interest income		340			25			28			318			—			—
Interest expense		(869	)		(2,214	)		(3,052	)		(3,909	)		(285	)		(1,285	)
Bargain purchase gain		—			—			19,326			19,326			—			—
Other income (expense), net		(503	)		478			—			—			—			—
Foreign exchange gain (loss), net		—			—			(273	)		(273	)		(2	)		422

Loss before income tax		(27,899	)		(20,500	)		(27,725	)		(39,000	)		(7,905	)		(7,853	)
Income tax benefit		—			—			660			643			—			182

Net loss	$	(27,899	)	$	(20,500	)	$	(27,065	)	$	(38,357	)	$	(7,905	)	$	(7,671	)

Capital contribution		—			3,489			—			—			—			—

Net loss attributed to common stockholders	$	(27,899	)	$	(17,011	)	$	(27,065	)	$	(38,357	)	$	(7,905	)	$	(7,671	)

Net loss per share, basic and diluted	$	(68.01	)	$	(40.65	)	$	(21.16	)	$	(25.73	)	$	(12.49	)	$	(5.13	)

Weighted average number of shares outstanding		410,206			418,520			1,279,133			1,490,548			633,146			1,493,962

Pro forma net loss per share, basic and diluted⁽¹⁾							$	(2.61	)							$	(0.64	)

Weighted average pro forma shares outstanding, basic and diluted⁽¹⁾								10,365,771									12,008,393

(1)	Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate the pro forma basic and diluted net loss per share and the number of shares used in the computation of the per share amounts.


	As of March 31, 2011
	Actual			Pro Forma			Pro Forma as Adjusted for this Offering
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	2,556		$	10,590		$	62,707
Working capital (deficit)		(25,172	)		1,802			53,919
Total assets		169,580			177,080			229,197
Long-term debt, net of current portion		9,266			19,246			19,246
Accumulated deficit		(114,723	)		(117,230	)		(117,230	)
Total stockholders’ equity		96,847			113,306			165,423

The summary unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2010 are based on our historical statements of operations and those of Nitec, giving effect to our acquisition of Nitec in April 2010 as if the acquisition and related transactions had occurred on January 1, 2010 and include the results of operations for Nitec for the three months ended March 31, 2010. The summary unaudited pro forma condensed consolidated balance sheet data as of March 31, 2011 give effect to (i) the borrowing of $17.0 million in June 2011 under a new debt facility with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, which we refer to as the Oxford facility, issuance of warrants to Oxford and SVB to purchase an aggregate of 80,007 shares of our Series B convertible preferred stock, issuance of an additional warrant to Kreos Capital III (UK) Limited, or Kreos, to purchase an aggregate of 100,000 shares of our Series B convertible preferred stock as partial consideration for Kreos’ consent to enter into the Oxford facility, repayment of $9.2 million, representing all outstanding amounts (including principal and interest) under an existing debt facility with Kreos and SVB as of March 31, 2011, and payment of $1.4 million (1.0 million Euros) to Kreos and assignment of a like amount of debt under an existing debt facility with Kreos to Horizon Pharma, Inc. as partial consideration for Kreos’ consent to enter into the Oxford facility, (ii) the issuance of the April 2011 notes and the conversion of the 2010 notes, January 2011 notes and April 2011 notes and accrued interest thereon into an aggregate of 1,636,273 shares of common stock upon the completion of this offering, assuming a conversion price of $11.00 per share and assuming a conversion date of June 29, 2011 and (iii) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 10,514,431 shares of common stock upon the completion of this offering. The unaudited pro forma condensed consolidated statement of operations data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. See “Unaudited Pro Forma Condensed Consolidated Financial Information” beginning on page 49 of this prospectus. These estimates and assumptions are preliminary and subject to change, and have been made solely for the purposes of developing this pro forma information. The summary unaudited pro forma condensed consolidated statement of operations data are presented for illustrative purposes only and are not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during the period.

The March 31, 2011 pro forma as adjusted balance sheet reflects the pro forma balance sheet data at March 31, 2011 as adjusted for the sale by us of 5,500,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes thereto. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks comes to fruition, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Our ability to generate revenues from any approved products will be subject to attaining significant market acceptance among physicians, patients and healthcare payers.

DUEXIS, LODOTRA and our other product candidates, if approved, may not attain market acceptance among physicians, patients, healthcare payers or the medical community. We have not yet sold DUEXIS in any market and LODOTRA has only been sold in a limited number of European countries. Sales of LODOTRA in these markets have been limited to date and sales in Europe may not grow to expected levels, in part because we depend on our distribution partner, Mundipharma International Corporation Limited, or Mundipharma, for the commercialization of LODOTRA in these markets. We believe that the degree of market acceptance and our ability to generate revenues from any products for which we obtain marketing approval will depend on a number of factors, including:

With respect to DUEXIS, studies indicate that physicians do not commonly co-prescribe GI protective agents to high-risk patients taking NSAIDs. We believe this is due in part to a lack of awareness among physicians prescribing NSAIDs of the risk of NSAID-induced upper GI ulcers, in addition to the inconvenience of prescribing two separate medications and patient compliance issues associated with multiple prescriptions. If physicians remain unaware of, or do not otherwise believe in, the benefits of combining GI protective agents with NSAIDs, our market opportunity for DUEXIS will be limited. Some physicians may also be reluctant to prescribe DUEXIS due to the inability to vary the dose of ibuprofen or if they believe treatment with NSAIDs or GI protectants other than ibuprofen and famotidine, including those of our competitors, would be more effective for their patients. With respect to both DUEXIS and LODOTRA, their higher cost compared to the generic forms of their active ingredients alone may limit adoption by physicians, patients and healthcare payers. If DUEXIS, LODOTRA or our product candidates that are approved fail to attain market acceptance, we may not be able to generate significant revenue to achieve or sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects.

Our current business plan is highly dependent upon our ability to successfully execute on our sales and marketing strategy for the commercialization of DUEXIS and LODOTRA. If we are unable to successfully execute on our sales and marketing strategy, we may not be able to generate significant product revenues or execute on our business plan.

Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of DUEXIS and, if approved by the FDA, LODOTRA in the U.S. market. We may not be able to successfully commercialize either DUEXIS or, if approved, LODOTRA in the U.S. We currently have a limited commercial organization for the sales, marketing and distribution of pharmaceutical products, and as a company, we do not have any experience commercializing pharmaceutical products on our own. We plan to commercially launch DUEXIS in the U.S. in the fourth quarter of 2011. LODOTRA was commercially launched in Europe by our exclusive distribution partners Merck Serono and Mundipharma. In order to commercialize any approved products, we must continue to build our sales, marketing, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We currently have limited resources and the establishment and development of our own commercial organization to market these products and any additional products we may develop will be expensive and time-consuming and could delay any product launch, and we cannot be certain that we will be able to successfully develop this capability. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. We also face competition in our search for potential co-promoters of our products. To the extent we rely on additional third parties to commercialize any approved products, we are likely to receive less revenues than if we commercialized these products ourselves. In addition, we may have little or no control over the sales efforts of any third parties involved in our commercialization efforts. In the event we are unable to fully develop our own commercial organization or collaborate with a third-party sales and marketing organization or enter into co-promotion agreements, we would not be able to commercialize our product candidates and execute on our business plan. If we are unable to successfully implement our commercial plans and drive adoption by patients and physicians of any approved products through our sales, marketing and commercialization efforts, or if our partners fail to successfully commercialize our products, then we will not be able to generate sustainable revenues from product sales which will have a material adverse effect on our business and prospects.

We are highly dependent on the success of DUEXIS and LODOTRA, and we may not be able to successfully commercialize these products or successfully obtain additional marketing approvals for DUEXIS in Europe or LODOTRA in the U.S.

To date, we have expended significant time, resources, and effort on the development of DUEXIS and LODOTRA, and a substantial majority of our resources are now focused on planning for potential commercialization of DUEXIS in the U.S. and seeking additional marketing approvals for DUEXIS and LODOTRA. Our ability to generate significant product revenues in the near term will depend almost entirely on our ability to successfully commercialize DUEXIS and LODOTRA, obtain European marketing approval for DUEXIS and obtain U.S. marketing approval for LODOTRA. DUEXIS is not approved for marketing in any jurisdiction outside of the U.S. and therefore, unless it obtains regulatory approval in other countries it may never be commercialized outside of the U.S. Although LODOTRA is approved for marketing in 14 European countries, to date it has only been marketed in a limited number of European countries. While we anticipate that LODOTRA will be marketed in additional European countries as our distribution partner, Mundipharma, formulates its reimbursement strategy, the ability to market LODOTRA in additional European countries will depend on Mundipharma’s ability to obtain regulatory and reimbursement approvals in these countries. Even if we obtain additional marketing and reimbursement approvals, our product revenues in Europe are entirely dependent upon the marketing efforts of our exclusive distribution partners, over which we have no control. LODOTRA is not approved for marketing in the U.S., which we believe represents its largest commercial opportunity. Before we can market and sell these products in a particular jurisdiction, we will need to obtain necessary regulatory approvals (from the FDA in the U.S. and from similar foreign regulatory agencies in other jurisdictions) and in some jurisdictions, reimbursement authorization. There are no guarantees that we will obtain any additional regulatory approvals for our products. Even if we obtain additional regulatory approvals, we may never generate significant revenues from any commercial sales of our products. If we fail to

successfully commercialize DUEXIS or LODOTRA, we may be unable to generate sufficient revenues to sustain and grow our business, and our business, financial condition and results of operations will be adversely affected.

Our products and product candidates are subject to extensive regulation, and we may not obtain additional regulatory approvals for DUEXIS or LODOTRA.

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, marketing and distribution, and other possible activities relating to our product candidates are, and any resulting drugs will be, subject to extensive regulation by the FDA and other regulatory agencies. Failure to comply with FDA and other applicable regulatory requirements may, either before or after product approval, subject us to administrative or judicially imposed sanctions.

We are not permitted to market LODOTRA or any of our other product candidates in the U.S. until we obtain regulatory approval from the FDA. To market a new drug in the U.S., we must submit to the FDA and obtain FDA approval of a new drug application, or NDA. To market a new drug in Europe, we must submit to the applicable regulatory authority in the designated Reference Member State and obtain approval of, a Marketing Authorization Application, or MAA. An NDA or MAA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the applicable product candidate.

Regulatory approval of an NDA or an MAA is not guaranteed. The number and types of preclinical studies and clinical trials that will be required for NDA or MAA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional preclinical studies, CMC studies or clinical trials. The FDA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:

Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. As part of the U.S. Prescription Drug User Fee Act, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a drug application is 10 months for a standard application and six months for a priority review application. The FDA’s review goals are subject to change, and it is unknown whether the review of an NDA filing for any of our product candidates will be completed within the FDA’s review goals or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other NDAs that are submitted to the FDA around the same time period.

In October 2010, we submitted an MAA for DUEXIS in the United Kingdom, the Reference Member State, through the Decentralized Procedure. In connection with our MAA for DUEXIS, and consistent with an identical request we made in our NDA for DUEXIS, we are requesting the Medicines and Healthcare products Regulatory Agency in the United Kingdom to approve a formulation that is different from the formulation used in our Phase 3 clinical trials, which we determined had inadequate stability characteristics to be suitable for commercialization. As a result, we were required to demonstrate the bioequivalence of famotidine between the new and old formulations in addition to the other NDA and MAA requirements. We successfully completed this

bioequivalence study prior to submitting the NDA and MAA for DUEXIS. We also demonstrated the bioequivalence of ibuprofen between the two formulations of DUEXIS and the reference labeled drug ibuprofen as part of the NDA and MAA submissions. We continue to complete CMC studies with the new formulation, and we cannot assure you that we will not have additional formulation issues related to DUEXIS or any of our other product candidates. The statutory review period for an MAA is 210 days from the date of submission, excluding any periods when the review period is stopped, but there are no guarantees that a decision on our MAA filing will take place on our anticipated timeline, if at all.

With the exception of our recently approved DUEXIS NDA, we have not previously submitted NDAs to the FDA. In addition, we have never obtained FDA approval for any drug other than DUEXIS. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for LODOTRA or our other product candidates. Even if we believe that data collected from our preclinical studies, CMC studies and clinical trials of our product candidates are promising and that our information and procedures regarding CMC are sufficient, our data may not be sufficient to support marketing approval by the FDA or any other U.S. or foreign regulatory authority, or regulatory interpretation of these data and procedures may be unfavorable. In addition, the FDA’s regulatory review of NDAs for product candidates intended for widespread use by a large proportion of the general population is becoming increasingly focused on safety. Even if approved, product candidates may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the drug may be marketed, restricted distribution methods or other limitations. Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of any of our product candidates. We cannot predict when or whether regulatory approval will be obtained for any product candidate we develop.

To market any drugs outside of the U.S., we and current or future collaborators must comply with numerous and varying regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, including obtaining reimbursement approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others, including the risk that our product candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed. While we anticipate that LODOTRA will be marketed in additional European Union countries as Mundipharma formulates its reimbursement strategy, the ability to market LODOTRA in additional European Union countries will depend on Mundipharma’s ability to obtain regulatory and reimbursement approvals in these countries.

Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.

We were incorporated as Horizon Pharma, Inc. on March 23, 2010. On April 1, 2010, we effected a recapitalization and acquisition pursuant to which we became a holding company that operates through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc. (formerly known as Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly known as Nitec Pharma AG, or Nitec). Horizon Pharma USA began its operations in 2005 and Nitec began its operations in 2004. We face considerable risks and difficulties as a holding company with limited operating history, particularly as a consolidated entity with operating subsidiaries that also have limited operating histories. If we do not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. Our limited operating history makes it particularly difficult for us to predict our future operating results and appropriately budget for our expenses. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected. Moreover, we have only two products approved for commercial sale. LODOTRA has only been approved in select countries within Europe, and we have a limited history of marketing LODOTRA through our distribution partners. DUEXIS was approved in the U.S. on April 23, 2011 and we have only recently increased our commercialization activities to enable us to market DUEXIS, and we have generated no revenues for DUEXIS to date. This limited history of commercial

sales also makes evaluating our business and future prospects difficult, and may increase the risk of your investment. We have limited experience as a consolidated operating entity, particularly with commercialization activities, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical or biotechnology areas.

We may not realize the benefits we expected from our recapitalization and acquisition of Nitec.

In April 2010, we completed our recapitalization and acquisition of Nitec pursuant to which Horizon Pharma USA and Horizon Pharma AG became our wholly-owned subsidiaries. The integration of the businesses of our subsidiaries will be complex, time-consuming and expensive and may cause disruptions in the combined business. We will need to overcome significant challenges in order to realize any benefits or synergies from the acquisition of Nitec. These challenges include the timely, efficient and successful execution of a number of tasks, including the following:

Many of these challenges are exacerbated by the fact that Horizon Pharma USA is a U.S.-based company and Horizon Pharma AG is a company based in Switzerland, with most of its European operations occurring through its subsidiary, Horizon Pharma GmbH, in Germany.

We may encounter difficulties successfully managing a substantially larger and internationally diverse organization and may encounter significant delays in achieving successful management of our organization. Integration of our subsidiaries’ operations will involve considerable risks and may not be successful. These risks include the following:

We may not succeed in addressing these risks or any other problems encountered in connection with the integration of our subsidiaries’ businesses. The inability to integrate successfully the operations, technology and personnel of our businesses, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations and prospects, and on the market price of our common stock.

We have experienced recent growth and expect to continue to grow the size of our organization, and we may experience difficulties in managing this growth.

As of December 31, 2009, we employed 12 full-time employees as Horizon Therapeutics, Inc., and our subsidiary Horizon Pharma AG employed 24 full-time employees as Nitec. As of March 31, 2011, we employed 39 full-time employees as a consolidated entity.

We expect this growth to continue and accelerate in the near term. As our commercialization plans and strategies develop, and as we transition into operating as a public company, we will need to recruit and train a substantial number of additional sales and marketing personnel and expect to need to expand the size of our employee base for managerial, operational, financial and other resources. Our ability to manage our planned growth effectively will require us to do, among other things, the following:

Our management may also have to divert a disproportionate amount of its attention away from day-to-day activities and towards managing these growth activities. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and our failure to effectively manage growth could have a material adverse effect on our business, results of operations, financial condition and prospects.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the U.S. and international markets, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or in-licensing on an exclusive basis products that are more effective and/or less costly than DUEXIS and LODOTRA or any product candidates that we are currently developing or that we may develop.

DUEXIS faces competition from Celebrex^®, marketed by Pfizer Inc., Vimovo^®, developed by Pozen Inc. and marketed by AstraZeneca AB, and Arthrotec^®, marketed by Pfizer. In addition, DUEXIS faces significant competition from the separate use of NSAIDs for pain relief and GI protective medications to reduce the risk of NSAID-induced upper GI ulcers. Both NSAIDs and GI protective medications are available in generic form and may be less expensive to use separately than DUEXIS. In addition, other product candidates that contain ibuprofen and famotidine in combination, while not currently known to us, may be developed and compete with DUEXIS in the future.

We expect LODOTRA will compete with a number of pharmaceuticals on the market to treat rheumatoid arthritis, or RA, including corticosteriods, such as prednisone, disease modifying antirheumatic drugs, or

DMARDs, such as methotrexate, and biologic agents such as HUMIRA^®, marketed by Abbott Laboratories, and Enbrel^®, marketed by Amgen Inc. and Pfizer. It is typical for an RA patient to take a combination of a DMARD, an oral glucocorticoid, an NSAID and/or a biologic agent. Therefore, we expect that LODOTRA’s principal competition will be prednisone, the active pharmaceutical ingredient in LODOTRA, or other oral corticosteriods, which, while they may be suboptimal, are or are expected to be less expensive than LODOTRA. In addition, other product candidates that contain prednisone or other oral corticosteriods in alternative delayed release forms, while not currently known to us, may be developed and compete with LODOTRA in the future.

The availability and price of our competitors’ products could limit the demand, and the price we are able to charge, for DUEXIS and LODOTRA. We will not successfully execute on our business objectives if the market acceptance of DUEXIS or LODOTRA is inhibited by price competition, if physicians are reluctant to switch from existing products to DUEXIS or LODOTRA, or if physicians switch to other new products or choose to reserve DUEXIS or LODOTRA for use in limited patient populations.

In addition, established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license and develop novel compounds that could make our products obsolete. Our ability to compete successfully with these companies and other potential competitors will depend largely on our ability to leverage our experience in drug discovery and development to:

In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to be approved and overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, obtaining FDA approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact on our business. The inability to compete with existing products or subsequently introduced products would have a material adverse impact on our business, financial condition and prospects.

A variety of risks associated with operating our business and marketing our products internationally could materially adversely affect our business.

In addition to our U.S. operations, we have operations in Switzerland and Germany. Moreover, LODOTRA is currently being marketed in a limited number of European countries, and Mundipharma is in the process of obtaining pricing and reimbursement approval for, and preparing to market, LODOTRA in other European countries. We face risks associated with our international operations, including possible unfavorable regulatory, pricing and reimbursement, political, tax and labor conditions, which could harm our business. We are subject to numerous risks associated with international business activities, including:

These and other risks associated with our international operations may materially adversely affect our business, financial condition and results of operations.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, sales and marketing and scientific and medical personnel, including our Chairman, President and Chief Executive Officer, Timothy P. Walbert, our Executive Vice President and Chief Financial Officer, Robert J. De Vaere, our Executive Vice President, Development, Regulatory Affairs and Chief Medical Officer, Dr. Jeffrey W. Sherman, our Senior Vice President, Marketing and Alliance Management, Todd Smith, and our Senior Vice President, Sales and Managed Care, Michael Adatto. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide incentive stock options that vest over time. The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Our scientific team in particular has expertise in many different aspects of drug discovery, development and commercialization, and may be difficult to retain or replace. We conduct our operations at our facilities in Northbrook, Illinois, Reinach, Switzerland and Mannheim, Germany, and may face challenges recruiting personnel to these geographic locales. Moreover, these regions are headquarters to many other biopharmaceutical companies and many academic and research institutions, and therefore we face increased competition for personnel in those geographies. Competition for skilled personnel in our markets is very intense and competition for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms.

Despite our efforts to retain valuable employees, members of our management, sales and marketing and scientific and development teams may terminate their employment with us on short notice. Although we have written employment arrangements with all of our employees, these employment arrangements generally provide for at-will employment, which means that our employees can leave our employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, financial condition and prospects. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior sales and marketing and scientific and medical personnel.

Many of the other biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than that which we have to

offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can develop and commercialize products and product candidates will be limited.

If we fail to obtain and maintain approval from regulatory authorities in international markets for DUEXIS and LODOTRA and any future product candidates for which we have rights in international markets, our market opportunities will be limited and our business will be adversely impacted.

Sales of our products and product candidates outside of the U.S. will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of our product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials. In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our products is also subject to approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others.

We are, with respect to DUEXIS, and will be, with respect to any other product candidate for which we obtain FDA approval, subject to ongoing FDA obligations and continued regulatory review, which may result in significant additional expense. Additionally, LODOTRA and any other product candidate, if approved by the FDA, could be subject to labeling and other restrictions and market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we obtain for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices, or cGMPs, good clinical practices, or GCPs, and good laboratory practices, which are regulations and guidelines enforced by the FDA for all of our products in clinical development, for any clinical trials that we conduct post-approval. For example, as post-marketing requirements for DUEXIS, we are required by the FDA to develop a pediatric suspension formulation for DUEXIS and conduct three pharmacokinetic studies of the drug product in pediatric populations. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

If we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects.

Market acceptance and sales of DUEXIS, LODOTRA or any other product candidates that we may develop will depend in large part on global reimbursement policies and may be affected by future healthcare reform measures, both in the U.S. and other key international markets. Successful commercialization of our products will depend in part on the availability of governmental and third-party payer reimbursement for the cost of our products. Government health administration authorities, private health insurers and other organizations generally provide reimbursement. In particular, in the U.S., private health insurers and other third-party payers often provide reimbursement for treatments based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. In the U.S., the European Union and other significant or potentially significant markets for our products and product candidates, government authorities and third-party payers are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. Further, the increased emphasis on managed healthcare in the U.S. and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.

In Europe, the success of our products, including LODOTRA and, if approved, DUEXIS, will depend largely on obtaining and maintaining government reimbursement, because in many European countries patients are unlikely to use prescription drugs that are not reimbursed by their governments. To date, reimbursement for LODOTRA has been obtained in Germany and Italy and Merck Serono GmbH is in the process of seeking reimbursement in Austria. Mundipharma is seeking reimbursement in a number of countries in Europe and currently sells LODOTRA without reimbursed pricing in a limited number of European countries. Negotiating prices with governmental authorities can delay commercialization by 12 months or more. Reimbursement policies may adversely affect our ability to sell our products on a profitable basis. In many international markets, governments control the prices of prescription pharmaceuticals, including through the implementation of reference pricing, price cuts, rebates, revenue-related taxes and profit control, and expect prices of prescription pharmaceuticals to decline over the life of the product or as volumes increase. Recently, many countries in the European Union have increased the amount of discounts required on pharmaceutical products, which we believe has impacted the reimbursement rates and timing to launch for LODOTRA to date, and we expect these discounts to continue as countries attempt to manage healthcare expenditures, especially in light of current economic conditions. For example, legislation was recently enacted in Germany that will increase the rebate on prescription pharmaceuticals and likely lower the revenues from the sale of LODOTRA in Germany that we would otherwise receive. As a result of these pricing practices, it may become difficult to achieve profitability or expected rates of growth in revenue or results of operations. Any shortfalls in revenue could adversely affect our business, financial condition and results of operations.

In light of such policies and the uncertainty surrounding proposed regulations and changes in the reimbursement policies of governments and third-party payers, we cannot be sure that reimbursement will be available for DUEXIS, for LODOTRA in any additional markets or for any other product candidates that we may develop. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize DUEXIS, LODOTRA or any other product candidates that we may develop.

The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payers in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the U.S. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for DUEXIS and any other approved product in the U.S. and could seriously harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers.

We expect to experience pricing pressures in connection with the sale of DUEXIS, LODOTRA and any other products that we may develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. There may be additional pressure by payers and healthcare providers to use generic drugs that contain the active ingredients found in DUEXIS and LODOTRA or any other product candidates that we may develop. If we fail to successfully secure and maintain adequate coverage and reimbursement for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and expected revenue and profitability which would have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

DUEXIS and any of our other products or product candidates that are approved by the FDA and commercialized in the U.S. may subject us directly, or indirectly through our customers, to various state and

federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs.

The federal Anti-Kickback Statute prohibits persons from knowingly and willingly soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of pharmaceutical, medical device and other healthcare companies to have to defend a False Claims Act action. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

We are unable to predict whether we could be subject to actions under any of these or other fraud and abuse laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations, all of which could have a material adverse effect on our business and results of operations.

We rely on third parties to manufacture commercial supplies of DUEXIS and LODOTRA, and we intend to rely on third parties to manufacture commercial supplies of any other approved products. The commercialization of any of our products could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of product or fail to do so at acceptable quality levels or prices.

The facilities used by our third-party manufacturers to manufacture our products and product candidates must be approved by the applicable regulatory authorities. We do not control the manufacturing processes of third-party manufacturers and are currently completely dependent on our third-party manufacturing partners Pharmaceutics International, Inc., located in Hunt Valley, Maryland, and, subject to FDA approval, sanofi-aventis U.S. LLC, located in Bridgewater, New Jersey for production of DUEXIS, and Jagotec AG, a wholly-owned subsidiary of SkyePharma PLC and operating through its affiliate SkyePharma SAS, located in Lyon, France, for production of LODOTRA. We purchase the primary active ingredients for DUEXIS from BASF Corporation in Bishop, Texas and Dr. Reddy’s Laboratories in India. If any of our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, or pass regulatory inspection, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our products or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our products.

Pharmaceutics International performs manufacturing services related to DUEXIS for us pursuant to a master services agreement under which we submit work orders for specific services. Pharmaceutics International is not obligated to accept any work orders that we submit in the future and we cannot be certain that Pharmaceutics International will continue to be willing to perform manufacturing services related to DUEXIS on acceptable terms to us or at all. In May 2011, we entered into a long-term supply and manufacturing agreement with sanofi-aventis U.S. for the manufacture of DUEXIS. The FDA must approve sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS and we have submitted a supplement to our NDA for DUEXIS to establish and qualify sanofi-aventis U.S. as the manufacturer of record with the FDA. If the FDA does not approve sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS, or if we are otherwise unable to establish a long-term supply arrangement with an FDA-approved supplier for the commercial supply of DUEXIS, our ability to timely launch and commercialize DUEXIS would be materially delayed.

Although we have entered into supply agreements for the manufacture of our products, our manufacturers may not perform as agreed or may terminate their agreements with us. Under our manufacturing and supply agreement with sanofi-aventis U.S., either we or sanofi-aventis U.S. may terminate the agreement upon an uncured breach by the other party or without cause upon two years prior written notice, so long as such notice is given after the third anniversary of the first commercial sale of DUEXIS. Under our manufacturing and supply agreement with Jagotec, either we or Jagotec may terminate the agreement in the event of an insolvency, liquidation or bankruptcy of the other party or upon an uncured breach by the other party. While we have the right to receive a continuing supply of LODOTRA from Jagotec for a period of 24 months after termination, we cannot assure you that we would be able to establish another commercial supply of LODOTRA in that time-frame, or qualify any new supplier with the applicable regulatory authorities on a timely basis or at all.

In addition, we do not have the capability to package DUEXIS, LODOTRA or any other product candidates for distribution. Consequently, we have entered into an agreement with Temmler Werke GmbH for packaging of LODOTRA in 14 European countries and in the U.S. if LODOTRA is approved by the FDA, as well as any additional countries as may be agreed to by the parties. If we obtain marketing approval from the applicable regulatory authorities including the FDA, we intend to sell drug product finished and packaged by either Temmler Werke GmbH or an alternate packager. Pending the FDA’s approval of sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS, we expect sanofi-aventis U.S. will manufacture and supply DUEXIS to us in final, packaged form in North America and certain countries and territories in Europe, including the European Union member states and Scandinavia, and South America.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Though we believe we have resolved any stability issues with respect to the commercial formulation of DUEXIS, we cannot assure you that any other stability or other issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to launch DUEXIS and LODOTRA in the U.S. or provide any product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in our ability to meet commercial demand for DUEXIS or LODOTRA will result in the loss of potential revenues and could adversely affect our ability to gain market acceptance for these products. In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

Failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of any of our products or product candidates and could have a material adverse effect on our business, results of operations, financial condition and prospects.

We are dependent on Mundipharma to commercialize LODOTRA in Europe and certain Asian and other countries. Failure of Mundipharma or any other third parties to successfully commercialize our products and product candidates in the applicable jurisdictions could have a material adverse effect on our business.

We rely on Mundipharma for commercialization of LODOTRA in various European countries and certain Asian and other countries. We have limited contractual rights to force Mundipharma to invest significantly in commercialization of LODOTRA in its markets. In the event that Mundipharma or any other third party with any future commercialization rights to any of our products or product candidates fails to adequately commercialize those products or product candidates because it lacks adequate financial or other resources, decides to focus on other initiatives or otherwise, our ability to successfully commercialize our products or product candidates in the applicable jurisdictions would be limited, which would adversely affect our business, financial condition, results of operations and prospects. We also rely on Mundipharma’s ability to obtain regulatory approval for LODOTRA in certain Asian and other countries. In addition, our agreements with Mundipharma may be terminated by either party in the event of a bankruptcy of the other party or upon an uncured material breach by the other party. If Mundipharma terminated its agreements with us, we may not be able to secure an alternative distributor in the applicable territory on a timely basis or at all, in which case our ability to generate revenues from the sale of LODOTRA would be materially harmed.

DUEXIS, LODOTRA or any other product candidate that we develop may cause undesirable side effects or have other properties that could delay or prevent regulatory approval or commercialization.

Undesirable side effects caused by any product candidate that we develop could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, or cause us to evaluate the future of our development programs. In our two Phase 3 trials with DUEXIS, the most commonly reported treatment-emergent adverse events were nausea, dyspepsia, diarrhea, constipation and upper respiratory tract infection. The most commonly reported treatment-emergent adverse events in the Phase 3 clinical trials with LODOTRA included flare in RA-related symptoms, abdominal pain, nasopharyngitis, headache, flushing, upper respiratory tract infection, back pain and weight gain. In addition, the FDA or other regulatory authorities may require, or we may undertake, additional clinical trials to support the safety profile of our product candidates.

In addition, if DUEXIS, LODOTRA or any other product candidate that we may develop that receives marketing approval and we or others later identify undesirable side effects caused by the product, or there is a perception that the product is associated with undesirable side effects:

If any of these events occurred with respect to DUEXIS or LODOTRA, our ability to generate significant revenues from the sale of these products would be significantly harmed.

We rely on third parties to conduct our preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We have agreements with third-party contract research organizations, or CROs, to conduct our clinical programs, including ongoing smaller safety studies of DUEXIS and LODOTRA, and anticipate that we may enter into other such agreements in the future regarding our other product candidates. We rely heavily on these parties for the execution of our clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol. We and our CROs are required to comply with current GCPs. The FDA enforces these GCP regulations through

periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCP regulations, the data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply or complied with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations, and require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our products and product candidates. As a result, our results of operations and the commercial prospects for our products and product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Switching or adding additional CROs can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition or prospects.

In addition, pursuant to a March 2011 letter agreement and in connection with our waiver of certain milestone payments, Mundipharma has agreed to conduct a separate clinical trial for LODOTRA for the potential treatment of polymyalgia rheumatica, or PMR, which we expect will be a Phase 3 clinical trial. We have limited control over the timing and implementation of the planned clinical trial and Mundipharma may carry the clinical trial out in a manner that does not maximize the trial’s chances of success or could lead to trial results that harm our and Mundipharma’s ability to market LODOTRA as a treatment for RA. If Mundipharma does not begin or complete the trial on the timelines that we anticipate, or at all, our ability to obtain marketing approval for LODOTRA for the treatment of PMR will be delayed, and our business prospects would be harmed. While we have the right to use any data resulting from the planned clinical trial, we may not own the results from the trial, which could make it more difficult to pursue the development of LODOTRA as a treatment for PMR on our own.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical testing.

To the extent that we are required to conduct additional clinical development of DUEXIS or LODOTRA or we conduct clinical development of our earlier stage product candidates or additional indications for LODOTRA, we may experience delays in these clinical trials. We are in the process of investigating LODOTRA through an investigator-initiated Phase 2 study as a potential treatment for PMR and pursuant to a March 2011 letter agreement, Mundipharma has agreed to conduct a separate clinical trial for LODOTRA in this indication, which we expect will be a Phase 3 clinical trial. In the future we may also investigate LODOTRA for the treatment of severe asthma. Additionally, we have a pipeline of earlier stage product candidates to treat pain-related diseases, and plan to investigate TRUNOC (tarenflurbil) for the treatment of pain-related diseases and HZN-602, a single pill combination of naproxen and famotidine, for reducing the risk of NSAID-induced upper GI ulcers in patients with mild to moderate pain and arthritis who require the use of

naproxen. We do not know whether any additional clinical trials will be initiated, begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we expect to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our future clinical trials and while we intend to have agreements governing their committed activities, we will have limited influence over their actual performance.

We could encounter delays if prescribing physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or if we terminate, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

The FDA may not ultimately approve our proposed trade names for our product candidates.

Any trade names that we intend to use for our product candidates must be approved by the FDA irrespective of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or PTO. The FDA conducts a rigorous review of proposed product names and may reject a proposed product name for a variety of reasons, including if it believes that the name inappropriately implies medical claims or if it poses the potential for confusion with other product names. Although we utilize the name “LODOTRA” in Europe, the FDA has rejected our usage of this product name in the U.S. and, if approved, LODOTRA will be sold under another name in the U.S., losing in the U.S. market the benefit of any brand equity it may develop in Europe. In addition, if the FDA determines that the trade names of other product candidates that are approved prior to the approval of our product candidates may present a risk of confusion with any of our proposed trade names, the FDA may not ultimately approve those proposed trade names. If the FDA does not approve any of our proposed product names prior to their applicable NDA approval dates, we may be required to launch commercial sales of such products without brand names, and our efforts to build successful brand identities for, and commercialize, such products may consequently be adversely impacted.

If we fail to develop and commercialize other product candidates or products, our business and prospects would be limited.

A key element of our strategy is to develop and commercialize a portfolio of other product candidates in addition to DUEXIS and LODOTRA. Since we do not have proprietary drug discovery technology, the success of this strategy depends in large part upon the combination of our regulatory, development and commercial capabilities and expertise and our ability to identify, select and acquire or in-license clinically enabled product candidates for the treatment of pain-related diseases or that otherwise fit into our development plans on terms that are acceptable to us. Identifying, selecting and acquiring or licensing promising product candidates requires substantial technical, financial and human resources and technical expertise. Efforts to do so may not result in the actual acquisition or license of a particular product candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. If we are unable to identify, select and acquire or license suitable product candidates from third parties on terms acceptable to us, our business and prospects will be limited.

Moreover, any product candidate we identify, select and acquire or license will require additional, time-consuming development efforts prior to commercial sale, including preclinical studies if applicable, and extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risk of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective or desired than other commercially available alternatives.

In addition, if we fail to successfully commercialize and further develop DUEXIS and LODOTRA, there is a greater likelihood that we will fail to successfully develop a pipeline of other product candidates to follow these lead product candidates, and our business and prospects would therefore be harmed.

We may seek to engage in strategic transactions that could have a variety of negative consequences, and we may not realize the benefits of such transactions or attempts to engage in such transactions.

From time to time, we may seek to engage in strategic transactions with third parties, such as acquisitions of companies or divisions of companies, asset purchases, or in-licensing of product candidates or technologies that we believe will complement or augment our existing business. We may also consider a variety of other business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and other investments. Any such transaction may require us to incur non-recurring and other charges, increase our near and long-term expenditures, pose significant integration challenges, require additional expertise, result in dilution to our existing stockholders and disrupt our management and business, which could harm our operations and financial results. Moreover, we face significant competition in seeking appropriate strategic partners and transactions, and the negotiation process for any strategic transaction can be time-consuming and complex. In addition, we may not be successful in our efforts to engage in certain strategic transactions because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential. There is no assurance that, following the consummation of a strategic transaction, we will achieve the anticipated revenues or net income that justifies such transaction. Any failures or delays in entering into strategic transactions could also delay or negatively impact the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market. In addition, any failures or delays in entering into strategic transactions anticipated by analysts or the investment community could result in a decline in our stock price.

Business interruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions. While we carry insurance for certain of these events, the

occurrence of any of these business interruptions could seriously harm our business and financial condition and increase our costs and expenses. A majority of our management operates in our principal executive offices located in Northbrook, Illinois. If our Northbrook offices were affected by a natural or man-made disaster or other business interruption, our ability to manage our domestic and foreign operations could be impaired, which could materially and adversely affect our results of operations and financial condition. We currently rely, and intend to rely in the future, on third-party manufacturers, located in Hunt Valley, Maryland, Laval, Quebec, Canada, St. Louis, Missouri, Compiegne, France and Lyon, France, to produce our products. Our ability to obtain commercial supplies of our products could be disrupted, and our results of operations and financial condition could be materially and adversely affected if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. The ultimate impact of such events on us, our significant suppliers and our general infrastructure is unknown.

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

We face an inherent risk of product liability as a result of the commercial sales of LODOTRA and the clinical testing of our product candidates, and will face an even greater risk if we commercialize DUEXIS and LODOTRA in the U.S. or other additional jurisdictions or if we engage in the clinical testing of new product candidates or commercialize any additional products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical studies and commercial product sales in the amount of $10 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent to increase our product liability coverage due to the commercial launch of DUEXIS and/or the commercial launch of LODOTRA in additional markets, we may be unable to obtain such increased coverage on acceptable terms or at all. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Our business involves the use of hazardous materials, and we and our third-party manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our third-party manufacturers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates and other hazardous compounds. We and our manufacturers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of our third-party manufacturers’ activities involving hazardous materials, our business and financial condition may be adversely affected. In the future we may seek to establish longer term third-party manufacturing arrangements, pursuant to which we would seek to obtain contractual indemnification protection from such third-party manufacturers potentially limiting this liability exposure.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

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

We have a limited operating history. We have financed our operations primarily through private placements of preferred stock and debt financing and have incurred significant operating losses since our inception. We had a net loss of $7.7 million for the three months ended March 31, 2011 and net losses of $27.1 million, $20.5 million and $27.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. Nitec had a net loss of CHF 25.9 million ($24.8 million) for the nine months ended March 31, 2010, and a net loss of CHF 22.1 million ($19.7 million) for the year ended June 30, 2009. On a pro forma basis giving effect to the acquisition of Nitec, we would have had a net loss of $38.4 million for the year ended December 31, 2010. As of March 31, 2011, we had an accumulated deficit of $114.7 million. Before our acquisition of Nitec, as of March 31, 2010, we had an accumulated deficit of $87.9 million and Nitec had an accumulated deficit of CHF 65.8 million ($61.7 million). We do not know whether or when we will become profitable. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. Our losses have resulted principally from costs incurred in our development activities for our products and product candidates. We anticipate that our operating losses will

substantially increase over the next several years as we execute our plan to expand our development and commercialization activities, including the planned commercialization of DUEXIS and LODOTRA, and as we transition into operating as a public company.

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this prospectus.

Our report from our independent registered public accounting firm for the year ended December 31, 2010 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. After this offering, future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We have limited product revenues and other sources of revenues. We may never achieve or sustain profitability, which would depress the market price of our common stock, and could cause you to lose all or a part of your investment.

Our ability to become profitable depends upon our ability to generate revenues from sales of our products. DUEXIS was approved by the FDA on April 23, 2011, and we do not anticipate generating revenues from sales of DUEXIS until at least the fourth quarter of 2011. LODOTRA is approved for marketing in Europe, and to date we have generated only limited revenues from sales of LODOTRA. We may never be able to successfully commercialize DUEXIS or develop or commercialize other products or sell LODOTRA in the U.S., which we believe represents its most significant commercial opportunity, or sell DUEXIS in Europe. Our ability to generate future revenues depends heavily on our success in:

Even if we do generate additional product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

The terms of our debt facilities place restrictions on our operating and financial flexibility, and if we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

In April 2010, we amended an existing debt facility between Kreos Capital III (UK) Limited, or Kreos, and Nitec, which we refer to as the Kreos facility, to permit us to acquire Nitec and to enter into another debt facility. The loans under this facility are currently payable in equal monthly installments of principal and interest through November 2013. The Kreos facility is secured by a lien on trade receivables and intellectual property.

In June 2011, we entered into a $17.0 million debt facility with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, which we refer to as the Oxford facility, and concurrently borrowed the full $17.0 million under this facility, of which $8.5 million was used to repay an existing debt facility in its entirety (including

principal and interest), and $1.4 million was used to pay Kreos for a partial assignment of the Kreos facility from Kreos to Horizon Pharma, Inc. Immediately following the partial assignment, the outstanding principal balance of the Kreos facility was approximately $3.9 million. The outstanding principal balance under the Oxford facility accrues interest at a fixed rate of 11.5% per annum, with interest only payments through June 1, 2012 followed by 36 equal monthly installments of principal and interest. The Oxford facility is secured by a lien on substantially all of our assets and those of Horizon Pharma USA, including intellectual property, but excluding the shares of Horizon Pharma AG. If we generate an annualized revenue run rate of no less than $45.0 million over three consecutive months from DUEXIS product sales, the lien on the assets may be released with the consent of the lenders, provided we are not in default under the Oxford facility.

The Oxford facility and the Kreos facility restrict our ability to incur additional indebtedness, incur liens, pay dividends and engage in significant business transactions, such as a change of control, so long as we owe any amounts to the lenders under the related loan agreements. Any of these restrictions could significantly limit our operating and financial flexibility and ability to respond to changes in our business or competitive activities. In addition, if we default under our debt facilities, our lenders may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, our lenders’ right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Our lenders could declare a default under our debt facilities upon the occurrence of any event that the lenders interpret as having a material adverse effect upon us as defined under the loan agreements, thereby requiring us to repay the loans immediately or to attempt to reverse the lenders’ declaration through negotiation or litigation. Any declaration by the lenders of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

If we fail to obtain additional financing, we may be unable to successfully commercialize or further develop DUEXIS and LODOTRA, develop other product candidates or continue our other research and development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to:

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations into the second quarter of 2012. We may need to raise additional funds sooner if we choose to expand our commercialization or development efforts more rapidly than we presently anticipate. We will also require additional capital if the FDA requires us to conduct additional clinical trials with respect to LODOTRA.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products or product candidates or one or more of our other research and development initiatives. We also could be required to:

Even if we obtain additional financing, our Horizon Pharma AG subsidiary is subject to Swiss laws regarding overindebtedness that require Horizon Pharma AG to maintain assets in excess of its liabilities. Our Swiss subsidiary was overindebted as of March 31, 2011 and we are in the process of taking steps to address the overindebtedness. In order to comply with these laws, we may be required to have cash at our Swiss subsidiary in excess of its near term operating needs, which may include a portion of our net proceeds from this offering and could limit the amount of cash available to our U.S. subsidiary. If we are unable to allocate sufficient cash to our U.S. subsidiary, even if we have sufficient cash on a consolidated basis, our ability to execute our U.S. business plan may be harmed.

Any of the above events could significantly harm our business, financial condition and prospects and cause the price of our common stock to decline.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish intellectual property rights to our product candidates.

We may seek additional capital through a combination of private and public equity offerings, debt financings, receivables or royalty financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt, receivables and royalty financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management may not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering to fund U.S. commercialization activities for DUEXIS and pre-commercialization activities for LODOTRA, to fund additional regulatory approvals of DUEXIS and LODOTRA, to fund development of LODOTRA for other indications and our other product candidates and for working capital, capital expenditures and general corporate purposes. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of our common stock to decline.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have concluded that as a result of

our acquisition of Nitec and related transactions occurring on April 1, 2010, we have triggered an “ownership change” limitation and that we will be subject to annual limits on our ability to utilize net operating loss carryforwards. We estimate that these annual limits will be $31.8 million, $18.1 million, $18.1 million and $16.9 million for 2011, 2012, 2013 and 2014, respectively, and will be cumulative such that any use of the carryforwards below the limitation in one year will result in a corresponding increase in the limitation for the subsequent tax year. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including as a result of the completion of this offering. Any limitation on our ability to use our net operating loss carryforwards will likely increase the taxes we would otherwise pay in future years if we were not subject to such limitations.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment and continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon commercialization or development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

At July 1, 2011, we had $4.9 million of cash and cash equivalents consisting of cash and money market funds. While as of the date of this prospectus, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since March 31, 2011, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by us.

Changes in accounting rules or policies may affect our financial position and results of operations.

U.S. generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations. In addition, the consolidation of Horizon Pharma AG and Horizon Pharma USA adds additional complexity to the application of U.S. generally accepted accounting principles. Changes in the application of existing rules or guidance applicable to us or our wholly-owned subsidiaries could significantly affect our consolidated financial position and results of operations.

If we are unable to obtain or protect intellectual property rights related to our products and product candidates, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our products and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover the products in the U.S. or in other foreign countries. If this were to occur, early generic competition could be expected against DUEXIS, LODOTRA and other product candidates in development. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can

invalidate a patent or prevent a patent from issuing based on a pending patent application. In particular, because the active pharmaceutical ingredients in DUEXIS and LODOTRA have been on the market as separate products for many years, it is possible that these products have previously been used off-label in such a manner that such prior usage would affect the validity of our patents or our ability to obtain patents based on our patent applications. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications, may not adequately protect our intellectual property or prevent others from designing around our claims. If the patent applications we hold with respect to DUEXIS and LODOTRA fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from collaborating with us to develop them, and threaten our ability to commercialize, our products. We cannot offer any assurances about which, if any, patents will issue or whether any issued patents will be found not invalid and not unenforceable or will go unthreatened by third parties. Further, if we encounter delays in regulatory approvals, the period of time during which we could market DUEXIS and LODOTRA under patent protection could be reduced. Since patent applications in the U.S. and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file any patent application related to DUEXIS and LODOTRA or our other product candidates. Furthermore, if third parties have filed such patent applications, an interference proceeding in the U.S. can be provoked by a third party or instituted by us to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the U.S. and Canada. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the U.S. and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the U.S., involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter party reexamination proceedings before the U.S. PTO. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of DUEXIS and LODOTRA and/or our other product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If

any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.

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

We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we hold an exclusive license to SkyePharma AG’s proprietary technology and know-how covering the delayed release of corticosteroids relating to LODOTRA. If we fail to comply with our obligations under our agreement with SkyePharma or our other license agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license, including LODOTRA.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the U.S.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors that control the prosecution and maintenance of our licensed patents fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no market for shares of our common stock. Although we expect that our common stock will be approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering, which may vary. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The price of our stock is likely to be highly volatile, and you could lose all or part of your investment.

The trading price of our common stock following the completion of this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

In addition, the stock market in general, and The NASDAQ Global Market and the stocks of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of our debt facilities, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.

Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our directors, five percent or greater stockholders and their respective affiliates owned in the aggregate approximately 81.8% of our outstanding voting stock and, upon completion of this offering, that same group will hold in the aggregate approximately 58.3% of our outstanding voting stock (assuming no exercise of the underwriters’ overallotment option). Therefore, after this offering these stockholders will continue to have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. Entities affiliated with Atlas Venture, Essex Woodlands Health Ventures, Scale Venture Partners, NGN Biomed, Sutter Hill Ventures, Global Life Science Ventures and TVM Life Science Ventures, each of which is a current stockholder, have indicated an interest in purchasing an aggregate of approximately $15.0 million of shares of our common stock in this offering, to be allocated pro rata among them based on each such stockholder’s current beneficial ownership of our outstanding capital stock. The previously-discussed ownership percentage upon completion of this offering does not reflect the potential purchase of any shares in this offering by such stockholders. If these stockholders purchase an aggregate of $15.0 million of shares of our common stock in this offering, upon completion of this offering, our executive officers, directors, 5% stockholders and their affiliates will hold approximately 65.4% of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option).

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $10.54 per share, based on an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover of this prospectus. Further, investors purchasing common stock in this offering will contribute approximately 34.7% of the total amount invested by stockholders since our inception, but will own only approximately 28.7% of the shares of common stock outstanding after giving effect to this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less than the price offered to the public in this offering when they purchased their shares and the exercise of stock options granted to our employees. As of March 31, 2011, there were 1,317,534 shares of our common stock issuable upon the exercise of outstanding options having a weighted average exercise price of $14.06 per share and 346,047 shares of our common stock issuable upon the exercise of outstanding warrants to purchase preferred stock (assuming the conversion of all such preferred stock to common stock), having a weighted average exercise price of $9.30 per share. The exercise of any of these options or warrants may result in additional dilution. Additionally, in July 2010, January 2011 and April 2011, we sold $10.0 million in aggregate principal amount of subordinated convertible promissory notes, or the 2010 notes, $5.0 million in aggregate principal amount of subordinated convertible promissory notes, or the January 2011 notes, and $1.7 million in aggregate principal amount of subordinated convertible promissory notes, or the April 2011 notes, respectively, in private placements to certain of our existing investors. The 2010 notes, January 2011 notes and April 2011 notes may convert into shares of our Series B preferred stock prior to the closing of this offering or will convert into shares of our common stock in connection with this offering at the lesser of the price offered to the public in this offering or $18.92 per share. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the NASDAQ Stock Market, Inc., or NASDAQ, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations will make it more difficult and more expensive for us to obtain and maintain director and officer liability insurance. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report, commencing in our annual report on Form 10-K for the year ending December 31, 2012, on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Unless we qualify for an exemption as a non-accelerated filer under the Dodd-Frank Wall Street Reform and Consumer Protection Act, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts, particularly because of our holding company structure and international operations. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and rules adopted by the SEC and by NASDAQ, would likely result in increased costs to us as we respond to their requirements.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares of common stock outstanding as of March 31, 2011, upon completion of this offering, we will have outstanding a total of 19,146,982 shares of common stock, assuming no exercise of the underwriters’ overallotment option and no exercise of outstanding options and warrants. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ overallotment option, will be freely tradable, without restriction, in the public market immediately following this offering. Our underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus (subject to extension upon the occurrence of specified events). After the lock-up agreements expire, up to an additional 13,646,982 shares of common stock will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, with respect to any of these shares held by directors, executive officers and other affiliates. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering.

Pursuant to our 2011 equity incentive plan, our board of directors is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our 2011 equity incentive plan will automatically increase on January 1 of each year starting January 1, 2012 by an amount equal to the lesser of 5% of our capital stock outstanding as of December 31 of the preceding calendar year or 1,474,304 shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. In addition, our board of directors may grant or provide for the grant of rights to purchase shares of our common stock pursuant to the terms of the 2011 employee stock purchase plan. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each year starting January 1, 2012 by an amount equal to the lesser of 4% of our capital stock outstanding as of December 31 of the preceding calendar year or 1,053,074, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. We are also subject to certain anti-takeover provisions under Delaware law which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We may become involved in securities class action litigation that could divert management’s attention and harm our business and could subject us to significant liabilities.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Even if we are successful in defending against any such claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that could adversely impact our financial condition and prospects.

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, do not protect any forward-looking statements that we make in connection with this offering.

We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

We estimate that the net proceeds from the sale of the shares of common stock we are offering will be approximately $52.1 million, based upon an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the net proceeds to us from this offering by approximately $5.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters fully exercise their overallotment option, we estimate that the net proceeds to us from this offering will be approximately $60.6 million.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We intend to use approximately $37.3 million of the net proceeds of this offering to fund U.S. commercialization activities for DUEXIS and LODOTRA and the remainder to fund regulatory approvals of LODOTRA and DUEXIS, to fund required post-marketing studies and development of DUEXIS, to fund development of LODOTRA for other indications and our other product candidates and for working capital, capital expenditures and general corporate purposes.

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

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, unless waived, the terms of our existing debt facilities prohibit us from paying dividends on our common stock.

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. In addition, while we believe our internal company research is reliable and the market definitions we use are appropriate, neither our internal research nor these definitions have been verified by any independent source.

The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2011:

You should read the information in this table together with our consolidated financial statements, and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus.

The number of shares of our common stock to be outstanding after this offering is based on 1,496,278 shares of common stock outstanding as of March 31, 2011 on an actual basis, and excludes:

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

Our historical net tangible book value (deficit) of our common stock as of March 31, 2011 was approximately $(60.4) million, or approximately $(40.39) per share, based on the number of shares of common stock outstanding as of March 31, 2011. Historical net tangible book value (deficit) per share is determined by dividing the number of shares of common stock outstanding as of March 31, 2011 into our total tangible assets (total assets less intangible assets) less total liabilities.

After giving effect to (1) our borrowing of $17.0 million in June 2011 under a new debt facility with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, which we refer to as the Oxford facility, issuance of warrants to Oxford and SVB to purchase an aggregate of 80,007 shares of our Series B convertible preferred stock, issuance of an additional warrant to Kreos Capital III (UK) Limited, or Kreos, to purchase an aggregate of 100,000 shares of our Series B convertible preferred stock as partial consideration for Kreos’ consent to enter into the Oxford facility, repayment of $9.2 million, representing all outstanding amounts under an existing debt facility with Kreos and SVB as of March 31, 2011, and payment of $1.4 million (1.0 million Euros) to Kreos and assignment of a like amount of debt under an existing debt facility with Kreos to Horizon Pharma, Inc. as partial consideration for Kreos’ consent to enter into the Oxford facility, (2) our issuance in April 2011 of convertible promissory notes in the aggregate principal amount of $1.7 million, or the April 2011 notes, (3) the conversion of the April 2011 notes, our January 2011 convertible promissory notes in the aggregate principal amount of $5.0 million, or the January 2011 notes, and our July 2010 convertible promissory notes in the aggregate principal amount of $10.0 million, or the 2010 notes, including interest accrued thereon, into an aggregate of 1,636,273 shares of common stock upon the completion of this offering, assuming a conversion price of $11.00 per share and assuming a conversion date of June 29, 2011 and (4) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 10,514,431 shares of common stock upon the completion of this offering, our pro forma net tangible book value (deficit) per share as of March 31, 2011 would have been approximately $(44.0) million, or approximately $(3.22) per share.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock by us in this offering at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, net of estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been approximately $8.1 million, or approximately $0.43 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.65 per share to existing stockholders, and an immediate dilution of $10.57 per share to investors participating in this offering. The following table illustrates this per share dilution:

forma as adjusted net tangible book value as of March 31, 2011 by approximately $5.1 million and the pro forma as adjusted net tangible book value per share after this offering by $0.27, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Based on our pro forma as adjusted net tangible book value, a $1.00 increase in the assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would result in dilution to new investors in this offering of $11.31 per share and a $1.00 decrease in the assumed initial public offering price would result in dilution to new investors in this offering of $9.84 per share.

If the underwriters exercise their overallotment option in full to purchase 825,000 additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $0.83 per share, the increase in the pro forma as adjusted net tangible book value per share to existing stockholders would be $0.41 per share and the dilution to new investors purchasing common stock in this offering would be $10.17 per share.

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2011, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid to us by existing stockholders and by investors participating in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus:

A $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, the total consideration paid to us by investors participating in this offering by approximately $5.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ overallotment option or any outstanding options or warrants. If the underwriters’ overallotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 68.3% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 6,325,000, or 31.7% of the total number of shares of common stock to be outstanding after this offering.

Entities affiliated with Atlas Venture, Essex Woodlands Health Ventures, Scale Venture Partners, NGN Biomed, Sutter Hill Ventures, Global Life Science Ventures and TVM Life Science Ventures, each of which is a current stockholder, have indicated an interest in purchasing an aggregate of approximately $15.0 million of shares of our common stock in this offering, to be allocated pro rata among them based on each such stockholder’s current beneficial ownership of our outstanding capital stock. The foregoing discussion does not reflect the potential purchase of any shares in this offering by these existing stockholders.

The number of shares of common stock outstanding as of March 31, 2011 on an actual basis excludes:

Effective immediately upon the signing of the underwriting agreement for this offering, an aggregate of 2,512,046 shares of our common stock will be reserved for issuance under our 2011 equity incentive plan and 2011 employee stock purchase plan, which number includes the 448,021 shares of common stock currently reserved for future issuance under our 2005 stock plan that will be allocated to our 2011 equity incentive plan, and these share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options or warrants are exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock or other equity securities in the future, there will be further dilution to investors participating in this offering.

Prior to April 1, 2010, we operated as Horizon Therapeutics, Inc. On April 1, 2010, we effected a recapitalization pursuant to which we formed a holding company, Horizon Pharma, Inc., and all of the shares of capital stock of Horizon Therapeutics, Inc. were converted into shares of Horizon Pharma, Inc. Horizon Therapeutics, Inc. survived as our wholly-owned subsidiary and changed its name to Horizon Pharma USA, Inc. Also on April 1, 2010, we acquired all of the shares of Nitec Pharma AG, or Nitec, in exchange for newly-issued shares of our capital stock. As a result of the acquisition, Nitec became our wholly-owned subsidiary and changed its name to Horizon Pharma AG. Following the recapitalization and acquisition of Nitec, we are organized as a holding company that operates through our wholly-owned subsidiaries, Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec). Immediately following the acquisition, the former shareholders of Horizon Therapeutics, Inc. and Nitec owned 51% and 49%, respectively, of Horizon Pharma, Inc. on a fully diluted basis. The total purchase price we paid for Nitec was approximately $119.3 million ($112.9 million, net of cash received of $6.4 million) and consisted of the following: 0.9 million shares of our common stock valued at $11.1 million, 11.2 million shares of our Series A convertible preferred stock valued at $88.9 million, a discount of $2.0 million on the sale of 1.2 million shares of Series B convertible preferred stock, warrants to purchase 0.1 million shares of Series A convertible preferred stock valued at $0.9 million, options to purchase 0.3 million shares of our common stock valued at $2.1 million, and $14.3 million in assumed current liabilities and long-term debt (including $6.8 million of debt under a credit facility between Nitec and Kreos Capital III (UK) Limited). The financial position and results of operations of Horizon Pharma AG have been included in our financial position and results of operations from the date of the acquisition. Concurrently with our recapitalization and acquisition of Nitec, we issued 2.5 million shares of our Series B convertible preferred stock for gross proceeds of $20.0 million.

The following unaudited pro forma condensed consolidated financial information was prepared in accordance with Securities and Exchange Commission Regulation S-X, Article 11, giving effect to the acquisition of Nitec through the exchange of all of Nitec’s outstanding shares of capital stock for shares of our capital stock, as well as certain reclassifications and pro forma adjustments, all of which are described in the notes accompanying this unaudited pro forma condensed consolidated financial information.

The determination of the accounting acquirer was based on a review of all pertinent facts and circumstances. The identification of the acquiring entity in this instance is subjective and was based on a number of factors outlined in ASC Topic 805-10-55-12, which are as follows:

After consideration of the factors outlined above, it was determined that Horizon Therapeutics, Inc. was the accounting acquirer in this transaction based on the following:

The Nitec acquisition was accounted for using the “acquisition method” of accounting. Under the acquisition method of accounting, the purchase price is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values. Any purchase price in excess of the fair market value of the acquired tangible and intangible assets is required to be allocated to goodwill in our condensed consolidated balance sheet as of the end of the period in which the acquisition closed. Conversely, to the extent the fair market value of the acquired tangible and intangible assets exceeds the purchase price, the excess is required to be reflected as a bargain purchase gain in our condensed consolidated statement of operations during the period in which the acquisition closed. We performed appraisals necessary to derive preliminary fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and liabilities arising from contingencies, and the amount of goodwill or bargain purchase gain to be recognized as of the acquisition date, and the related preliminary allocation of the purchase price.

Based on this analysis, we recorded a bargain purchase gain resulting from the Nitec acquisition, which was reflected in our statement of operations. We believe the bargain purchase gain resulted in part from the unprecedented credit crisis and constrained capital markets at the time of the acquisition which made it extremely difficult for small private, pre-commercial biotechnology companies, particularly those located in Europe such as Nitec, to access capital to execute their business plans. We believe these economic circumstances, along with the limited number of other potential acquirers of Nitec due to the financial crisis, the opportunity to diversify Nitec’s product portfolio with our product candidates to enable the combined company to better access the capital markets and gaining access to our management team which has significant commercial experience in the therapeutic areas of arthritis, pain and inflammatory diseases provided motivation for Nitec to sell to Horizon Therapeutics, Inc.

In accordance with our established accounting policies regarding review of intangible assets, in the fourth quarter of 2010 we reviewed the intangible assets acquired in the Nitec acquisition and determined there was no change in the recorded fair value of the assets acquired. At the time of our review, we had also enhanced our understanding of tax laws in Switzerland since the time of the acquisition, which indicated a lower expected tax rate attributable to in-process research and development, or IPR&D. Primarily as a result of the correction to a lower expected tax rate, we decreased our preliminary assessment of the deferred tax liabilities by $4.6 million to $26.0 million, which resulted in a net increase of $4.6 million to the bargain purchase gain we had originally recorded, to a revised amount of $19.3 million.

The unaudited pro forma condensed consolidated statement of operations information for the year ended December 31, 2010, is based on the historical consolidated statements of operations of Horizon Pharma, Inc.

and Nitec, giving effect to our acquisition of Nitec as if it had occurred on January 1, 2010 and includes the results of operations for Nitec for the three months ended March 31, 2010.

The historical profit and loss accounts of Nitec have been prepared in accordance with International Financial Reporting Standards, or IFRS, as prescribed by the International Accounting Standards Board. For the purpose of presenting the unaudited pro forma condensed consolidated financial information, the profit and loss accounts relating to Nitec have been adjusted to conform with accounting principles generally accepted in the U.S., or U.S. GAAP, as described in Note 2 to this unaudited pro forma condensed consolidated financial information. In addition, certain adjustments have been made to the historical financial statements of Nitec to reflect reclassifications to conform with the presentation under U.S. GAAP. The historical financial statements of Nitec are presented in Swiss Francs (CHF). For the purposes of presenting the unaudited pro forma consolidated financial information, the adjusted statements of operations of Nitec for the three months ended March 31, 2010 have been translated into U.S. Dollars at the average rate of one Swiss Franc to 0.9465 U.S. Dollars, respectively.

The unaudited pro forma condensed consolidated financial information was prepared using (1) the audited consolidated financial statements of Horizon Pharma, Inc. for the year ended December 31, 2010 included elsewhere in this prospectus, (2) the unaudited consolidated financial statements of Nitec for the three months ended March 31, 2010 which are not required to be included in this prospectus, (3) the purchase price allocation of the Nitec acquisition, a summary of which is included in Note 1 to this unaudited pro forma condensed consolidated financial information and (4) the assumptions and adjustments described in the notes accompanying this unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information is preliminary and subject to change, is provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the acquisition of Nitec been completed as of the dates indicated or that may be achieved in future periods. The unaudited pro forma condensed consolidated statement of operations does not include the effects of any non-recurring costs or income/gains resulting from (1) professional fees and other direct or indirect costs incurred in relation to the acquisition, (2) restructuring or integration activities that we implemented during the 12 months subsequent to the closing of the acquisition and (3) the realization of any cost savings from operating efficiencies, synergies or other restructurings that may result from the acquisition.

This unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated audited and unaudited financial statements of Horizon Pharma, Inc. and Nitec and the related audited and unaudited notes thereto included elsewhere in this prospectus.

The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information.

(A) To record amortization associated with the estimated identifiable intangible assets acquired over a twelve-year useful life.

The 1,490,548 pro forma weighted average common shares outstanding as of December 31, 2010 gives effect to the acquisition of Nitec and our recapitalization on April 1, 2010, as if they had occurred on January 1, 2010, including the issuance of 857,400 shares of our common stock in connection with the acquisition of Nitec, and the conversion of 510,920 shares of special convertible preferred stock into common stock and the conversion of 842,458 shares of common stock into 417,931 shares of common stock, each in connection with the recapitalization.

The unaudited pro forma condensed consolidated financial information reflects a total purchase price of approximately $119.3 million consisting of the following (in millions):

We engaged consultants to assist management in determining the fair value of our common stock and our Series A and B convertible preferred stock using an income approach.

The initial estimated purchase price resulted in a fair value of assets and liabilities which exceeded the purchase price. This amount was originally recorded as a bargain purchase gain in other income (expense), net in our consolidated statement of operations.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date. The table below shows how we originally allocated the total purchase price of approximately $119.3 million ($112.9 million, net of cash acquired of $6.4 million) over the fair value of the assets acquired and liabilities assumed, the revisions we made in the fourth quarter of 2010 primarily as a result of subsequent information indicating a correction to a lower expected tax rate in Switzerland, and the final allocation of the purchase price (in millions):

Developed Technology. The valuation of the developed technology acquired, an identifiable intangible asset, was based on management’s estimates, information and reasonable and supportable assumptions. The allocation was generally based on our estimated fair value of the rights to payments with respect to our developed product LODOTRA in Europe which were acquired in the acquisition of Nitec. This estimated fair value was determined using the income approach under the discounted cash flow method. Significant assumptions used in valuing the developed technology included revenue projections through 2026 based on existing partnerships in Europe and assumptions relating to pricing and reimbursement rates and market size and market penetration rates, cost of goods sold based on current manufacturing experience, allocated general and administrative expense without any sales and marketing expense as the product was fully out licensed in Europe, research and development expenses for clinical and regulatory support for obtaining reimbursement approval in Europe through 2010, a 39.3% blended tax rate, a 100% probability of cash flows as the product was already marketed in Europe, and a discount rate of 16%. Of the total purchase price, $43.5 million was allocated to developed technology, which was being amortized to cost of goods sold using a straight-line method over an estimated

useful life of nine years. In connection with our fourth quarter 2010 review of intangible assets, we determined the useful life of the developed technology was twelve years as a result of expectations for market exclusivity based on data regarding intellectual property exclusivity in the pharmaceutical industry. As of December 31, 2010, developed technology had decreased $3.5 million to $40.0 million due to $2.6 million of amortization expense, which was recorded in cost of goods sold, and $0.9 million due to foreign exchange rate effects of the Euro to U.S. dollar translation. During the three months ended March 31, 2011 (unaudited), developed technology increased by a net amount of $1.6 million to $41.6 million due to an increase of $2.5 million related to foreign exchange rate effects of the Euro to U.S. dollar translation, partially offset by amortization expense of $0.9 million for the three months ended March 31, 2011.

In-process research and development. We recorded $110.9 million for acquired in-process research and development, or IPR&D, related to the U.S. rights to LODOTRA which were acquired from Nitec. The value of acquired IPR&D was determined using an income approach. Significant assumptions used in valuing the IPR&D included revenue projections from 2012 through 2026 based on our experience with products in the same category and the overall market size, cost of goods sold based on then-current manufacturing experience with the product in Europe, allocated general and administrative expense and sales and marketing expense based on our intention to market the product directly in the U.S., estimated research and development expenses to complete submissions and approvals and for ongoing clinical and regulatory maintenance costs, a 39.3% blended tax rate, our estimated probability of cash flows based on similar products that have completed Phase 3 trials, and a discount rate of 17%.

IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. We may not be able to successfully obtain FDA approval for LODOTRA. As a result of this uncertainty, we are unable to amortize IPR&D at this time. As of December 31, 2010, IPR&D had decreased $2.2 million to $108.7 million due to the foreign exchange rate effects of the Euro to U.S. dollar translation. During the three months ended March 31, 2011 (unaudited), IPR&D increased by $6.9 million to $115.7 million due to the foreign exchange rate effects of the Euro to U.S. dollar translation.

Deferred tax liabilities. The deferred tax liabilities are primarily associated with the taxes we expect to incur based on the valuation of the IPR&D related to LODOTRA. We based the amount of the deferred tax liabilities on Swiss statutory taxes as the intellectual property related to LODOTRA has been developed and is located in Switzerland and initially assumed an effective tax rate of 27.5%. Subsequent to the acquisition date, we enhanced our understanding of tax laws in Switzerland and reduced the deferred tax liabilities recorded in connection with the acquired IPR&D by $4.6 million to $26.0 million primarily as a result of a correction to a lower expected tax rate of 20.0%.

Bargain purchase gain. After a preliminary reassessment of (1) whether all of the assets acquired and liabilities assumed had been identified and recognized and (2) the consideration transferred in the Nitec acquisition, we initially recognized a bargain purchase gain within other income (expense), net, in our statement of operations, representing the amount by which the fair value of the identifiable net assets exceeded the purchase price, of approximately $14.7 million. As a result of the net decrease of $4.6 million in deferred tax liabilities at the acquisition date, we increased the initial amount of the bargain purchase gain by a corresponding amount of $4.6 million to $19.3 million.

The following table shows a reconciliation of the historical unaudited profit and loss accounts of Nitec for the three months ended March 31, 2010, prepared in accordance with IFRS and in Swiss Francs, to the unaudited statements of operations of Nitec under U.S. GAAP and in U.S. Dollars included in the unaudited pro forma condensed consolidated statement of operations information.

The IFRS to U.S. GAAP adjustments represent the significant adjustments that are required to present the statement of operations of Nitec under U.S. GAAP. These adjustments and the descriptions of the nature of each adjustment are as follows (in thousands):

The following tables set forth selected consolidated financial data for the periods and as of the dates indicated. The selected financial data should be read in conjunction with, and are qualified by reference to, our financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus. The selected financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

The selected balance sheet data as of December 31, 2009 and 2010 and the selected statement of operations data for the years ended December 31, 2008, 2009 and 2010 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected balance sheet data as of December 31, 2006, 2007 and 2008 and the selected statement of operations for the years ended December 31, 2006 and 2007 are derived from our audited financial statements which are not included in this prospectus. The selected statement of operations data for the three months ended March 31, 2010 and 2011 and the selected balance sheet data as of March 31, 2011 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the financial information in those statements.

The selected unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2010 are based on our historical statements of operations and those of Nitec Pharma AG, or Nitec, giving effect to our acquisition of Nitec as if the acquisition and related transactions had occurred on January 1, 2010 and include the results of operations for Nitec for the three months ended March 31, 2010. The unaudited pro forma condensed consolidated statement of operations data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. See “Unaudited Pro Forma Condensed Consolidated Financial Information” beginning on page 49 of this prospectus. These estimates and assumptions are preliminary and subject to change, and have been made solely for the purposes of developing such pro forma information. The selected unaudited pro forma condensed consolidated statement of operations data are presented for illustrative purposes only and are not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during the period.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration, or FDA, approved DUEXIS^® (formerly HZT-501), a novel tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. DUEXIS is indicated for the relief of signs and symptoms or rheumatoid arthritis, or RA, and osteoarthritis, or OA, and to decrease the risk of developing upper gastrointestinal, or GI, ulcers in patients who are taking ibuprofen for these indications. We plan to launch DUEXIS in the U.S. in the fourth quarter of 2011. We submitted a Marketing Authorization Application, or MAA, for DUEXIS in the United Kingdom, the Reference Member State, through the Decentralized Procedure in October 2010 and we anticipate a decision on the MAA in the first half of 2012. Our other product, LODOTRA, is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partner, Mundipharma International Corporation Limited, or Mundipharma, for the treatment of moderate to severe, active RA in adults when accompanied by morning stiffness. We have successfully completed multiple Phase 3 clinical trials of LODOTRA and we intend to submit a new drug application, or NDA, for LODOTRA to the FDA in the third quarter of 2011. We have worldwide marketing rights for DUEXIS and have retained exclusive marketing rights in the U.S. for all of our products. Our strategy is to commercialize our products in the U.S., to explore co-promotion opportunities for DUEXIS in the U.S., and to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S.

On April 1, 2010, we effected a recapitalization and acquisition pursuant to which Horizon Pharma, Inc. became a holding company that operates through its wholly-owned subsidiaries Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec Pharma AG, or Nitec). Our LODOTRA product was developed and is owned by Horizon Pharma AG, and our historical financial statements and results of operations do not reflect the results of operations of Nitec for any period prior to the recapitalization and acquisition in April 2010. As a result of the acquisition of Nitec and organic growth, our organization has grown from 12 full-time employees as of March 31, 2010 to 39 full-time employees as of March 31, 2011 and our development efforts have expanded significantly through the acquisition of LODOTRA. Consequently, we expect our expenses to increase from prior periods. As a result of the recapitalization and acquisition, our future operations will be impacted by both the operations of our U.S. subsidiary Horizon Pharma USA and our Swiss subsidiary Horizon Pharma AG.

We market LODOTRA in Europe through three separate agreements. Pursuant to two separate agreements, we granted Merck Serono and Merck GesmbH, an affiliate of Merck Serono, exclusive rights to distribute and market LODOTRA in each of Germany and Austria, respectively, and pursuant to the third agreement, we granted Mundipharma exclusive rights to distribute and market LODOTRA in the rest of Europe. In April 2011, we consented to Merck Serono’s assignment of the agreement with respect to Germany to Mundipharma, and currently anticipate that Merck will assign the second agreement with respect to Austria to Mundipharma as well. Pursuant to another agreement, we granted Mundipharma exclusive rights to distribute and market LODOTRA in certain Asian and other countries. We also have a manufacturing and supply agreement with Jagotec AG under which Jagotec or its affiliates manufacture and supply LODOTRA exclusively to us as bulk tablets. We have committed to certain minimum orders under the agreement, and we also supply the active ingredient to Jagotec for use in the manufacture of LODOTRA.

We are focusing our efforts and capital resources on obtaining additional approvals for and commercializing DUEXIS and LODOTRA in the U.S. In addition to DUEXIS and LODOTRA, we have a pipeline of earlier stage product candidates to treat pain-related diseases and chronic inflammation. We are currently evaluating the development pathway for these product candidates, but do not intend to develop them further until such time as we generate sufficient cash from our operations or other sources.

We are subject to risks common to biopharmaceutical companies in the development stage, including, but not limited to, obtaining regulatory approval for our product candidates, dependence upon market acceptance of our products, risks associated with intellectual property, pricing and reimbursement, intense competition, development of markets and distribution channels and dependence on key personnel. We have a limited operating history and have yet to generate significant revenues. To date, we have been funded predominantly by convertible preferred stock and debt financings. Our ultimate success is dependent upon our ability to successfully develop, obtain approval for and market our products. We anticipate we will continue to incur net losses for at least the next several years as we:

As of March 31, 2011, we had cash and cash equivalents of $2.6 million, including borrowings under our debt facility. In April 2011, we received an additional $1.7 million from the issuance of convertible promissory notes and in June 2011, we received $17.0 million under a new debt facility we entered into with Oxford Finance LLC, or Oxford, and Silicon Valley Bank, or SVB, which we refer to as the Oxford facility, of which $8.5 million was used to repay all outstanding amounts (including principal and interest) under an existing debt facility with Kreos Capital III (UK) Limited, or Kreos, and SVB, and $1.4 million (1.0 million Euros) was paid to Kreos in connection with Horizon Pharma, Inc.’s assumption of a like amount of debt under an existing debt facility with Kreos, as partial consideration for Kreos’ consent to enter into the Oxford facility. At July 1, 2011, we had $4.9 million in cash and cash equivalents.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations into the second quarter of 2012. However, we may need additional financing in the event that we do not obtain regulatory approvals for DUEXIS and LODOTRA when expected or if the future sales of DUEXIS, LODOTRA and any additional products we may develop do not generate sufficient revenues to fund our operations. Our failure to raise capital if and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies. In its report on our financial statements for the year ended December 31, 2010, our independent registered public accounting firm included an explanatory paragraph regarding our ability to continue as a going concern.

Unless otherwise indicated, historical amounts presented with respect to Nitec are presented in accordance with accounting principles generally accepted in the U.S., or U.S. GAAP. With respect to certain amounts that are set forth in Swiss francs, we have included a corresponding amount in U.S. Dollars. Where the amounts relate to a specific date, the exchange rate between the Swiss franc and U.S. Dollar on such date was used to effect the conversion. Where the amounts relate to a period, the average exchange rate between the Swiss franc and U.S. Dollar during such period was used to effect the conversion.

Prior to our acquisition of Nitec we had no revenues and incurred significant operating losses since inception. Before our acquisition of Nitec, as of March 31, 2010, we had an accumulated deficit of $87.9 million. Giving effect to our acquisition of Nitec and, as of March 31, 2011, we had an accumulated deficit of $114.7 million, after giving effect to the $19.3 million bargain purchase gain we recognized in connection with the Nitec acquisition.

As of April 1, 2010, as a result of our acquisition of Nitec, we began recognizing revenues from the sale of LODOTRA. We recognize revenues from out-licensing marketing and distribution rights to third parties in Europe and certain Asian and other countries, including upfront fees, milestone payments and product sales. Upfront fees and payments for non-substantive milestones are recorded as deferred revenue when paid and recognized over the remaining life of the marketing and distribution agreement or manufacturing and supply agreement, as applicable. Milestone payments are considered non-substantive if any portion of the associated milestone payment is determined to not relate solely to past performance or if a portion of the consideration earned from achieving the milestone may be refunded. During the year ended December 31, 2010, all revenues recognized, and during the three months ended March 31, 2011, substantially all revenues recognized, were related to the sale of LODOTRA to our distribution partners. Cost of goods sold consists of raw materials, manufacturing and other supply chain costs for the manufacture of LODOTRA, and royalty amounts payable to SkyePharma AG on LODOTRA sales and upon receipt of certain milestone payments. In addition, cost of goods sold includes amortization of developed technology relating to our acquisition of Nitec. We expect to record approximately $3.5 million annually related to amortization of developed technology. We will adjust the rate of amortization if there are changes in our expected LODOTRA sales in Europe that indicate impairment of the developed technology or change in the expected useful life of the developed technology. The use of material is charged applying the “first-in first-out” (FIFO) method on capitalized inventory stock. We expect the per unit cost of goods sold for LODOTRA to decrease as sales volumes increase, due to lower per-unit manufacturing costs at higher volumes.

We expect our revenues and cost of goods sold to increase beginning in late 2011 and/or 2012 due to the approval and launch of DUEXIS. Revenues and costs of goods sold will be materially impacted by the timing of the DUEXIS commercial launch. The process of commercializing products is costly and time consuming. The probability of success may be affected by a variety of factors, including, among others, competition, pricing and reimbursement, manufacturing capabilities and commercial viability. As a result of these uncertainties, we are unable to determine when, or to what extent, we will generate significant revenues from the commercialization and sale of any of our products. We are also currently focused on obtaining U.S. regulatory approval of LODOTRA. However, we will need to raise substantial additional capital in the future in order to fully commercialize DUEXIS and obtain U.S. regulatory approval for LODOTRA. We would also need to raise substantial additional capital to the extent that we decide to pursue further development and commercialization of our other product candidates.

Research and development expenses consist of: (1) expenses incurred under agreements with contract research organizations, or CROs, and investigative sites, which conduct our clinical trials and our preclinical studies; (2) the cost of manufacturing clinical trial materials; (3) payments to consultants; (4) employee-related expenses, which include salaries and benefits and (5) stock-based compensation expense. All research and development expenses are expensed as incurred.

Conducting a significant amount of research and development has been central to our business model, which in the past had focused primarily on clinical research and trials and more recently has focused on development work, including regulatory approval and manufacturing activities. We expect that this trend will continue through 2011 as the result of our acquisition of Nitec. Through March 31, 2011, we had incurred approximately $82.6 million in research and development expenses since our inception in 2005. Through December 31, 2009, Nitec had incurred approximately CHF 44.2 million ($39.2 million) of research and development expenses. The following table summarizes our research and development expenses for the years ended December 31, 2008, 2009 and 2010, and the three months ended March 31, 2011:

Substantially all of our research and development expenses prior to our acquisition of Nitec were attributable to development of DUEXIS. A portion of our internal costs, including indirect costs relating to our product candidates, are not tracked on a project basis and are allocated based on management estimates of where the benefit accrues, or as a percentage of direct project costs. Our research and development expenses increased in 2010 as a result of our acquisition of Nitec. We expect these research and development expense levels to continue to increase into 2011 and to be primarily attributable to the development of LODOTRA, including expenses related to obtaining additional regulatory approvals for LODOTRA and post-marketing studies of DUEXIS.

We generally consider our development of a product to be complete when we receive approval from regulatory authorities to market the product in the applicable jurisdiction. As a result, we are unable to reasonably estimate our additional research and development costs to complete our development work with respect to LODOTRA in the U.S. and DUEXIS in Europe, including our regulatory approval and manufacturing activities. Such estimates depend on numerous factors that are outside of our control, such as whether regulatory authorities will change their approval criteria for products in the same class as DUEXIS or LODOTRA, whether our applications for marketing approval will be accepted for review by regulatory authorities, whether regulatory authorities will require that we complete additional studies before or after granting marketing approval, and when, if ever, regulatory authorities will approve any applications for marketing approval that we submit. For similar reasons, we are unable to reasonably estimate when, if ever, our development work with respect to DUEXIS and LODOTRA will be complete or when we may receive material net cash inflows related to our on-going development work with respect to DUEXIS and LODOTRA. We submitted an MAA in selected European countries in October 2010 to market DUEXIS, and we anticipate submitting an NDA for LODOTRA in the U.S. in the third quarter of 2011, however, we cannot estimate when, if ever, the applicable regulatory authorities will grant marketing approvals based on these submissions.

If we experience delays in receiving approval of our marketing applications for DUEXIS or LODOTRA, our ability to generate significant revenues from these product candidates will also be delayed, which will negatively affect our financial position and liquidity. If the FDA or other regulatory authorities require that we complete additional studies prior to approving our marketing applications, the costs of such studies could have a further material adverse effect on our capital resources and financial position. We believe that if we experience delays in receiving marketing approval for our product candidates, our ability to raise additional funds to continue our operations would also be adversely affected.

Sales and marketing expenses of Horizon Pharma USA and Horizon Pharma AG historically have consisted principally of business development expenses, trade show expenses and pre-launch marketing activities, including market research and pricing reimbursement studies in anticipation of our market launch for DUEXIS and LODOTRA in the U.S. As of March 31, 2011, our sales and marketing headcount was seven full-time equivalents. We expect these expenses to increase significantly as we continue to establish sales and marketing capabilities to commercialize DUEXIS and LODOTRA in the U.S.

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, information technology and human resources functions. Other general and administrative expenses include facility costs, professional fees for legal, consulting and auditing and tax services. General and administrative expenses also consist of stock-based compensation expense. As a result of our acquisition of Nitec, our general and administrative headcount changed from six full-time equivalents as of March 31, 2010 to 13 full-time equivalents as of April 1, 2010. In connection with our acquisition of Nitec on April 1, 2010, we eliminated three redundant executive management positions in Europe. As of March 31, 2011, our general and administrative headcount was 13 full-time equivalents. We expect general and administrative expenses to increase as we continue to build our corporate infrastructure in support of our activities relating to commercializing DUEXIS and obtaining regulatory approval of and commercializing LODOTRA in the U.S., and as we begin to operate as a public company. These increases likely will include salaries and related expenses, legal and consultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services and costs of enhanced business and accounting systems.

We review indefinite-lived intangible assets for impairment at least annually, in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment, until such time as the related research and development efforts are completed or abandoned. If the research and development efforts are completed successfully, we will reclassify the in-process research and development, or IPR&D, to indentified intangible assets and begin amortization of the assets. We review intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. We review for impairment by analyzing any facts or circumstances, either external or internal, indicating that we may not recover the carrying value of the asset. We measure impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. We measure fair value generally based on the estimated discounted future cash flows. Our analysis is based on available information and on assumptions and projections that we consider to be reasonable and supportable. If necessary, we perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Interest expense, both historically and prospectively, is related to interest and fees on certain debt facilities outstanding at both Horizon Pharma USA and Horizon Pharma AG. We are also incurring interest expense on outstanding convertible promissory notes in the aggregate principal amount of $10.0 million that we issued in July 2010, or the 2010 notes, and in the aggregate principal amount of $5.0 million that we issued in January 2011, or the January 2011 notes. In April 2011, we issued additional convertible promissory notes in the aggregate principal amount of $1.7 million, or the April 2011 notes. In June 2011, we entered into the Oxford facility and borrowed $17.0 million under this facility, which will incrementally increase interest expense in 2011 by approximately $1.1 million. Additionally, we will incur interest expense related to the Oxford facility of $1.9 million, $1.3 million, $0.7 million and $32,000 in the years 2012, 2013, 2014 and 2015, respectively. We will incur additional interest expense on the April 2011 notes as well. Historically, Horizon Pharma USA also had interest related to other convertible promissory notes outstanding prior to the conversion of such notes to convertible preferred stock in December 2009.

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting.

For the year ending December 31, 2012, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current Securities and Exchange Commission rules, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting beginning with the year ending December 31, 2012, unless we qualify for an exemption as a non-accelerated filer under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reported period. We evaluate our estimates and judgments on an ongoing basis. Actual results could differ materially from those estimates.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of our agreements contain multiple elements and in accordance with these agreements, we may be eligible for upfront license fees, marketing or commercial milestones and payment for product deliveries.

As of April 1, 2010, as a result of the acquisition of Nitec, we began recognizing revenues from the sale of LODOTRA. We recognize revenues from marketing and distribution agreements with third parties in Europe and certain Asian and other countries, including up-front license fees, milestone payments and product deliveries.

We recognize revenues consisting of payments of non-refundable, up-front license fees. In situations where the licensee is able to obtain stand-alone value from the license and no further performance obligations exist on our part, revenues are recognized on the earlier of when payments are received or collection is assured. Where our continuing involvement is required in the form of technology transfer, product manufacturing or technical support, revenues are deferred and recognized over the term of the agreement.

Milestone payments are recognized as revenue based on achievement of such milestones, as defined in the relevant agreements. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from our partner, provided that (1) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (2) the milestone represents the culmination of an earnings process and (3) the milestone payment is non-refundable. If all of these criteria are not met, revenue from the milestone achievement is recognized over the remaining minimum period of our performance obligations under the agreement.

Upon initial launch of a product, we recognize revenues based on an estimate of the amount of product sold through to the end user consumer until such time as a reasonable estimate of allowances for product returns, rebates and discounts can be made. Upon establishing the ability to reasonably estimate such allowances, we recognize revenue from the delivery of our products to our distribution partners when delivery has occurred, title has transferred to the partner, the selling price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations. We record product sales net of allowances for product returns, rebates and discounts. We are required to make significant judgments and estimates in determining some of these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future.

Given our limited sales history, we are unable to estimate returns from distribution partners with whom we have no understanding of product return history. Therefore, we have determined that shipments of LODOTRA made to our distribution partner, Mundipharma, does not meet the criteria for revenue recognition at the time of shipment, and such shipments are accounted for using the sell-through method. Under the sell-through method, we recognize revenue based on an estimate of the amount of product sold through to the customers of our distribution partners and end users.

As of April 1, 2010, as a result of the acquisition of Nitec, we began recognizing cost of goods sold in connection with our sale of LODOTRA. Cost of goods sold includes all costs directly related to the manufacture and delivery of product and out-licensing of distribution and marketing rights to third parties. Cost of goods sold also includes amortization of developed technology related to our acquisition of Nitec.

The cost in connection with product delivery to our distribution partners consists of raw material costs, costs associated with third-party manufacturers who manufacture LODOTRA for us, supply chain costs, royalty payments to third parties for the use of certain licenses and patents, and applicable taxes. The cost of sales associated with deferred product revenues are recorded as deferred cost of goods sold, which are included in other current assets, until such time the deferred revenue is recognized.

We account for acquired businesses using the acquisition method of accounting in accordance with U.S. GAAP accounting rules for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired and liabilities assumed over the purchase price is recorded as a bargain purchase gain. The fair value of intangible assets, including developed product and IPR&D, is based on significant judgments made by management. The valuations and useful life assumptions are based on information available near the acquisition date and are based on expectations and assumptions that are considered reasonable by management. In our assessment of the fair value of identifiable intangible assets acquired in the Nitec acquisition, management used valuation techniques and made various assumptions. Our analysis and financial projections were based on management’s prospective operating plans and the historical performance of the acquired business. In connection with our acquisition of Nitec on April 1, 2010, we engaged consultants to assist management in the following:

All work performed by consultants was discussed and reviewed in detail by management to determine the estimated fair values of the intangible assets. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

In accordance with our established accounting policies regarding review of intangible assets, in the fourth quarter of 2010 we performed our initial annual impairment test for the IPR&D acquired in the Nitec acquisition and considered whether a triggering event had occurred which would necessitate performing an impairment test relating to our long-lived assets, primarily developed technology. As a result, we determined there was no impairment in the carrying amounts of the assets acquired. Our review of the intangible assets in the fourth quarter of 2010 also indicated that the useful lives of the assets were longer than originally believed, based on information we received subsequent to the acquisition date regarding average market exclusivity periods for similarly situated assets. As a result, we incorporated the longer utilization period of those assets into the cash flow analysis used in our impairment test.

Also in the fourth quarter of 2010, we revised the value of our deferred tax liabilities to reflect the appropriate effective tax rate in Switzerland, which resulted in the reduction in the original amount of deferred tax liabilities recorded in connection with the acquired intangible assets. This correction to our expected effective tax rate in Switzerland resulted in a net decrease in the initial amount of deferred tax liabilities of $4.6 million to a revised amount of $26.0 million, and a net increase of $4.6 million to the bargain purchase gain we had originally recorded, to $19.3 million.

Our preclinical studies and clinical trials have been conducted by third-party CROs and other vendors. Preclinical study and clinical trial expenses are based on the services received from these CROs and vendors. Payments under some of the contracts we have with such parties depend on factors such as the milestones accomplished, successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual accordingly. Historically, our accruals have been within management’s estimates, and no material adjustments to research and development expenses have been recognized. Subsequent changes in estimates may result in a material change in our accruals.

We have been subject to income taxes only in the U.S. through March 31, 2010, and beginning on April 1, 2010 in both the U.S. and foreign jurisdictions as a result of the acquisition of Nitec, and we use estimates in determining our provisions for income taxes. We use the asset and liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

As of December 31, 2010, we had net operating loss carryforwards of $98.1 million, $102.7 million and $71.3 million available to reduce future taxable income, if any, for federal, state and foreign income tax purposes, respectively. The federal, state and foreign net operating loss carryforwards begin to expire in 2026, 2016 and 2012, respectively.

As of December 31, 2010, we had research and development credit carryforwards of $2.6 million and $0.3 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal credits will expire beginning 2027 if not utilized.

and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization. As a result of the acquisition of Nitec on April 1, 2010, we performed a study to determine if there had been an ownership change under Section 382 of the IRC. As a result of our Section 382 study, we concluded that there was an ownership change as of April 1, 2010, and that we will be subject to annual limits on our ability to utilize net operating loss carryforwards. We estimate that these annual limits will be $31.8 million, $18.1 million, $18.1 million, $16.9 million and $13.2 million for 2011, 2012, 2013, 2014 and 2015, respectively, and will be cumulative such that any use of the carryforwards below the limitation in one year will result in a corresponding increase in the limitation for the subsequent tax year.

We have provided a full valuation allowance for our net deferred tax assets at December 31, 2010 due to the uncertainty surrounding the future realization of these assets.

On January 1, 2009, we adopted the provisions of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 740-10 Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The cumulative effect of adopting ASC 740-10 resulted in no adjustment to retained earnings as of January 1, 2009. As of December 31, 2010, we had gross unrecognized tax benefits of $0.4 million. It is unlikely that the amount of liability for unrecognized tax benefits will significantly change within the next 12 months. There was no interest or penalties accrued at January 1, 2009, December 31, 2009 and 2010.

We file income tax returns in the U.S. federal jurisdiction, in the states of California and Illinois and in the foreign jurisdictions of Switzerland and Germany. As of December 31, 2010, all returns for the years ended 2005 through the current period remain open to examination. We are not currently subject to income tax examinations by any tax authorities.

We account for employee stock-based compensation by measuring and recognizing compensation expense for all stock-based payments based on estimated grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. Under ASC Topic 718 Compensation-Stock Compensation, we estimate the fair value of our share-based awards to employees using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions, including the expected stock price, volatility, risk-free interest rate, the calculation of expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

The following table summarizes our weighted average assumptions used in the Black-Scholes option pricing model:

The replacement stock options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled. The substituted options were issued with the same vesting schedule and terms as the cancelled Nitec options, with continuous service with Nitec credited towards the original vesting period and share amounts adjusted in a manner consistent with the share exchange agreement. We estimated the fair value of the stock options using the Black-Scholes option pricing model with the following assumptions as of April 1, 2010: expected volatility of 75%, risk-free interest rate of 1.03%, expected term of 2.3 years and expected dividend yield of 0%.

Expected Volatility. We used an average historical stock price volatility of comparable publicly traded companies to be representative of future stock price volatility as we did not have any trading history for our common stock.

Risk-Free Interest Rate. We determined the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate as of the date of grant.

Expected Term. Given our limited historical exercise behavior, the expected term of options granted was determined using the “simplified” method. Under this approach, the expected term is presumed to be the average of the vesting term and contractual term.

Expected Dividends. We have never paid dividends and do not anticipate paying any dividends in the near future.

Forfeitures. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on our historical experience.

We recorded employee stock-based compensation expense of $0.1 million, $0.4 million, $2.4 million, $0.2 million and $0.6 million during the years ended December 31, 2008, 2009, and 2010, and the three months ended March 31, 2010 and 2011, respectively. As of March 31, 2011, we had $5.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 2.8 years. In future periods, our stock-based compensation expense is expected to increase materially as a result of our existing unrecognized stock-based compensation expense and as we issue additional stock-based awards to continue to attract and retain employees and non-employee directors.

We also account for stock options issued to non-employees based on the stock options’ estimated fair value determined using the Black-Scholes option pricing model. However, the fair value of the equity awards granted to non-employees is re-measured at each reporting date, and the resulting increase (decrease) in value, if any, is recognized as expense (income) during the period the related services are rendered.

Due to the absence of an active market for our common stock, the fair value of our common stock for purposes of determining the exercise price of stock option grants was determined by our board of directors, with the assistance of our management, in good faith based on a number of objective and subjective factors including:

Based on these factors, our board of directors granted common stock options at exercise prices that ranged from $1.22 per share to $20.78 per share during the period between January 1, 2006 to March 31, 2011 (excluding replacement stock options granted on April 1, 2010 in connection with the Nitec acquisition). We estimated the fair value of our common stock at $13.46, $5.20, $12.94, $16.97, $20.77, $17.21 and $18.52 per share as of December 31, 2008, December 31, 2009, April 1, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011, respectively.

In June 2010, in connection with the preparation of our consolidated financial statements included in this prospectus, we began performing a retrospective analysis to reassess the fair value of our common stock at certain option grant dates. We performed a retrospective valuation analysis with respect to the 12 months ended December 31, 2009, three months ended March 31, 2010 and three months ended June 30, 2010, because these periods encompass the time frame in which we began contemplating and planning our initial public offering. First, we estimated the Business Enterprise Value, or BEV, defined as the sum of the fair value of our total equity and interest-bearing debt. We utilized the estimated BEV and an option-based valuation model to estimate the fair value of the common stock in the context of our capital structure as of each valuation date. We then reviewed milestones accomplished and significant progress made during interim periods in our retrospective analysis to reassess fair value. Unless there were specific milestones, other achievements or specifically identified positive or adverse changes to general market conditions that suggested fair value changed, we assumed a pro rata change in fair value for options granted between the valuation dates of December 31, 2008, December 31, 2009, March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011 to determine the fair value of our common stock during these periods.

To determine the BEV, we evaluated the income approach and the prior sale of company stock approach to estimate our aggregate enterprise value at December 31, 2008 and December 31, 2009 valuation dates and we evaluated the income approach to estimate our aggregate enterprise value at the March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011.

The income approach is an estimate of the present value of the future monetary benefits expected to flow to the owners of a business. It requires a projection of the cash flows that the business is expected to generate. These cash flows are converted to present value by means of discounting, using a rate of return that accounts for the time value of money and the appropriate degree of risks inherent in the business.

The prior sale of company stock approach considers any prior arm’s length sales of the company’s equity securities. Considerations factored into the analysis include: (1) the type and amount of equity sold; (2) the estimated volatility; (3) the estimated time to liquidity; (4) the relationship of the parties involved; (5) the timing compared to the common stock valuation date; and (6) the financial condition and structure of the company at the time of the sale. In estimating the volatility assumption, we considered the historical volatility over the anticipated time to liquidity for comparable publicly traded companies. Historical volatility was calculated based on the daily volatility of the comparable companies over the estimated time to liquidity of 1.5 years as of December 2008 and one year as of December 2009. We determined not to consider implied volatility in estimating the volatility assumption as some of the comparable companies did not have publicly traded options, resulting in a lack of observable data points for those companies. The comparable companies selected at each valuation date were small biopharmaceutical companies, typically with a market capitalization of less than $500 million that had similar product pipelines in terms of therapeutic focus, commercial sales force target physicians, and number of products. While we considered the prior sale of company stock approach, we did not ultimately rely on prior stock sale transactions to determine BEV after December 2009 as we did not sell shares of our capital stock to new investors. Our equity financing transactions subsequent to December 2009 consisted of existing investors participating to keep their pro rata ownership and thus we determined that the sales prices of our capital stock in these financings were not a reliable indicator of the fair value of our common stock.

Except as described above, we applied consistent methodologies to arrive at BEV and common stock value. At each valuation date, we updated our financial projections, including cash flow projections. In preparing financial projections, we made certain assumptions relating to probability of successful approval and commercial launch of products and probable date of commercial launch, pricing and product adoption for

products, capital required to achieve our forecasts, likelihood of securing the necessary capital, and capital market conditions. Between December 2008 and December 2009, we reduced our revenue projections to reflect constrained capital markets and our belief that it would be difficult to raise the amount of capital necessary to meet our 2008 projections. As a result of our anticipated acquisition of Nitec, on April 1, 2010, which would increase the number of products we were developing and expecting to commercialize, we increased our revenue projections at the March 2010 valuation date. Between the March 2010 and June 2010 valuation dates our projections were adjusted slightly to reflect updated product market information, including market size and pricing data. Our projections were unchanged between the June 2010 and September 2010 valuation dates. Between the September 2010 and December 2010 valuation dates, we reduced our revenue projections again, primarily attributable to new market research we conducted, and also our belief that the capital markets remained constrained and that it would be difficult to raise the amount of capital needed to support our prior spend and revenue projections. Between December 2010 and March 2011 valuation data, our revenue projections were unchanged. The projections were discounted to present value using rates of 43.5%, 43.5%, 18.5%, 16.5%, 15.5%, 17.5% and 17.5%, for December 2008, December 2009, March 2010, June 2010, September 2010, December 2010, and March 2011, respectively. The discount rates used for each valuation were based on a weighted average cost of capital. We determined the weighted average cost of capital by weighting the required returns of capital required to obtain interest bearing debt, preferred equity capital, and common equity capital in proportion to their estimated percentages in an expected capital structure, using a capital asset pricing model. In addition, an analysis was performed to support the discount for lack of marketability applied in each valuation. We applied a lack of marketability discount of 40%, 35%, 18%, 8%, 4%, 10% and 6% for December 2008, December 2009, March 2010, June 2010, September 2010, December 2010 and March 2011, respectively. The increase in lack of marketability discount to 10% at December 2010 from 4% at September 2010 was due to the increase in expected holding period of the shares and the expected volatility of the shares. The decrease in lack of marketability discount between December 2010 and March 2011 was due to the decrease in the expected holding period of the shares. Using this methodology, our BEV was $100 million, $71 million, $298 million, $333 million, $350 million, $277 million and $288 million as of December 2008, December 2009, March 2010, June 2010, September 2010, December 2010 and March 2011, respectively.

The indicated fair value calculated at each valuation date was then allocated to the shares of convertible preferred stock, warrants to purchase shares of convertible preferred stock, and common stock, using a contingent claim methodology. This methodology treats the various components of our capital structure as a series of call options on the proceeds expected from the sale of the company or the liquidation of our assets at some future date. These call options are then valued using the Black-Scholes option pricing model. This model defines the securities’ fair values as functions of the current fair value of the company and assumptions based on the securities’ rights and preferences. As a result, the option-pricing requires assumptions regarding the anticipated timing of a potential liquidity event, such as an initial public offering, and the estimated volatility of our equity securities. The anticipated timing of a liquidity event utilized in these valuations was based on then current plans and estimates of our board of directors and management regarding an initial public offering. The estimated time to liquidity at each valuation date was as follows: 1.5 years as of December 2008, one year as of December 2009, one year as of March 2010, four months as of June 2010, three months as of September 2010, five months as of December 2010 and two months as of March 2011. The time to liquidity was based on our view of when we expected to complete an initial public offering or alternatively, a merger and acquisition process. In December of 2008, we had received positive Phase 3 data for DUEXIS but capital market conditions were difficult, leading to the expectation that a liquidity event could not be achieved in less than 1.5 years. In December 2009, we were very close to filing a NDA for U.S. approval of DUEXIS and capital market conditions were improving, but still not robust, leading us to estimate it would be one year to a liquidity event. In December 2010, the FDA notified us in that it had extended the DUEXIS PDUFA goal date by three months to April 23, 2011, leading us to estimate it would potentially be five months from December 2010 to a liquidity event and two months to a liquidity event from March 2011.

As of the April 1, 2010, the date we closed the acquisition of Nitec, we had not yet initiated an initial public offering or initial public offering process. In our view it was more likely than not that an initial public offering

process would be initiated in the future, and that the initial public offering would occur sometime between the fourth quarter of 2010 and the fourth quarter of 2011. Therefore, it was assumed that a liquidity event would occur on April 1, 2011. An option pricing method was used given the difficulty in reliably estimating the likelihood of the liquidity event being completion of an initial public offering rather than a sale of the company through a merger or acquisition. We calculated the implied probability of an initial public offering event occurring by April 1, 2011, at approximately 60%.

As of June 30, 2010, we had initiated an initial public offering process. Accordingly, in our view, it had become more likely than not that an initial public offering would occur in the fourth quarter of 2010. Therefore, we assumed that a liquidity event would occur by October 31, 2010. An option pricing method was used given the difficulty in reliably estimating the likelihood of the liquidity event being an initial public offering rather than a merger or acquisition event. We calculated the implied probability of an initial public offering event occurring by October 31, 2010 at approximately 70%. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies.

As of September 30, 2010, we had filed a registration statement for our potential initial public offering, as well as a first amendment to the registration statement, and we had continued to believe that it was more likely than not that an initial public offering would occur in the fourth quarter of 2010. We calculated the implied probability of an initial public offering event occurring by December 31, 2010 at approximately 85%. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies.

As of December 31, 2010, we had advanced our efforts to prepare for our potential initial public offering, but we had also been notified by the FDA that it had extended the DUEXIS PDUFA goal date to April 23, 2011. We believed that if we were to receive FDA approval of DUEXIS in April 2011, we could potentially complete our initial public offering in the second quarter of 2011. While we continued to believe an initial public offering was a likely event, we were unable to reliably estimate either the probability of an initial public offering or the likely sales price of our common stock in an initial public offering, given the volatility of market conditions and the small number of recently completed initial public offerings. For illustrative purposes, we estimated a probability of completing an initial public offering by the second quarter of 2011 at 90%. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies.

As of March 31, 2011, we had continued to advance our efforts to prepare for our potential initial public offering. We also continued to believe that if we were to receive FDA approval of DUEXIS in April 2011, we could potentially complete our initial public offering in the second quarter of 2011. While we continued to believe an initial public offering was a likely event, we were unable to reliably estimate either the probability of an initial public offering or the likely sales price of our common stock in an initial public offering, given the volatility of market conditions and the small number of recently completed initial public offerings. For illustrative purposes, we continued to estimate a probability of completing an initial public offering by the second quarter of 2011 at 90%. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies.

We granted stock options with an exercise price of $13.47 on March 11, 2009, May 28, 2009, June 23, 2009 and September 29, 2009, an exercise price of $5.20 and $12.94 per share on February 3, 2010 and June 16, 2010, respectively, an exercise price of $16.98 per share on September 23, 2010, an exercise price of $20.78 per share on December 2, 2010 and December 21, 2010, and an exercise price of $17.22 per share on March 24, 2011. Common stock fair value declined from December 31, 2008 to December 7, 2009 because our expectation of future cash flows declined during this period as we reduced our revenue projections to reflect constrained capital markets and our belief that it would be difficult to raise the amount of capital necessary to meet our 2008 projections. The decline in our expected cash flows from December 31, 2008 to December 7, 2009 resulted primarily from a change in our sales forecasting model during 2009. In late 2008, we developed a model for our lead product, DUEXIS, that anticipated an increase in top line revenue at a maximum rate following potential marketing approval by the FDA. This model required a significant amount of upfront capital investment, primarily to put a substantial sales organization in place by the approval and subsequent

commercial launch date. Following the dramatic downturn in the financial markets in late 2008 and 2009, we revised our forecasts in late 2009 to reflect the constrained capital markets. The primary change we made was to develop a sales forecast for DUEXIS that required significantly less capital in the initial years after approval, as well as an anticipated 9 to 12 month delay in commercial launch to complete additional regulatory requirements. Under this revised forecasting model, we anticipated launching DUEXIS with a much smaller initial sales organization and gradually building the organization, subject to cash flow constraints. While we believed this model was more austere in terms of the initial capital required to commercialize DUEXIS, the revised model resulted in a downward adjustment in our projected revenue and operating income in future periods. For example, between December 2008 and December 2009, we reduced our projected sales and operating income for the year 2013 by 67% and 77%, respectively. This in turn led to lower projected cash flows and a reduced BEV from December 2008 to December 2009.

In addition, in December 2009 and January 2010 we sold Series D preferred shares at a significant discount to our prior round of financing. The Series D preferred shares had an aggregate liquidation preference of approximately $24 million. This liquidation preference represented a significant portion of our $71 million BEV and had a dilutive impact on the value of our common stock. Our December 7, 2009 valuation resulted in the allocation of approximately $12.37 per share to the Series D preferred shares. The Series D financing transaction was a very recent market transaction, resulting in a better indicator of value than the Series C financing transaction, which took place in mid-2007. The Series D financing transaction involved a sale to existing investors, with the price per share determined after negotiations and discussions with potential third-party investors as to price and other terms of the financing.

Between September 2010 and December 2010, we again adjusted our revenue projections and associated cash flows downward primarily attributable to new market research we conducted, and also our belief that the capital markets remained constrained and that it would be difficult to raise the amount of capital needed to support our prior capital spending and commercialization projections. With less capital available, the number of sales representatives we would initially hire to sell our products would be reduced, as would the peak number of representatives we would hire, which would result in a lower revenue ramp upon launch of our product candidates, if approved, and lower peak revenue estimates. Our revenue projections were unchanged from December 2010 to March 2011.

In determining the fair value of our common stock, we conducted retrospective valuations using the approach mentioned above. A brief narrative of estimated fair value as of the date of the grant and the option exercise price is set forth below:

Year ended December 31, 2009. During this period we did not complete any significant company milestones. Most of the activity during this twelve month period centered around the regulatory, manufacturing and clinical activities necessary to prepare the NDA filing for DUEXIS, which was eventually filed in March 2010. Additionally, during this period macro-economic conditions continued to be difficult and deteriorate, making it very hard for private biotech companies to raise additional capital to fund their operations. Financings that closed during this period were at significant discounts to prior rounds of financing. In December 2009, we completed another convertible preferred stock financing at a significant discount to our prior round of financing to ensure we had the necessary capital resources to continue our regulatory filing activity. Options were granted in March, May, June and September of 2009, all with an exercise price of $13.47 per share. Our retrospective analysis indicates that the fair value on each of the grant dates was below the exercise price per share on date of grant due to lack of completion of significant milestones and the need to complete another convertible preferred stock financing to fund our operations at a valuation significantly below the prior convertible preferred stock financing.

Three months ended March 31, 2010. During this period, we filed an NDA with the FDA for DUEXIS, consummated our recapitalization and acquisition of Nitec and completed a concurrent convertible preferred stock financing. The acquisition and financing were completed the day after the first quarter ended March 31, 2010. The option awards granted during this period had an exercise price of $5.20 per share. We conducted a retrospective valuation analysis because there was a material change in our business which created incremental value during the three months ended March 31, 2010. The fair value of our common stock as of December 31,

2009 and April 1, 2010 was estimated at $5.20 and $12.94 per share, respectively. Based on a pro rata change in the fair value of our common stock between these valuation dates, the fair value of our common stock of $8.12 per share as of February 3, 2010 was used for accounting purposes. The value of $8.12 per share was determined appropriate for accounting purposes based on the pro rata change in fair value between the December 2009 and March 2010 valuation dates as there were no significant milestones achieved during the intervening period, other than the filing of our NDA for DUEXIS which occurred at the end of March 2010, and because capital market conditions were relatively the same during the period.

Three months ended June 30, 2010. During this period, we completed the Nitec acquisition and our Series B preferred stock financing on April 1, 2010. In addition, we undertook preparations for our proposed public offering, including interviewing numerous investment banks, holding an organization meeting, and beginning to draft a preliminary registration statement. In April 2010, we sold Series B preferred stock at $7.97 per share to existing investors. The Series B preferred stock has a liquidation preference of $7.97 per share, as well as a participation right feature that allows the preferred stock to receive both its liquidation preference and a pro-rata share of the remaining proceeds upon a sale of the company through a merger or acquisition. These two features make the preferred stock significantly more valuable than the common stock. As of April 1, 2010, if an initial public offering were completed, the preferred stock would be converted to common stock and have the same value per share as the common stock. However, if the company were sold prior to the completion of an initial public offering, the price per share paid for the Series B preferred stock could be up to $7.97 per share more than the price per share paid for common stock. As of April 1, 2010, we estimated the probability of a merger or acquisition at 41% and the probability of an initial public offering at 59%. As of June 30, 2010, our estimate of a merger or acquisition decreased to 33% and our estimate of the probability of an initial public offering increased to 67%. As of the June 30, 2010 valuation date, we estimated our BEV at an initial public offering as $333 million and we had 13,664,000 shares outstanding on a fully diluted basis. We also had an aggregate liquidation preference of $177 million at June 30, 2010. This yielded a common stock value of $23.62 per share in an initial public offering scenario and $10.68 per share in a merger or acquisition scenario, after allowing for payment of liquidation preferences and pro rata participation by the preferred stock and common stock in the remaining proceeds on an as converted to common stock basis. Applying the probabilities of 67% for an initial public offering and 33% for a merger or acquisition yielded weighted average common stock values of $15.95 per share and $3.47 per share for an initial public offering and merger or acquisition scenario, respectively, with a total weighted average common stock value of $19.42 per share. Applying a 16.5% discount rate for four months and a lack of marketability discount of 8% yielded a common stock value of $16.97 per share as of June 30, 2010.

The option awards granted during this period had an exercise price of $12.94 per share. In anticipation of a proposed initial public offering, and because we granted a significant amount of option awards during this period, we conducted a retrospective valuation analysis. The fair value of our common stock as of April 1, 2010 and June 30, 2010 was estimated at $12.94 and $16.97 per share, respectively. Based on a pro rata change in the fair value of our common stock between these valuation dates, the fair value of our common stock of $16.36 per share as of June 16, 2010 was used for accounting purposes.

Three months ended September 30, 2010. During this period we continued preparing for our proposed initial public offering as we filed an initial registration statement on Form S-1 on August 3, 2010 and filed a first amendment to the registration statement on September 16, 2010 to respond to comments we received from the Securities and Exchange Commission. As of September 30, 2010, we estimated the probability of a merger or acquisition at 15% and our estimate of the probability of an initial public offering increased to 85%. As of the September 30, 2010 valuation date, we estimated our BEV at an initial public offering to be $350 million and we had approximately 13,681,000 shares outstanding on a fully diluted basis. We also had an aggregate liquidation preference of $177 million at September 30, 2010. This yielded a common stock value of $24.48 per share in an initial public offering scenario and $11.54 per share in a merger or acquisition scenario, after allowing for payment of liquidation preferences and pro rata participation by the preferred stock and common stock in the remaining proceeds on an as converted to common stock basis. Applying the probabilities of 85% for an initial public offering and 15% for a merger or acquisition yielded weighted average common stock values of $20.80 per share and $1.73 per share for an initial public offering and merger or acquisition scenario,

respectively, with a total weighted average common stock value of $22.53 per share. Applying a 15.5% discount rate for three months and a lack of marketability discount of 4% yielded a common stock value of $20.77 per share as of September 30, 2010.

The option awards granted during this period had an exercise price of $16.98 per share. The fair value of our common stock as of June 30, 2010 and September 30, 2010 was estimated at $16.97 and $20.77 per share, respectively. Based on a pro rata change in the fair value of our common stock between these valuation dates, the fair value of our common stock of $20.49 per share as of the September 23, 2010 option grant date was used for accounting purposes.

Three months ended December 31, 2010. During this period we filed our MAA in selected European countries requesting approval to market DUEXIS, we received an upfront payment of less than $5.0 million for the commercialization of LODOTRA in certain Asian countries which we will recognize as deferred revenue over an extended period of time, and continued preparing for our proposed initial public offering, including the filing of additional amendments to our initial registration statement on Form S-1. As of the December 31, 2010 valuation date, we estimated our BEV at an initial public offering to be $277 million. Using an option pricing model consistent with prior periods, a discount rate of 17.5% and a lack of marketability discount of 10%, we estimated our common stock value at $17.21 per share at December 31, 2010. We believed that if we were to receive FDA approval of DUEXIS in April 2011, we could potentially complete an initial public offering in the second quarter of 2011, which timeframe we used to determine the volatility of our peer group of companies in our pricing model, and to determine the lack of marketability discount of our common stock. If we did not receive FDA approval, we believed that in an alternative merger or acquisition scenario, proceeds for the common stockholders would be significantly less than in an initial public offering scenario given the $177 million liquidation preference to be paid first to our preferred stockholders. We were unable to reliably estimate either an initial public offering price or probability, given continued volatility of the market conditions and the small number of recently completed initial public offerings. We estimated a possible initial public offering price of $19.11 per share and a possible initial public offering probability of 90%. Using these assumptions, our estimate of the probability weighted value of the common stock was approximately $19.11 multiplied by 90%, or $17.21 per share.

The option awards granted during this period had an exercise price of $20.78 per share and the estimated fair value of our common stock as of December 31, 2010 was $17.21 per share. For accounting purposes, the estimated fair value of $17.22 was used for options granted in December 2010.

Three months ended March 31, 2011. During this period, we continued preparing for our proposed initial public offering by filing an additional amendment to our registration statement on Form S-1. As of the March 31, 2011 valuation date, we estimated our BEV at an initial public offering to be $288 million. Using an option pricing model consistent with prior periods, a discount rate of 17.5% and a lack of marketability discount of 6%, we estimated our common stock value at $18.52 per share at March 31, 2011. We believed that if we were to receive FDA approval of DUEXIS in April 2011, we could potentially complete an initial public offering in the second quarter of 2011. If we did not receive FDA approval, we believed that in an alternative merger or acquisition scenario, proceeds for the common stockholders would be significantly less than in an initial public offering scenario given the $177 million liquidation preference to be paid first to our preferred stockholders. We were unable to reliably estimate either an initial public offering price or probability, given continued volatility of the market conditions and the small number of recently completed initial public offerings. We estimated a possible initial public offering price of $20.58 per share and a possible initial public offering probability of 90%. Using these assumptions, our estimate of the probability weighted value of the common stock was approximately $20.58 multiplied by 90%, or $18.52 per share.

The option awards granted during this period had an exercise price of $17.22 per share and the estimated fair value of our common stock as of March 31, 2011 was $18.52 per share. For accounting purposes, the estimated fair value of $18.52 was used for options granted in March 2011.

The table below summarizes options granted from January 1, 2009 through May 31, 2011 and options outstanding as of March 31, 2011.

The options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled in connection with our acquisition of Nitec.

In the second quarter of 2011, we believed we were closer to completing a potential initial public offering and had engaged in extensive discussions with the underwriters regarding the current state of the U.S. capital markets and the difficulties of other biotechnology companies in completing initial public offerings. Based on these discussions, we estimated that the price per share in our initial public offering would be between $10.00 and $12.00 per share. The mid-point of the estimated price per share for this offering of $11.00 per share represents a decrease of approximately 35.2%, 47.0%, 36.1% and 40.6% in the estimated value of our common stock of $16.97 at June 30, 2010, $20.77 at September 30, 2010, $17.21 at December 31, 2010 and $18.52 at March 31, 2011, respectively. The difference between the estimated price per share in this offering and the estimated price per share of our common stock at the prior valuation dates is due to the recent extreme volatility of the capital markets and the recent difficulty of biotechnology companies in particular in completing initial public offerings in the current market environment. We do not believe our estimate of the price per share in this offering reflects any reduction in our BEV subsequent to March 31, 2011, and we do not believe any such reduction has occurred, due in part to the fact that we received approval from the FDA to market DUEXIS in April 2011.

Freestanding warrants to purchase shares of our convertible preferred stock that contain net share settlement features requiring us to settle the warrants based on a fixed monetary amount known at inception and that require us to issue a variable number of shares in the future are classified as liabilities on our consolidated balance sheets at fair value. Our warrants are also classified as liabilities when they conditionally obligate us to redeem the underlying convertible preferred stock at some point in the future. The fair value of the warrants is subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense), net in the consolidated statements of operations. We estimate the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model. We use a number of assumptions to estimate the fair value including the remaining contractual terms of the warrant, risk-free interest rates and expected dividend yield and expected volatility of the price of the underlying common stock. These assumptions are highly judgmental and could differ significantly in the future.

Between October 2008 and October 2009, in connection with our issuance of convertible promissory notes, we issued warrants to purchase our capital stock, or the bridge warrants. The bridge warrants were exercisable for a number of shares of our capital stock to be determined based on the number and type of shares into which the corresponding convertible promissory notes were converted in the future. At December 31, 2009, in connection with the issuance of Series D convertible preferred stock (upon which the bridge warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price), the aggregate fair value of the bridge warrants was reclassified from liabilities to equity and we discontinued recording related periodic fair value adjustments. It is anticipated that upon the completion of this offering all of these warrants will be adjusted to become warrants to purchase common stock.

For the years ended December 31, 2008 and 2009, we recorded income (charges) of $(0.1) million and $0.5 million, respectively, through other income (expense), net to reflect the change in the fair value of the warrants. As the warrants were reclassified from liabilities to equity at the end of 2009, no income (charges) were recorded for the year ended December 31, 2010 and for the three months ended March 31, 2011.

Revenues and Gross Profit (Loss). During the three months ended March 31, 2011, we recognized revenues of $1.8 million, substantially all of which was from the sale of LODOTRA in Europe. Our cost of goods sold during the three months ended March 31, 2011 was $1.8 million, including $0.9 million of amortization of developed technology. As a result, we had a gross loss of $46,000 during this period. We had no revenue or cost of goods sold prior to our acquisition of Nitec on April 1, 2010.

Research and Development Expenses. The decrease in research and development expenses during the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to a decrease of $0.4 million in regulatory consultant expenses and a decrease of $0.3 million for contract manufacturing and pharmacovigilence studies for DUEXIS. The decrease was partially offset by increases of $0.6 million of personnel costs resulting from increased headcount from the Nitec acquisition.

Sales and Marketing Expenses. The increase in sales and marketing expenses during the three months ended March 31, 2011, compared to the same period in 2010, was due to an increase of $0.6 million in personnel-related costs and $0.2 million of increased spending associated with commercialization activities for LODOTRA in Europe, primarily attributable to our acquisition of Nitec and pre-commercialization activities for DUEXIS and LODOTRA in the U.S.

General and Administrative Expenses. The decrease in general and administrative expenses during the three months ended March 31, 2011, compared to the same period in 2010, was primarily due to a decrease of $2.2 million of acquisition-related expenses, which consisted of $1.1 million for investment banking fees and $1.1 million for legal and consulting fees in the first quarter of 2010, and a decrease of $0.3 million related to the preparation of our initial public offering for audit and consulting fees, and was partially offset by an increase of

$0.8 million in personnel costs resulting from higher headcount attributable to the acquisition of Nitec, and an increase of $0.4 million for other consulting fees and travel and office expenses related to the building of our corporate infrastructure.

Interest Expense. The net increase of $1.0 million in interest expense during the three months ended March 31, 2011, compared to the same period in 2010, was due to $0.9 million of incremental interest expense under an existing 7.5 million Euro debt facility between Kreos and Nitec, which we refer to as the Kreos facility, and a new debt facility with Kreos and SVB allowing borrowings of up to $12.0 million, which we refer to as the Kreos-SVB facility, and an increase of $0.4 million for interest expense related to the 2010 notes and January 2011 notes, and was partially offset by a reduction of $0.3 million in interest expense associated with a debt facility with Hercules Technology Growth Capital and Comerica Bank, which we refer to as the Hercules facility, which was repaid on April 1, 2010.

Foreign Exchange Gain. The $0.4 million foreign exchange gain for the three months ended March 31, 2011 was primarily a result of the decrease in value of the U.S. dollar against the Euro in connection with translating foreign currency transactions during the three months ended March 31, 2011.

Revenue and Gross Profit (Loss). During the year ended December 31, 2010, we recognized revenue of $2.4 million from the sale of LODOTRA in Europe. We had no revenue prior to our acquisition of Nitec on April 1, 2010. Our cost of goods sold during the year ended December 31, 2010 was $4.3 million, including $2.6 million of amortization of developed technology. As a result, we had a gross loss of $1.9 million during this period.

Research and Development Expenses. The increase in research and development expenses during the year ended December 31, 2010, compared to the same period in 2009, was primarily due to a $2.8 million increase in personnel-related costs due to the acquisition of Nitec and increase in headcount to support DUEXIS development activities, an increase of $1.4 million for manufacturing expenses, including payments made to sanofi-aventis U.S. LLC under the Technical Transfer Agreement dated November 9, 2009, between us and sanofi-aventis U.S. and an increase of $2.7 million for expenses associated with regulatory activities.

Sales and Marketing Expenses. The increase in sales and marketing expenses during the year ended December 31, 2010 compared to the same period in 2009 was due to an increase of $1.2 million in personnel-related costs and $2.2 million of increased spending associated with commercialization activities for LODOTRA in Europe and market research and pre-commercialization activities for DUEXIS and for LODOTRA in the U.S. Sales and marketing expenses as a whole increased during 2010 due to our acquisition of Nitec in April 2010.

General and Administrative Expenses. The increase in general and administrative expenses during the year ended December 31, 2010, compared to the same period in 2009, was primarily due to an increase of

$3.0 million for acquisition-related expenses, which consisted of $1.1 million for investment banking fees and $1.9 million for legal and consulting fees, an increase of $4.0 million related to the preparation of our initial public offering for legal, audit and consulting fees, an increase of $2.5 million related to personnel costs resulting from higher headcount attributable to the acquisition of Nitec, and an increase of $2.9 million for other consulting fees and travel and office expenses related to the building of our corporate infrastructure.

Interest Income. Interest income during the year ended December 31, 2010 compared to 2009 was relatively unchanged.

Interest Expense. The net increase of $0.8 million in interest expense during the year ended December 31, 2010, compared to the same period in 2009, was due to $2.2 million of incremental interest expense under the Kreos facility and the Kreos-SVB facility, and an increase of $0.5 million for interest expense related to the 2010 notes, offset by a reduction of $1.4 million in interest expense associated with the convertible promissory notes that were converted to convertible preferred stock in December 2009, and a $0.5 million decrease in interest expense associated with the Hercules facility which was subsequently retired.

Bargain Purchase Gain. The bargain purchase gain of $19.3 million was recognized in connection with the Nitec acquisition as a result of the fair market value of the acquired tangible and intangible assets exceeding the purchase price.

Other Income (Expense), Net. The $0.5 million in other income, net for the year ended December 31, 2009 was primarily related to the change in the fair value of convertible preferred stock warrants. At December 31, 2009, in connection with the issuance of our Series D convertible preferred stock (upon which the bridge warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price), the aggregate fair value of the bridge warrants was reclassified from liabilities to equity and the periodic fair value adjustments were discontinued.

Foreign Exchange Loss. The $0.3 million foreign exchange loss for the year ended December 31, 2010 was primarily a result of the increase in value of the U.S. dollar against the Euro in connection with translating foreign currency transactions during the year ended December 31, 2010.

Research and Development Expenses. The decrease in research and development expenses for the year ended December 31, 2009, compared to the year ended December 31, 2008, was primarily due to a decrease of $14.2 million in clinical trial expenses and related consulting fees as Phase 3 clinical trials for DUEXIS were completed in November 2008. The decrease was offset by increases of $1.0 million for pharmacovigilance studies associated with DUEXIS, $1.0 million for regulatory consulting and legal fees, $0.5 million for manufacturing costs and $0.4 million in personnel costs resulting from increased headcount.

Sales and Marketing Expenses. The increase of $0.7 million in sales and marketing expenses for the year ended December 31, 2009, compared to the year ended December 31, 2008, was primarily due to $0.5 million of additional spending related to our participation in tradeshows and conferences and a $0.2 million increase in other pre-launch marketing related activities.

General and Administrative Expenses. The increase in general and administrative expenses for the year ended December 31, 2009, compared to the year ended December 31, 2008, was primarily due to an increase of $1.0 million in personnel costs related to increased headcount, an increase of $0.8 million for consulting fees associated with information technology, business development and finance, an increase of $0.5 million for legal expenses and a $0.3 million increase due to facility and other expenses.

Interest Income. The higher interest income in the year ended December 31, 2008, compared to the year ended December 31, 2009, was due primarily to higher cash balances related to the $10.0 million proceeds received under the Hercules facility, and $8.0 million of proceeds from the sale and issuance of convertible promissory notes in October 2008, which we refer to as the bridge notes.

Interest Expense. Interest expense increased for the year ended December 31, 2009, compared to the year ended December 31, 2008, due to an increase in interest of $1.1 million under the bridge notes and an increase of $0.2 million for interest expense under the Hercules facility.

Other Income (Expense), Net. The increase in other income, net for the year ended December 31, 2009, compared to other expense for the year ended December 31, 2008, is primarily related to the change in the fair value of the convertible preferred stock warrants which amounted to $0.5 million of other income and a $0.4 million impairment loss associated with manufacturing equipment recorded in the 2008 period.

We have incurred losses since our inception in June 2005 and, as of March 31, 2011, we had an accumulated deficit of $114.7 million. We anticipate that we will continue to incur net losses for at least the next several years. We expect that our development, selling, marketing and general and administrative expenses will continue to increase as a result of our acquisition of Nitec as of April 1, 2010, and our development and commercialization of DUEXIS and LODOTRA and, as a result, we will need to generate significant net product sales, and royalty and other revenues to achieve profitability.

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2010 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements.

We have financed our operations to date through equity financings, debt financings and the issuance of convertible notes. As of March 31, 2011, we had $2.6 million in cash and cash equivalents. In April 2011, we raised $1.7 million from the issuance of subordinated convertible promissory notes, and in June 2011, we borrowed $17.0 million under a new debt facility, a portion of which was used to repay an existing debt facility. At July 1, 2011, we had $4.9 million in cash and cash equivalents.

In connection with our acquisition of Nitec in April 2010, we entered into the Kreos-SVB facility and borrowed the $7.0 million then-available under a total facility of $12.0 million. In September 2010, we borrowed the remaining $5.0 million. As of March 31, 2011, we had an outstanding balance of $9.1 million under the Kreos-SVB facility. The initial $7.0 million of proceeds of the Kreos-SVB facility were used to repay all outstanding amounts under a prior debt facility and the subsequent $5.0 million of proceeds are being used to fund our operations. In connection with the Kreos-SVB facility, we issued warrants to Kreos and SVB to purchase an aggregate of 150,602 shares of Series B convertible preferred stock. The warrants have an exercise price of $0.01 per share and expire on April 1, 2020 unless terminated earlier as a result of certain reorganizations or changes in control as set forth in the warrants. In June 2011, in connection with the Oxford facility described below, we repaid all $8.5 million due under the Kreos-SVB facility, which included $7.8 million of principal, $0.5 million of interest and $0.2 million of end of loan fees.

In connection with our acquisition of Nitec, we also renegotiated the payment terms of Nitec’s outstanding Kreos facility. The Kreos facility is secured by a lien on all of Horizon Pharma AG’s trade receivables and intellectual property. Upon completion of this offering, assuming we receive gross proceeds of not less than

$50.0 million, the lien on the intellectual property securing the Kreos facility will be released. The loan bears interest at 11.9% per annum. We were required to pay only interest on the Kreos facility through December 31, 2010 and are currently required to pay equal monthly installments of principal and interest through November 2013. In June 2011, in connection with the Oxford facility described below, we paid Kreos $1.4 million (1.0 million Euros) in exchange for Kreos’ consent to a partial assignment of the Kreos facility to Horizon Pharma, Inc. As a result, Horizon Pharma, Inc. is now a co-lender with Kreos to Horizon Pharma AG.

Through March 31, 2011, we have received net proceeds of $96.4 million from the issuance of convertible preferred stock as follows: in October 2005, we issued an aggregate of 1,192,118 shares of Series A convertible preferred stock at a purchase price of $5.075 per share, for net proceeds of approximately $6.0 million; in November 2006, we issued an aggregate of 1,482,213 shares of Series B convertible preferred stock at a purchase price of $10.12 per share, for net proceeds of approximately $14.9 million; in July 2007, we issued an aggregate of 2,109,706 shares of Series C convertible preferred stock at a purchase price of $14.22 per share, for net proceeds of approximately $29.9 million and in December 2009 and January 2010, we issued an aggregate of 4,978,674 shares of Series D convertible preferred stock at a purchase price of $5.201 per share, for net proceeds of approximately $25.8 million.

As of April 1, 2010, we recapitalized all of our outstanding shares of Series A, B, C and D convertible preferred stock, and converted those shares into a new Series A convertible preferred stock in connection with our recapitalization and acquisition of Nitec. We also concurrently completed a Series B convertible preferred stock financing in which we issued an aggregate of 2,510,040 shares of Series B convertible preferred stock at a purchase price of $7.968 per share, raising net proceeds of $19.8 million.

In July 2010, January 2011 and April 2011, we issued the 2010 notes, the January 2011 notes and the April 2011 notes, respectively, to holders of our Series B convertible preferred stock in accordance with our Series B Preferred Stock and Convertible Note Purchase Agreement dated April 1, 2010. The 2010 notes, the January 2011 notes and the April 2011 notes accrue interest at a rate of 10% per annum and have a maturity date of the earliest of August 12, 2011, January 7, 2012, and April 25, 2012, respectively, or the date we sell all or substantially all of our assets or we are acquired. The 2010 notes, the January 2011 notes and the April 2011 notes are expected to convert to shares of our common stock upon completion of this offering at a conversion rate that is the lower of (1) the price per share to the public of our common stock sold in this offering or (2) $18.92. Upon completion of this offering, we expect all of the outstanding shares of our Series A and Series B convertible preferred stock to convert into common stock and all of our outstanding warrants to be adjusted to be exercisable for shares of our common stock.

In June 2011, we entered into the Oxford facility and borrowed the full $17.0 million available under this facility. The debt under the Oxford facility accrues interest at a fixed rate of 11.5% per annum, with interest only payments through June 1, 2012, followed by 36 equal monthly installments of principal and interest. The Oxford facility is secured by a lien on substantially all of our assets and those of Horizon Pharma USA, including intellectual property, but excluding the shares of Horizon Pharma AG. If we generate an annualized revenue run rate of at least $45.0 million over three consecutive months from DUEXIS product sales, the lien on the assets may be released with the consent of the lenders, provided we are not in default under the Oxford facility. With the loan proceeds, we repaid all $8.5 million (including principal and interest) due under the Kreos-SVB facility. We also paid Kreos $1.4 million (1.0 million Euros) and Horizon Pharma, Inc. assumed from Kreos a like amount of debt under the Kreos facility (becoming a co-lender with Kreos to Horizon Pharma AG), as partial consideration for Kreos’ consent to enter into the Oxford facility. The remaining loan proceeds of $6.9 million (net of $0.2 million loan fees) are being used to fund our operations. In connection with the Oxford facility, we issued warrants to Oxford and SVB to initially purchase an aggregate of 80,007 shares of our Series B convertible preferred stock which will become warrants to purchase an aggregate number of shares of our common stock equal to (1) $637,500 divided by (2) the lower of the price per share to the public of our common stock sold in this offering or $18.92. The warrants will have a per share exercise price that is the lower of (1) the price per share to the public of our common stock sold in this offering or (2) $18.92. The warrants will expire on June 2, 2021, unless terminated earlier as a result of certain reorganizations or changes in control as set forth in the warrants. We also issued a warrant to Kreos to purchase an aggregate of 100,000 shares of our

Series B convertible preferred stock with an exercise price of $0.01 per share, which will expire on June 2, 2021 unless earlier terminated as a result of certain acquisitions or changes in control, as partial consideration for Kreos’ consent to enter into the Oxford facility.

The Oxford facility and the Kreos facility restricts our ability to incur additional indebtedness, incur liens, pay dividends and engage in significant business transactions, such as a change of control, so long as we owe any amounts to the lenders under the related loan agreements. If we default under our debt facilities, our lenders may accelerate all of our repayment obligations and take control of our pledged assets. Our lenders could declare a default under our debt facilities upon the occurrence of any event that the lenders interpret as having a material adverse effect upon us as defined under the loan agreements, thereby requiring us to repay the loans immediately or to attempt to reverse the lenders’ declaration through negotiation or litigation.

Cash in excess of our immediate requirements is either held as cash or in money market funds.

In addition, we must maintain compliance with Swiss laws with respect to our Horizon Pharma AG subsidiary, including laws requiring maintenance of equity in the subsidiary to avoid overindebtedness, which requires Horizon Pharma AG to maintain assets in excess of its liabilities. We review on a regular basis whether our Swiss subsidiary is overindebted, and we took steps to address overindebtedness through a subordinated loan to our Swiss subsidiary in June 2010. Our Swiss subsidiary was also overindebted as of December 31, 2010 and March 31, 2011 and we are in the process of taking further steps to address the overindebtedness. We may need to continue taking steps to address overindebtedness until such time as our Swiss subsidiary generates positive income at a statutory level, which could cause us to have cash at our Swiss subsidiary in excess of its near term operating needs, including a portion of our net proceeds from this offering, and could affect our ability to have sufficient cash at our U.S. subsidiary to meet its near term operating needs.

The following table shows a summary of our cash flows for the periods indicated (in thousands) :

Net cash used in operating activities. During 2008, 2009, 2010 and the three months ended March 31, 2010 and 2011, our operating activities used cash of $24.0 million, $18.4 million $37.5 million, $4.8 million and $6.5 million, respectively. The use of cash in all periods primarily resulted from our net losses and changes in our working capital accounts. The cash used decreased from 2008 through 2009 due to Phase 3 clinical trial activities that declined as we completed those trials and transitioned to a company more focused on regulatory and manufacturing activities in preparation for the submission of our NDA for DUEXIS with the FDA. The changes in operating assets and liabilities were primarily a result of preclinical and clinical trial costs, personnel-related costs and professional fees.

The increase in cash used in operations during the year ended December 31, 2010 as compared to December 31, 2009 was primarily due to incremental operating costs of our subsidiary, Horizon Pharma AG, related to regulatory activities for LODOTRA, increases in general and administrative expenses related to investment banking fees and professional fees associated with the acquisition of Nitec, increased expenses indirectly related to the preparation of our initial public offering, and increased regulatory and manufacturing expenses in preparation for the submission for our NDA for DUEXIS, offset by decreased clinical trial expenses in 2010. The changes in operating assets and liabilities were primarily a result of clinical trial costs, regulatory consulting, personnel-related costs and professional fees associated with the acquisition of Nitec.

The increase in cash used in operations during the three months ended March 31, 2011, as compared to March 31, 2010, was primarily due to incremental operating costs of our subsidiary, Horizon Pharma AG,

which we acquired in April 2010, including expenses related to regulatory activities for LODOTRA, increased regulatory and manufacturing expenses for DUEXIS and LODOTRA, increased spending associated with commercialization activities for LODOTRA in Europe and pre-commercialization activities for DUEXIS and LODOTRA in the U.S., increased personnel costs due to higher headcount and increased interest expense paid in connection with the Kreos facility and the Kreos-SVB facility, offset by decreases in general and administrative expenses related to investment banking fees and professional fees associated with the acquisition of Nitec.

Net cash (used in) provided by investing activities. Net cash used in investing activities during 2008, 2009 and 2010 was primarily related to the purchase of property and equipment, partially offset by the proceeds from the sale of manufacturing equipment. The increase in cash provided by investing activities in the year ended December 31, 2010 compared to 2008 and 2009 was primarily due to $6.5 million of cash acquired in the Nitec acquisition.

Net cash provided by financing activities. Net cash provided by financing activities was primarily attributable to proceeds from debt financing in the year ended December 31, 2008, the issuance of Series D convertible preferred stock of $7.0 million and proceeds from the issuance of notes payable to related parties of $9.0 million, net of repayments made on outstanding loan amounts of $4.2 million in the year ended December 31, 2009, and the issuance of Series B convertible preferred stock of $20.7 million, proceeds from a debt financing of $12.0 million and proceeds from the issuance of 2010 notes payable to related parties of $10.0 million, net of repayments made on outstanding loan amounts of $11.0 million and deferred financing expenses related to our potential initial public offering of $1.9 million in the year ended December 31, 2010. Net cash provided by financing activities in the three months ended March 31, 2011 was primarily attributable to proceeds from the issuance of the January 2011 notes in the aggregate principal amount of $5.0 million, net of repayments made on outstanding loan amounts of $1.3 million. Net cash used in financing activities in the three months ended March 31, 2010 was attributable to repayments made on outstanding loan amounts.

The following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of December 31, 2010 and March 31, 2011 (in thousands including notes):

We have incurred net operating losses and negative cash flows from operations during every year since inception. These factors raise substantial doubt about our ability to continue as a going concern. In order to continue our operations, we must achieve profitable operations and/or obtain additional debt or equity financing. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to us or at all.

We are working toward our objective of realizing revenues and then profitability by commercializing DUEXIS in the U.S. and obtaining regulatory approval to commercialize LODOTRA in the U.S. The failure to successfully launch DUEXIS in the U.S. or to obtain regulatory approvals for DUEXIS in Europe and LODOTRA in the U.S. and to commercialize these products in a manner that maximizes our potential sales or at all could have a material adverse effect on our business, results of operations, future cash flows, financial condition and our ability to continue as a going concern.

We anticipate we will continue to incur net losses for at least the next several years as we incur expenses as we build commercial capabilities and launch DUEXIS in the U.S., pursue the development and regulatory approval of DUEXIS in Europe and LODOTRA in the U.S. and expand our corporate infrastructure. We may not be able to launch and commercialize DUEXIS in the U.S. in an optimal manner if we do not have sufficient working capital and we may not be able to complete the development and initiate commercialization of these programs if, among other things, the MAA for DUEXIS or our planned NDA for LODOTRA is not approved when we expect, or at all.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations into the second quarter of 2012. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

The net proceeds from this offering alone may not be sufficient to fund our operations through the successful commercialization of DUEXIS and development and commercialization of LODOTRA (if approved) in the U.S. or any other products we develop on our own or in-license. As a result, we may need to raise additional capital following this offering to fund our operations and to potentially conduct clinical trials to support regulatory approval of any other product candidates. To raise additional capital, we may seek to sell additional equity or debt securities or incur additional indebtedness. The sale of additional equity and debt securities may

result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may also seek funding through collaborations or other similar arrangements with third parties.

If we are unable to raise sufficient additional capital, we may need to substantially curtail our planned operations. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.”

Because of the numerous risks and uncertainties associated with development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. We will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The adoption of this update did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued amended guidance on fair value measurements and disclosures. The new guidance requires additional disclosures regarding fair value measurements, amends disclosures about postretirement benefit plan assets, and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, we adopted this amendment on January 1, 2010, except for the additional Level 3 requirements which were adopted in 2011 without any material impact on our consolidated financial statements.

In April 2010, the FASB issued an accounting standard update which provides guidance on the criteria to be followed in recognizing revenue under the milestone method. The milestone method of recognition allows a vendor who is involved with the provision of deliverables to recognize the full amount of a milestone payment upon achievement, if, at the inception of the revenue arrangement, the milestone is determined to be substantive as defined in the standard. The guidance is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those fiscal years, beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign exchange fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk. Our exposure to interest rate risk is confined to our cash and cash equivalents with maturities of less than three months. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash. To achieve our goal of maximizing income without assuming significant risk, we maintain our excess cash and cash equivalents in money market funds. Because of the short-term maturities of our cash equivalents, we do not believe that an increase in interest rates would have any material negative impact on the value of cash equivalents.

Foreign Currency Risk. Our sales contracts relating to LODOTRA, our only product that is currently commercialized, are principally denominated in Euros and therefore, until we derive material revenues from sales of DUEXIS and, if approved, LODOTRA, in the U.S., our revenues will be subject to significant foreign currency risk. We will also incur certain operating expenses in currencies other than the U.S. dollar in relation to Horizon Pharma AG; therefore, we will be subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes in the Euro. To date, we have not entered into any hedging contracts since exchange rate fluctuations have had minimal impact on our results of operations and cash flows.

Inflation Risk. We do not believe that inflation has had a material impact on our business or results of operations during the periods presented in this prospectus.

LODOTRA, a proprietary programmed release formulation of low-dose prednisone, has received regulatory approval in Europe for the treatment of moderate to severe, active RA in adults when accompanied by morning stiffness. Prednisone is a drug used to inhibit the production of various pro-inflammatory cytokines, which are proteins associated with joint inflammation in RA. We believe current formulations of prednisone are suboptimal because they fail to deliver the drug at the time of most need for RA patients. LODOTRA utilizes a proprietary formulation technology which enables a programmed release of prednisone approximately four hours after bedtime administration. By synchronizing the prednisone delivery time with the patient’s elevated cytokine levels in the early morning hours, LODOTRA exerts its effect at a physiologically optimal point to inhibit cytokine production and thus significantly reduces the signs and symptoms of RA. We have completed two pivotal Phase 3 clinical trials of LODOTRA in a total of over 600 patients with RA. The first pivotal Phase 3 trial supported the approval of LODOTRA in Europe in March 2009 where it is currently approved for marketing in 14 European countries. The second pivotal Phase 3 clinical trial was designed to support an NDA submission for U.S. marketing approval. LODOTRA achieved statistically significant results and met the primary endpoint in each of the two pivotal Phase 3 clinical trials.

focused inhibitor of certain well-characterized genes (NF-kB and AP-1), for the treatment of pain-related diseases. We also anticipate we will continue investigating HZN-602, a novel, prescription strength fixed-dose combination of immediate release naproxen, a widely prescribed NSAID, and famotidine in a single pill, for the treatment of mild to moderate pain and arthritis. We are currently evaluating the development pathway for these product candidates, but do not intend to develop them further until such time as we generate sufficient cash from our operations or other sources.

Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of DUEXIS, which received FDA approval in April 2011, and, if approved by the FDA, LODOTRA in the U.S. market. We retain all U.S. commercialization rights for our products and have begun to build an internal sales and marketing organization, to be comprised initially of approximately 75 sales representatives, to market these products in the U.S. to key specialists, such as rheumatologists, orthopedic surgeons and pain specialists, and top prescribing primary care physicians. We also plan to explore co-promotion opportunities in the U.S. with companies that have appropriate commercial platforms in our key markets. We intend to enter into licensing or additional distribution arrangements for commercialization of our products outside the U.S., such as our relationship with Mundipharma for the commercialization of LODOTRA in Europe and Asia. As part of our longer-term strategy, we anticipate we will further develop our product candidates and selectively license or acquire additional products and/or late stage product candidates that are synergistic with our commercial strategy.

Some of the most common and debilitating chronic inflammation and pain-related diseases are OA, RA and acute and chronic pain. According to National Health Interview Survey data analyzed by the Centers for Disease Control and Prevention, 50 million U.S. adults 18 years of age and over had reported being diagnosed with some form of arthritis. With the aging of the U.S. population, the prevalence of arthritis is expected to rise by approximately 40% by 2030, impacting 67 million people in the U.S. People with these diseases may become increasingly debilitated as the disease progresses, experiencing not only significant pain but also loss of mobility, independence and the ability to work, thereby potentially placing a significant burden on family caregivers and healthcare and social services. In addition, patients suffering from chronic inflammatory diseases tend to have shortened life expectancies as a direct result of these diseases. According to the American Pain Foundation Fact Sheet and the U.S. Centers for Disease Control and Prevention:

In addition, the Arthritis Foundation reports 992,000 hospitalizations and 44 million office visits in the U.S. annually for arthritis alone.

OA is a type of arthritis that is caused by the breakdown and eventual loss of the cartilage of one or more joints. Cartilage is a protein substance that serves as a cushion between the bones of the joints. OA is also known as degenerative arthritis. Among the over 100 different types of arthritis conditions, OA is the most common and occurs more frequently with age. Before age 45, OA occurs more frequently in males. After age 50, it occurs more frequently in females. OA commonly affects the hands, feet, spine and large weight-bearing joints, such as the hips and knees. Most cases of OA have no known cause and are referred to as primary OA.

Symptoms of OA manifest in patients as joint pain, tenderness, stiffness, limited joint movement, joint cracking or creaking (crepitation), locking of joints and local inflammation. OA can also lead to joint deformity in later stages of the disease. Many drugs are now used to treat the inflammation and pain associated with OA, including aspirin and other NSAIDs, such as ibuprofen and naproxen, that have a rapid analgesic and anti-inflammatory response.

RA is a chronic disease that causes pain, stiffness and swelling, primarily in the joints. According to DataMonitor, RA affects approximately 1.8 million patients in the U.S. and has no known cause, but unlike OA, RA is not associated with factors such as aging. RA occurs when the body’s immune system malfunctions, attacking healthy tissue and causing inflammation, which leads to pain and swelling in the joints, and may eventually cause permanent joint damage and painful disability. The primary symptoms of RA include progressive immobility and pain, especially in the morning, with long-term sufferers experiencing continual joint destruction for the remainder of their lives. There is no known cure for RA. Once the disease is diagnosed, treatment is prescribed for life to alleviate symptoms and/or to slow or stop disease progression.

RA treatments include medications, physical therapy, exercise, education and sometimes surgery. Early, aggressive treatment of RA can delay joint destruction. Treatment of RA usually includes multiple drug therapies taken concurrently. Disease modifying antirheumatic drugs, or DMARDs, are the current standard of

care for the treatment of RA, in addition to rest, strengthening exercise, and anti-inflammatory drugs such as NSAIDs, which are also often prescribed. Methotrexate is the most commonly prescribed DMARD for the treatment of RA. Other common agents for the treatment of RA include corticosteroids and biologic agents. Corticosteroids, such as prednisone, effectively reduce joint swelling and inflammation but at high doses are associated with potential for significant long-term adverse side effects such as osteoporosis, cardiovascular disease and weight gain. Over the last decade, the advent of biologic agents has transformed the treatment of RA. Tumor necrosis factor, or TNF, inhibitors are the primary biologic agents used today to treat RA. Although effective for treatment of RA, these agents are costly and, because they are very potent immunosuppressants, may increase the risk of infection.

RA has the potential to cause serious damage to joints and bones and, as such, physicians typically treat patients aggressively, including with combination therapies to reduce pain and inflammation and to slow the progression of the disease. Recent research sponsored by Mundipharma and conducted by Ipsos MORI involving 750 RA patients from 11 European countries found that 60% of surveyed patients with RA indicated that pain and morning stiffness controls their lives. Additionally, 74% of people with pain and morning stiffness as a result of their RA indicated that they are either unemployed, retired early or are on sick leave as a result of RA and 58% say they are frustrated emotionally because they find it difficult to do everyday tasks due to morning stiffness caused by their RA.

Mild to moderate pain is generally characterized as either acute or chronic. Acute pain often results from tissue damage, such as a broken bone. Acute pain can also be associated with headaches or muscle cramps. This type of pain usually decreases as the injury heals or the cause of the pain is removed. Pain is generally considered acute if it dissipates within six months of onset. Chronic pain includes pain that persists after an injury heals, pain related to a persistent or degenerative disease and long-term pain from an unidentifiable cause. Chronic pain may be caused by the body’s response to acute pain or may have unknown causes. According to the American Pain Foundation, 44% of pain sufferers 20 years of age and over in the U.S. report pain that lasts up to three months (over 30 million people), 14% report pain lasting for three months to one year (approximately 11 million people) and 42% report pain lasting more than one year (approximately 32 million people). About one-third of people who report pain indicate that their pain is disabling, which is defined as both severe and having a high impact on functions of daily life.

However, even if the underlying disorder can be treated, analgesics such as NSAIDs may still be needed to manage the pain. Physicians choose an analgesic based on the type and duration of pain and on the likely benefits and risks. Most analgesics are effective for treatment of pain due to ordinary injury of tissues (nociceptive pain) but are less effective for treatment of pain due to damage or dysfunction of the nerves, spinal cord, or brain (neuropathic pain). Common analgesics to treat acute and chronic pain are opioid (narcotic) analgesics and nonopioid analgesics, such as acetaminophen and NSAIDs.

DUEXIS is a novel single tablet formulation containing a fixed-dose combination of ibuprofen, one of the most widely prescribed NSAIDs, and famotidine, a well-established GI agent used to treat dyspepsia, GERD and active ulcers. Ibuprofen has proven anti-inflammatory and analgesic properties, and famotidine reduces the stomach acid secretion that can cause upper GI ulcers. Both ibuprofen and famotidine have well-documented and excellent long-term safety profiles, and both products have been used for many years by millions of patients worldwide. Based on our clinical study results, we believe DUEXIS provides effective pain relief and decreases stomach acidity, thus reducing the risk of NSAID-induced upper GI ulcers.

NSAIDs are very effective at providing pain relief, including pain associated with OA and RA; however, there are significant upper GI-associated adverse events that can result from the use of NSAIDs. As a result, COX-2 inhibitor drugs (i.e., Vioxx^TM, Merck & Co., Inc.; Celebrex/Bextra^TM, Pfizer Inc.) were introduced to the market in order to provide pain and arthritis relief with reduced risk of significant upper GI-associated adverse events. The COX-2 drugs generated approximately $6.3 billion in sales at their peak in 2004. However, safety concerns associated with COX-2 inhibitor drugs led to the withdrawal of Vioxx and Bextra from the market in 2004 and a significant decline in the use of Celebrex. In the U.S. alone, over $3 billion in sales of COX-2 inhibitor drugs were lost. As a result, demand for traditional prescription NSAIDs, such as ibuprofen and meloxicam, has increased dramatically.

According to a 2004 article published in Aliment Pharmacology & Therapeutics, significant GI side effects, including serious ulcers, afflict up to approximately 25% of all chronic arthritis patients treated with NSAIDs for three months and OA and RA patients are two to five times more likely than the general population to be hospitalized for NSAID-related GI complications. It is estimated that NSAID-induced GI toxicity causes over 16,500 related deaths in OA and RA patients alone, and over 107,000 hospitalizations for serious GI complications each year. In more than 80% of patients with these serious GI complications, there are no prior symptoms.

Despite the fact that GI ulcers are one of the most prevalent adverse events resulting from the use of NSAIDs in the U.S., according to a 2006 article published in BMC Muskoskeletal Disorders, eleven observational studies indicated that physicians do not commonly co-prescribe GI protective agents to high-risk patients. Physicians prescribe concomitant therapy to only 24% of NSAID users, and studies show sub-optimal patient compliance with concomitant prophylaxis therapy. According to a 2003 article published in Aliment Pharmacology & Therapeutics, in a study of 784 patients, 37% of patients were non-compliant, a rate increasing to 61% in patients treated with three or more drugs. This noncompliance results in a substantial unmet clinical need, which we believe can be appropriately addressed with DUEXIS, creating a simple solution for both patients and physicians.

Ibuprofen continues to be one of the most widely prescribed NSAIDs worldwide. According to Wolters Kluwer Health, in the U.S. alone, there were approximately 28 million prescriptions written for ibuprofen in 2010. Ibuprofen prescription volumes in Europe approximately equal those in the U.S. In the U.S., both the 600 mg and 800 mg doses together account for approximately 90% of total ibuprofen prescriptions. In addition, ibuprofen’s flexible three times daily dosing allows it to be used for both chronic conditions such as arthritis and chronic back pain, and acute conditions such as sprains and strains.

Famotidine, the most potent marketed drug in the class of histamine-2 receptor antagonists, a class of drugs used to block the action of histamine on the cells in the stomach that secrete gastric acid, was chosen as the ideal GI protectant to be combined with ibuprofen as it is a well studied compound with an estimated 18.8 million patients treated worldwide that provides distinct advantages including:

Despite these advantages, famotidine had not yet been approved to reduce the incidence of NSAID-induced upper GI ulcers in patients taking NSAIDs. As a result, we conducted pivotal Phase 3 clinical trials demonstrating that treatment with DUEXIS significantly reduced the incidence of NSAID-induced upper GI ulcers in patients with mild to moderate pain or arthritis compared to ibuprofen alone. Based on the data from our Phase 3 clinical trials of DUEXIS, in March 2010 we submitted an NDA requesting approval to market DUEXIS in the U.S. On April 23, 2011, the FDA approved DUEXIS for the relief of signs and symptoms of RA and OA and to decrease the risk of developing upper GI ulcers in patients who are taking ibuprofen for these indications.

Numerous studies have demonstrated that fixed-dose combination therapy provides significant advantages over taking multiple pills. Specifically, fixed-dose combinations can reduce the number of pills, ensure that the correct dosage of each component is taken at the correct time and improve compliance, often associated with better treatment outcomes. DUEXIS has been formulated to provide an optimal dosing regimen of ibuprofen and famotidine together in the convenience of a single pill.

We have completed two large-scale Phase 3 clinical trials of DUEXIS under an SPA with the FDA. The SPA process creates a written agreement between the FDA and a sponsor concerning the clinical trial design, clinical endpoints and other clinical trial matters that can be used to support regulatory approval of a product candidate. The process is intended to provide assurance that if the agreed upon clinical trial protocols are followed, the clinical trial endpoints are achieved and there is a favorable risk-benefit profile, the data may serve as the primary basis of an efficacy claim in support of an NDA. In addition, we received scientific advice from the European Medicines Agency, or EMA, with respect to certain questions concerning the quality, and preclinical and clinical development of DUEXIS as part of our MAA submission plans. These trials, named the Registration Endoscopic Study to Determine Ulcer Formation of HZT-501 Compared to Ibuprofen: Efficacy and Safety Study, or REDUCE-1 and REDUCE-2, were randomized, double-blind, controlled trials that enrolled more than 1,500 patients in the U.S. with chronic pain or arthritis. Patients were randomly assigned, in approximately a 2:1 ratio, to receive DUEXIS (800 mg ibuprofen and 26.6 mg famotidine in a single pill) or ibuprofen (800 mg) alone, orally three times daily for a 24-week treatment period or until patients developed either an endoscopically diagnosed upper GI ulcer and/or prohibitive toxicity.

The primary endpoint of REDUCE-1 was to show a reduction in the cumulative incidence of gastric ulcers during the six month treatment period. The primary endpoint of REDUCE-2 was to show a reduction in the cumulative incidence of upper GI (defined as gastric and/or duodenal) ulcers during the six month treatment period. In REDUCE-1, DUEXIS demonstrated a statistically significant reduction in the incidence of gastric ulcers versus treatment with ibuprofen alone (8.7% versus 17.6%). In REDUCE-2, DUEXIS demonstrated a statistically significant reduction in the incidence of upper GI ulcers versus treatment with ibuprofen alone (10.5% versus 20.0%). The overall relative risk reduction of upper GI ulcers with DUEXIS versus ibuprofen was consistent across key subgroups including: age (under and over 65), history of prior ulcer, low dose aspirin use, gender and presence of baseline upper GI erosions although the studies were not powered for these individual subgroups.

In the REDUCE-1 and REDUCE-2 combined patient population, the most common adverse reactions (at least 1% and greater than ibuprofen alone) were nausea, diarrhea, constipation, upper abdominal pain and headache. Overall, the discontinuation rate in the REDUCE-1 and REDUCE-2 studies due to adverse events for patients receiving DUEXIS and ibuprofen alone were similar.

On April 23, 2011, the FDA approved DUEXIS, and we plan to launch DUEXIS in the U.S. in the fourth quarter of 2011. In October 2010, we submitted an MAA for DUEXIS to the Medicines and Healthcare products Regulatory Agency in the United Kingdom, the Reference Member State, through the Decentralized Procedure in the European Economic Area, or EAA. In connection with our MAA for DUEXIS, and consistent with an identical request we made in our NDA for DUEXIS, we are requesting the Medicines and Healthcare products Regulatory Agency in the United Kingdom to approve a formulation that is different from the formulation in our Phase 3 clinical trials, which we determined had inadequate stability characteristics to be suitable for commercialization. As a result, we were required to demonstrate the bioequivalence of famotidine between the new and old formulations of DUEXIS and the reference labeled drug ibuprofen as part of the MAA submission. See “—Government Regulation” for a description of the regulatory approval process in the EAA. We expect that a determination with respect to the MAA will be made in the first half of 2012.

LODOTRA is a proprietary programmed release formulation of low-dose prednisone and has received regulatory approval in Europe for reduction in morning stiffness associated with RA.

According to DataMonitor, there are approximately four million RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom, of which 1.8 million are in the U.S. Common agents for the treatment of RA include NSAIDs, DMARDs, biologic agents and corticosteroids. Physicians are increasingly supportive of prescribing combination therapy as some RA patients are able to achieve a clinical remission with a combination of treatments. A Medical Marketing Economics May 2008 study of 150 RA patients in the U.S., which we sponsored, showed that despite the use of a combination of currently available treatments for RA, over 90% of the patients reported suffering from morning stiffness, pain and immobility.

In addition, according to DataMonitor, approximately 50% of RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom are prescribed combination therapy which often includes corticosteroids, with prednisone being one of the most common. Corticosteroids, including prednisone, are used to suppress various autoimmune, inflammatory and allergic disorders by inhibiting the production of various pro-inflammatory cytokines, such as interleukin 6, or IL-6, and TNF-alpha. Joint inflammation in RA is driven by excessive production of inflammatory mediators and cytokines such as IL-6 and TNF-alpha. While corticosteroids are potent and effective agents to treat patients with RA, they are usually used at high doses to treat RA flares or significant inflammation. High-dose oral corticosteroid treatment is not a viable long-term treatment option due to adverse side effects such as osteoporosis, cardiovascular disease and weight gain. However, clinical studies have shown that the long-term use of low-dose prednisone does not dramatically increase total adverse events. In addition, low-doses, typically less than 10 mg daily, of corticosteroids such as prednisone have been shown to treat the symptoms of RA while slowing the overall progression of the disease.

An additional limitation of RA treatment with corticosteroids is related to the time at which patients’ pro-inflammatory cytokines are at peak levels. Increased levels of pro-inflammatory cytokines during the early morning hours are a known cause of morning stiffness and decreased mobility. IL-6 levels are substantially increased in patients with RA in general and show a significant circadian variation in these levels. As reflected in the chart below, peak IL-6 levels tend to occur in the early morning hours and low levels typically occur in the afternoon and evening. Therefore, we believe an optimal treatment would reduce IL-6 levels in the early morning hours.

The proprietary formulation technology of LODOTRA enables a programmed release of prednisone approximately four hours after administration. As reflected in the chart below, LODOTRA synchronizes the prednisone delivery time with the patient’s elevated cytokine levels, thereby taking effect at a physiologically optimal point to inhibit cytokine production, and thus significantly reduces the signs and symptoms of RA.

LODOTRA was developed utilizing SkyePharma’s proprietary GeoClock™ and GeoMatrix™ technologies, for which we hold an exclusive worldwide license for the delivery of corticosteroids. LODOTRA is comprised of an active core containing prednisone, which is encapsulated by an inactive porous shell. The inactive shell acts as a barrier between the product’s active core and a patient’s GI fluids. LODOTRA is intended to be administered at bedtime. At approximately four hours following bedtime administration of LODOTRA, water in the digestive tract diffuses through the shell, causing the active core to expand, which leads to a weakening and breakage of the shell and allows the release of prednisone from the active core.

Our pharmacokinetic studies have shown that the blood concentration of prednisone from LODOTRA is similar to immediate release prednisone except for the intended time delay. The administration of LODOTRA (5 mg) provides equivalent exposure, or area under curve, and maximum blood concentration to an immediate release prednisone 5 mg formulation. The following chart shows mean plasma levels of prednisone after a single dose of LODOTRA (5 mg) compared to an immediate release prednisone 5 mg tablet.

We have successfully completed two pivotal Phase 3 clinical trials evaluating LODOTRA for the treatment of RA. The Circadian Administration of Prednisone in Rheumatoid Arthritis-1, or CAPRA-1 trial, investigating the efficacy of LODOTRA in the treatment of RA, was designed to support MAA approval in Europe. The second pivotal Phase 3 clinical trial, Circadian Administration of Prednisone in Rheumatoid Arthritis-2, or CAPRA-2 trial, was designed to support an NDA submission for U.S. marketing approval.

The primary endpoint of CAPRA-1 was reduction of the duration of morning stiffness associated with RA. CAPRA-1 was a 12-week, randomized, double-blind, placebo-controlled trial that enrolled 288 RA patients comparing bedtime administration of LODOTRA with morning administration of immediate release prednisone at the same individual dose (an average dose of 6.7 mg). All patients continued on existing DMARD and NSAID treatment at stable doses. At the conclusion of the 12-week period, patients taking LODOTRA were permitted to continue LODOTRA treatment and patients taking immediate release prednisone were permitted to switch to LODOTRA for a nine-month open label extension study. There were a total of 219 patients who completed the open label extension study.

The trial results demonstrated that bedtime administration of LODOTRA was superior to immediate release prednisone in reducing the duration of morning stiffness associated with RA. As shown in the chart below, the duration of morning stiffness was significantly reduced in the LODOTRA treatment group compared to the group treated with immediate release prednisone, where no change in morning stiffness was shown. The mean relative change in duration of morning stiffness of joints from baseline was approximately 23% in patients taking LODOTRA compared to approximately 0.4% for patients taking immediate release prednisone (p-value = 0.045) after 12 weeks.

LODOTRA reduced IL-6 levels by approximately 29% (relative median change), which was statistically significant (p-value < 0.0001), while corresponding IL-6 levels following treatment with immediate release prednisone remained constant. In addition, LODOTRA was as effective as treatment with immediate release prednisone for other markers of disease activity, including disease activity scores in 28 joints typically impacted by RA, and American College of Rheumatology 20, or ACR20, response rate, which measures the percentage of patients who have achieved a 20% improvement in tender or swollen joint counts as well as a 20% improvement in three of five other criteria of disease activity and all other efficacy parameters investigated. In the initial 12-week period of the study, the most commonly reported treatment-emergent adverse events were a flare in RA-related symptoms (7.6% for LODOTRA compared to 9.0% for immediate release prednisone), abdominal pain (3.5% for LODOTRA compared to 5.6% for immediate release prednisone), nasopharyngitis, or

inflammation of the nasal passages (2.8% for LODOTRA compared to 5.6% for immediate release prednisone) headache (4.2% for LODOTRA compared to 2.8% for immediate release prednisone), and flushing (2.8% for LODOTRA and 4.2% for immediate release prednisone).

At the conclusion of the nine-month open label extension period, patients who continued treatment with LODOTRA experienced a 55% reduction in the duration of morning stiffness. In addition, patients who were newly assigned to LODOTRA exhibited a 45% reduction in the duration of morning stiffness over the nine-month course of this extension study. These patients also experienced a 50% median reduction in IL-6 levels which also corresponded to improvements in the duration of morning stiffness following daily administration of LODOTRA at bedtime.

In the open label phase, the most commonly reported treatment-emergent adverse events were a flare in RA-related symptoms (14.5%), flushing (5.2%), upper respiratory tract infections (2.8%), back pain (2.8%) and weight increase (2.8%). Adverse events indicative of aggravated hypothalamic-pituitary-adrenal, or HPA, axis suppression, typical of high dose prednisone administration, were not observed.

The primary endpoint of CAPRA-2 was to show that LODOTRA significantly improved the ACR20 response rate in patients with RA as compared to placebo. This primary endpoint is the standard used in approval of RA products in the U.S. by the FDA. CAPRA-2 was a 12-week, randomized, double-blind, placebo-controlled Phase 3 clinical trial conducted in centers in both the U.S. and Europe involving 350 RA patients. All patients were inadequate responders to DMARD therapy and were randomized into one of two arms to receive either LODOTRA (5 mg) or placebo once daily at bedtime in addition to their existing therapy. Results showed that patients treated with LODOTRA experienced a statistically significant improvement in ACR20 response criteria compared to patients in the placebo group (48.5% vs. 28.6%; p-value = 0.0002), which met the primary endpoint.

In addition, patients taking LODOTRA experienced a statistically significant improvement in the more stringent American College of Rheumatology 50, or ACR50, response criteria (22.7% vs. 9.2%; p-value = 0.0027), which was the secondary endpoint. ACR50 response rate measures the percentage of patients who have achieved a 50% improvement in tender or swollen joint counts as well as a 50% improvement in three of five other criteria of disease activity. Patients taking LODOTRA also experienced an improvement in

the more stringent American College of Rheumatology 70, or ACR70, response criteria (7.0% vs. 2.5%; p-value = 0.0955), which is another measure of treatment response. ACR70 response rate measures the percentage of patients who have achieved a 70% improvement in tender or swollen joint counts as well as a 70% improvement in three of five other criteria of disease activity. Importantly, patients treated with LODOTRA also experienced a statistically significant reduction in morning stiffness compared to patients in the placebo group (56.5% vs. 33.3%; p-value = 0.0008).

In this study, the most commonly reported treatment-emergent adverse events were joint pain (10.4% for LODOTRA compared to 20.2% for placebo), RA flare (6.5% for LODOTRA compared to 9.2% for placebo), nasopharyngitis (4.8% for LODOTRA compared to 3.4% for placebo) and headache (3.9% for LODOTRA compared to 4.2% for placebo).

LODOTRA received its first approval in Europe in March 2009 and is currently approved for marketing in 14 European countries where it is being commercialized by Mundipharma. We intend to submit an NDA for LODOTRA to the FDA in the third quarter of 2011.

We are in the process of investigating LODOTRA through an investigator-initiated Phase 2 clinical trial as a potential treatment for polymyalgia rheumatica, or PMR, an inflammatory disorder involving aching and stiffness in patients over the age of 50 typically affecting the shoulders and arms. Similar to RA, the symptoms associated with PMR such as stiffness are worse in the morning as compared to the rest of the day. However, unlike RA, glucocorticoid therapy is the most effective treatment currently available. The clinical trial is being conducted to assess whether LODOTRA compared to immediate-release prednisone will induce changes in the inflammatory cytokine, IL-6, and morning symptoms associated with PMR similar to those observed with LODOTRA in RA. Additionally, pursuant to a March 2011 letter agreement and in connection with our waiver of certain milestone payments, Mundipharma has agreed to conduct a separate clinical trial for LODOTRA for the potential treatment for PMR, which we expect will be a Phase 3 clinical trial, beginning in the second half of 2011.

We also conducted a small exploratory Phase 2a clinical trial to evaluate the potential use of LODOTRA to treat severe asthma. Severe asthma sufferers are frequently prescribed very high doses of oral corticosteroids. However, high-dose oral corticosteroid treatment is limited by side effects which include, among others,

osteoporosis and its various negative effects. Data from seven patients who had been treated with 5 to 45 mg of daily immediate release prednisone in accordance with the study protocol showed improvements in nocturnal symptoms, asthma control and asthma-related quality of life when switched to an equivalent dose of LODOTRA. We are currently assessing whether to pursue further clinical trials for LODOTRA for the treatment of severe asthma.

In addition to DUEXIS and LODOTRA, we have a pipeline of clinically enabled product candidates for the treatment of pain-related diseases and chronic inflammation. We are currently evaluating the development pathway for those product candidates, which include TRUNOC and HZN-602.

We are evaluating TRUNOC (tarenflurbil) as a treatment for pain-related diseases. Tarenflurbil is a focused inhibitor of certain well-characterized genes (NF-kB and AP-1), whose expression is known to lead to pain and inflammation. The compound is one of two enantiomers (chemically mirror-imaged compounds) that constitute flurbiprofen, an analgesic and anti-inflammatory pharmaceutical, which received marketing approval in the 1970s. Compared to the opposite enantiomer, tarenflurbil does not exhibit significant COX-1/2 inhibition, or its associated negative side-effects. Third parties have conducted multiple clinical trials of TRUNOC in other indications and we expect our clinical development of this candidate for pain-related diseases would commence with Phase 1/2 clinical trials following our submission of an IND to the FDA or equivalent filing with foreign regulatory authorities.

HZN-602 is a novel fixed-dose combination product containing immediate release naproxen, commonly known as Naprosyn^®, with famotidine. Naproxen is one of the most widely prescribed NSAIDs in the U.S. We plan to investigate HZN-602 for the reduction of the risk of NSAID-induced upper GI ulcers in patients with mild to moderate pain and arthritis. HZN-602 may potentially improve naproxen’s GI safety profile without altering its ability to reduce pain and inflammation. We expect our further clinical development of HZN-602 would continue with a Phase 1 clinical trial following submission of a planned trial to our existing open IND on file with the FDA.

In December 2006 and March 2009, we entered into separate transfer, license and supply agreements with Merck Serono and Merck GesmbH, an affiliate of Merck Serono, for the commercialization of LODOTRA in Germany and Austria, respectively. The agreement covering Germany was amended in December 2008 to allow co-promotion of LODOTRA in Germany. Under the agreements, we granted Merck Serono and Merck GesmbH exclusive distribution and marketing rights pertaining to LODOTRA for each of Germany and Austria, respectively, and an exclusive license to use the trademark for LODOTRA in Germany and Austria. In April 2011, Merck Serono, with our consent, transferred and assigned the transfer, license and supply agreement with respect to Germany and the rights to commercialize LODOTRA in Germany thereunder to Mundipharma Laboratories GmbH, or Mundipharma Laboratories. We anticipate that Merck will also transfer the rights to commercialize LODOTRA in Austria. Mundipharma Laboratories and Merck Serono are obligated to commercialize LODOTRA in Germany and Austria, as applicable, exclusively under the LODOTRA trademark. Mundipharma Laboratories and Merck Serono are obligated to use commercially reasonable efforts to market LODOTRA in Germany and Austria, and are prohibited from launching other oral corticosteroids for the treatment of RA for the first three years following the launch of LODOTRA. With respect to the agreement covering Germany, if Mundipharma Laboratories does not meet specified minimum sales targets over specified periods of time, the marketing rights to LODOTRA will become nonexclusive unless Mundipharma Laboratories pays us the shortfall. With respect to the agreement covering Austria, if Merck Serono does not meet specified minimum sales targets over specified periods of time, after good faith discussions to modify the agreement, we have the right to terminate the agreement.

Mundipharma Laboratories and Merck Serono agreed to purchase LODOTRA commercial product exclusively from us. We supply LODOTRA to each of them at the price which is the higher of (1) a percentage

of the list price of LODOTRA sold to final purchasers of LODOTRA from Mundipharma Laboratories or Merck Serono, as applicable, (excluding any discounts) and (2) the costs we incur for the production and delivery of LODOTRA to a Mundipharma Laboratories or Merck Serono supply depot, as applicable, plus a profit mark-up.

Subject to early termination, the terms of the agreements are 15 years from the launch of LODOTRA in Germany and 10 years from the launch of LODOTRA in Austria. Thereafter, the agreements automatically renew until terminated by a party by giving specified prior written notice to the other party to the agreement. Under both agreements a party may also terminate an agreement in the event of a bankruptcy of the other party, certain events beyond the parties’ control that impair performance under an agreement, or upon material uncured breach by a party.

In March 2009, we entered into a distribution agreement with Mundipharma for the commercialization of LODOTRA in Europe, excluding Germany and Austria, and a manufacturing and supply agreement with Mundipharma Medical Company, or Mundipharma Medical. The distribution agreement, which was amended in July 2009 and March 2011, provides for an upfront payment of 5.0 million Euros, all of which has been paid by Mundipharma, and aggregate potential milestone payments of up to an additional 11.0 million Euros, which includes a credit in the amount of 1.0 million Euros we agreed to provide to Mundipharma to be applied towards certain future milestone payments in connection with the March 2011 amendment. As of March 31, 2011, we had received an aggregate of 8.8 million Euros under the distribution agreement.

Under the distribution agreement, we granted Mundipharma the exclusive distribution and marketing rights pertaining to LODOTRA for: Albania, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Latvia, Liechtenstein, Lithuania, Luxemburg, Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Serbia, former Soviet Union countries, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United Kingdom. We also granted to Mundipharma an exclusive license to use our trademark for LODOTRA in these countries, and Mundipharma is allowed to commercialize LODOTRA under the LODOTRA trademark. Mundipharma is obligated to use commercially reasonable efforts to market LODOTRA in the territory and is prohibited from launching other oral corticosteroids during the term of the distribution agreement. If Mundipharma does not meet specified minimum sales targets, which range from single digit millions of Euros to tens of millions of Euros on a country by country basis, over specified periods of time, the marketing rights granted under the distribution agreement will become nonexclusive with respect to the applicable country unless Mundipharma pays us the shortfall.

Under the manufacturing and supply agreement, which was subsequently amended in March 2011, Mundipharma Medical agreed to purchase LODOTRA exclusively from us with respect to the territory. We supply LODOTRA to Mundipharma Medical at the price which is a specified percentage of the average net selling price for sales in a given country.

Subject to early termination, the terms of both of the March 2009 agreements extend to March 2024. Thereafter, the agreements automatically renew until terminated by either party giving specified prior written notice to other party. Either party may also terminate either of the agreements in the event of a bankruptcy of the other party or upon an uncured material breach by the other party. In addition, Mundipharma has the right to terminate the distribution agreement in the event of material risk of personal injury to third parties or immediately by written notice with respect to any country if the market authorization for LODOTRA is cancelled in such country.

In November 2010, we entered into a second distribution agreement with Mundipharma for the commercialization of LODOTRA in several Asian countries, Australia, New Zealand and South Africa, and a second manufacturing and supply agreement with Mundipharma Medical. Under the distribution agreement, we received an upfront payment of $3.5 million and may be entitled to additional aggregate milestone payments of up to an $4.4 million.

Under the distribution agreement, we granted Mundipharma the exclusive distribution and marketing rights pertaining to LODOTRA for: Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam. In addition, Mundipharma will be responsible for obtaining regulatory approvals in these countries. We also granted to Mundipharma an exclusive license to use our trademark for LODOTRA in these countries, and Mundipharma is allowed to commercialize LODOTRA under the LODOTRA trademark. Mundipharma is obligated to use commercially reasonable efforts to obtain regulatory approval for and market LODOTRA and is prohibited from launching other oral corticosteroids in these countries during the term of the distribution agreement. If Mundipharma does not meet specified minimum volume targets, which range from thousands of Euros to millions of Euros on a country by country basis, over specified periods of time, the marketing rights granted under the distribution agreement will become nonexclusive with respect to the applicable country unless Mundipharma pays us the shortfall.

Under the manufacturing and supply agreement, Mundipharma Medical agreed to purchase LODOTRA exclusively from us with respect to the territory. We supply bulk product of LODOTRA to Mundipharma Medical at an adjustable price per tablet and Mundipharma is responsible for final packaging and distribution in the territory.

Subject to early termination, the terms of both of the November 2010 agreements are 15 years from the first product launch on a country by country basis. Thereafter, the agreements automatically renew until terminated by either party by giving specified prior written notice to other party. Either party may terminate either of the agreements early in the event of a change in control of the other party, bankruptcy of the other party, or upon an uncured material breach by the other party. Either party has the right to terminate the distribution agreement with respect to any country upon prior written notice if the volume target is not met in such country for reasons beyond its control. In addition, Mundipharma has the right to terminate the distribution agreement in the event of material risk of personal injury to third parties or immediately by written notice with respect to any country if the market authorization for LODOTRA is cancelled, withdrawn or suspended in such country. We also have the right, subject to certain conditions, to terminate the distribution agreement with respect to any country in the territory if within a specified period of time, Mundipharma fails to submit appropriate filings to obtain marketing authorization in the country or fails to initiate a clinical trial required for marketing authorization in the country.

In August 2004, we entered into a development and license agreement with SkyePharma AG and Jagotec AG, a wholly-owned subsidiary of SkyePharma, regarding certain proprietary technology and know-how owned by SkyePharma for the delayed release of corticosteroids. The agreement replaced a similar agreement entered into between Merck and SkyePharma in 1998, which Merck assigned to us.

Under the agreement, which was amended in August 2007, we received an exclusive, sub-licensable worldwide license to the oral formulation of any corticosteroid, including prednisone, prednisolone, methylprednisolone and/or cortisone, with delayed release technology covered by intellectual property rights and know-how owned by SkyePharma. We were also granted an option to acquire a royalty-free, exclusive and sub-licensable right to license and manufacture LODOTRA which we can exercise any time upon specified prior written notice, expiring no earlier than five years after the first launch of LODOTRA.

In return for the grant of the license, Jagotec has the exclusive right to manufacture, package and supply LODOTRA to us in accordance with terms and conditions of a separate manufacturing and supply agreement we entered into with Jagotec. In addition, Jagotec is entitled to receive a single digit percentage royalty on net sales of LODOTRA and on any sub-licensing income, which includes any payments not calculated based on the net sales of LODOTRA, such as license fees, and lump sum and milestone payments.

The agreement expires on the later of August 20, 2014 or, on a country-by-country basis, upon the expiration of the last patent rights for LODOTRA. In the event of expiration, the licenses under the agreement will be perpetual, fully paid-up and royalty-free. Either party may also terminate the agreement in the event of a liquidation or bankruptcy of the other party or upon an uncured breach by the other party.

In August 2007, we entered into a manufacturing and supply agreement with Jagotec. Under the agreement, which was amended in March 2011, Jagotec or its affiliates manufacture and supply LODOTRA exclusively to us in bulk. We purchase LODOTRA exclusively from Jagotec. As of March 31, 2011 our total remaining minimum purchase commitment was approximately $3.5 million based on tablet pricing under the agreement as of that date, which amount is subject to volume and price adjustments due to, among other things, inflation, order quantities and launch and approval in certain European Union countries. We also supply the active pharmaceutical ingredient prednisone to Jagotec at our expense for use in the manufacture of LODOTRA.

We pay Jagotec, exclusive of any value added tax or similar governmental charges, a price for LODOTRA representing a negotiated mark-up over manufacturing costs. After a short initial period, the price will be adjusted annually to reflect changes in both manufacturing and materials costs as measured by the Ensemble price index.

If Jagotec makes a major capital expenditure during the contract term to fulfill increased orders forecast by us, the price per unit will increase if the actual order falls short of the forecast.

The agreement term extends until the end of the fifth year after the first launch of LODOTRA and automatically extends on a yearly basis unless terminated by either party upon prior written notice. Either party may also terminate the agreement in the event of insolvency, liquidation or bankruptcy of the other party or upon an uncured breach by the other party. We have the right to receive a continuing supply of LODOTRA from Jagotec for a period of 24 months after termination by Jagotec, regardless of the reason for termination.

In November 2009, we entered into a technical transfer agreement with sanofi-aventis U.S. LLC to increase our commercial manufacturing capacity. Pursuant to the agreement, sanofi-aventis U.S. has performed engineering studies of DUEXIS core tablets and finished product, performed installation qualification of equipment used in the manufacture of DUEXIS, produced validation batches of DUEXIS and is obligated to conduct a stability study on the final validation batches. In order to allow sanofi-aventis U.S. to perform its obligations under the agreement, we provided sanofi-aventis U.S. certain pharmaceutical materials and process information relating to the production of DUEXIS tablets and granted sanofi-aventis U.S. a license to our related intellectual property.

We have paid for the purchase and installation of equipment necessary to manufacture DUEXIS tablets, and sanofi-aventis U.S. is obligated to pay the costs of routine maintenance of the equipment. We are also obligated to pay sanofi-aventis U.S. for any validation batches of DUEXIS.

Pursuant to the agreement, we made an initial payment of several hundred thousand dollars to sanofi-aventis U.S. and are obligated to make additional payments of less than $1.5 million in the aggregate to sanofi-aventis U.S. for the stability study and upon certain milestone achievements related to DUEXIS manufacturing capability and validation. We have made all payments except for payments related to the stability study and the last milestone payment, which total less than $0.5 million in the aggregate.

Subject to early termination, the agreement will expire on the earlier of December 31, 2011 or the completion of the manufacturing readiness and validation activities contemplated by the agreement. Either party may terminate the agreement in the event of a bankruptcy of the other party, breach by the other party that is not cured within 90 days, termination of negotiations regarding the commercial manufacturing and supply agreement, expiration or termination of the commercial manufacturing and supply agreement or if the parties cannot reach agreement on certain cost modifications resulting from a change in the manufacturing process.

In May 2011, we entered into a manufacturing and supply agreement with sanofi-aventis U.S. Pursuant to the agreement, sanofi-aventis U.S. is obligated to manufacture and supply DUEXIS to us in final, packaged form,

and we are obligated to purchase DUEXIS exclusively from sanofi-aventis U.S. for our commercial requirements of DUEXIS in North America and certain countries and territories in Europe, including the European Union member states and Scandinavia, and South America. sanofi-aventis U.S. is obligated to acquire the components necessary to manufacture DUEXIS, including the active pharmaceutical ingredients DC85 and famotidine, and is obligated to acquire all DC85 under the terms of any agreements we may have with suppliers for the supply of DC85. We expect that sanofi-aventis U.S. will obtain DC85 from BASF Corporation through our sales contract with BASF and will enter into a separate supply agreement for famotidine with another third-party supplier. In order to allow sanofi-aventis U.S. to perform its obligations under the agreement, we granted sanofi-aventis U.S. a non-exclusive license to our related intellectual property. In addition, the FDA must first approve sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS and we have submitted a supplement to our NDA for DUEXIS to establish and qualify sanofi-aventis U.S. as the manufacturer of record with the FDA.

The price for DUEXIS under the agreement varies depending on the configuration and volume of DUEXIS we purchase and is subject to annual adjustments to reflect changes in costs as measured by the Producer Price Index published by the U.S. Department of Labor, Bureau of Labor Statistics and certain other changes and events set forth in the agreement.

We agreed to purchase and pay for the installation and qualification at sanofi-aventis U.S.’s or its affiliate’s manufacturing facilities of certain equipment necessary to manufacture DUEXIS. Upon expiration or termination of the agreement we may also be obligated to reimburse sanofi-aventis U.S. for the depreciated net book value of any other equipment purchased by sanofi-aventis U.S. in order to fulfill its obligations under the agreement. sanofi-aventis U.S. is obligated to pay the costs of routine maintenance of the equipment.

The agreement term extends until the eighth anniversary of the first commercial sale of DUEXIS in any country in the territory and automatically extends for successive two year terms unless terminated by either party upon two years prior written notice. Either party may terminate the agreement upon 30 days’ prior written notice to the other party in the event of breach by the other party that is not cured within 30 days of notice (which notice period may be longer in certain, limited situations) or in the event we lose regulatory approval to market DUEXIS in all countries within the territory, and either party may terminate the agreement without cause upon two years prior written notice to the other party at any time after the third anniversary of the first commercial sale of DUEXIS in any country in the territory. sanofi-aventis U.S. may also terminate the agreement upon six months written notice in the event commercialization of DUEXIS is delayed beyond December 31, 2012.

In September 2008, we entered into a master services agreement with Pharmaceutics International, Inc., or PII. Pursuant to the agreement and several project contracts under the agreement, PII is obligated to perform product development services and prepare regulatory batches in preparation for the manufacturing of commercial products. Services performed by PII include tablet manufacturing, testing, packaging and study design for DUEXIS. Under the agreement, we are obligated to make payment to PII for services according to project budgets specified in advance of each service contract.

The agreement will continue until terminated. We may terminate the agreement or any service contract at any time by giving prior written notice. Either party may terminate the agreement in the event of uncured breach by the other party.

Pending the FDA’s approval of sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS and the completion of all outstanding project contracts under our agreement with PII, we expect that sanofi-aventis will be our exclusive manufacturer and supplier of DUEXIS.

We have entered into an agreement with Temmler Werke GmbH, or Temmler, for the packaging and assembling of LODOTRA. Pursuant to the agreement, we may order LODOTRA according to specified rolling forecasts. Subject to early termination, the agreement will remain in effect until December 21, 2015. Thereafter, the agreement automatically renews for additional one year periods unless either party provides notice to the

other party at least twelve months prior to the expiration of the then-current period. Either party may also terminate the agreement at any time for an uncured material breach. There are no minimum purchase requirements under the agreement and we may enter into agreements with other third-party packagers for LODOTRA.

In July 2010, we entered into a sales contract with BASF Corporation for the purchase of DC85, the active ingredient in DUEXIS. The agreement provides for an initial pre-purchase credit in the hundreds of thousands of dollars to be used as payment for DC85. Pursuant to the agreement, we are obligated to purchase a significant majority of our commercial demand for DC85 from BASF.

The sales contract expires in December 2017. Thereafter, the agreement automatically renews until terminated by either party giving specified prior written notice to the other party. Either party may also terminate the agreement in the event of uncured breach by the other party. In addition, the agreement will automatically terminate in the event that we fail to secure regulatory approval of DUEXIS in the United States by December 31, 2011, in which case BASF has the right to withhold the unused pre-purchase credit. If the agreement terminates for any reason before a specified date and we have not purchased requisite amounts of DC85, BASF has the right to withhold from the pre-purchase credit an amount based upon the total amount of DC85 purchased throughout the life of the agreement.

We currently do not have significant sales and marketing capabilities. In conjunction with the recent FDA approval of DUEXIS and the potential FDA approval of LODOTRA, we have begun to build an internal targeted commercial organization, including the hiring of senior sales and field force management personnel. We intend to establish a sales force comprised initially of approximately 75 sales representatives to target rheumatologists, orthopedic surgeons, pain specialists and top prescribing primary care physicians. By the fourth quarter of 2012, we plan to expand this sales force to up to approximately 150 sales representatives and to also potentially establish relationships with companies that have appropriate commercial platforms in our key markets. We believe that a targeted sales force can be effective in the current NSAID market due to a decrease in branded product promotional activity, and we currently anticipate marketing DUEXIS in the U.S. at a price comparable to other branded NSAIDs such as Arthrotec and Celebrex. We intend to enter into licensing or additional distribution agreements for commercialization of our products outside the U.S., such as our relationship with Mundipharma for commercialization of LODOTRA in Europe and certain Asian and other countries. At this time, we have not identified specific additional distribution partners.

Our policy is to patent the technology, inventions and improvements that we consider important to the development of our business. We have a portfolio of patents and applications based on clinical and pharmacokinetic/pharmacodynamic modeling discoveries, and our novel formulations. In addition, we have an exclusive license to pending U.S. and foreign patent applications from SkyePharma. We intend to continue filing patent applications seeking intellectual property protection as we generate anticipated formulation refinements, new methods of manufacturing and clinical trial results.

With respect to LODOTRA, we have filed our own patent applications covering site- and time-controlled GI release of corticosteroids, delayed release corticosteroid treatment of RA and diseases with a suppression of the HPA axis, and delayed release treatment of asthma. With respect to LODOTRA, we have filed patent applications with the World Intellectual Property Organization covering site- and time-controlled GI release of corticosteroids and delayed release treatments for asthma, and have filed patent applications in the U.S. covering site- and time-controlled GI release of corticosteroids and delayed release corticosteroid treatment of RA and diseases with a suppression of the HPA axis. Related patent applications have been filed in the following jurisdictions: Algeria, Arab Emirates, Argentina, Australia, Brazil, Canada, China, Egypt, Eurasion Patent Organization, European Patent Office, Gulf Cooperation Council, Hong Kong, India, Indonesia, Israel, Japan, Libya, Malaysia, Mexico, Monaco, Norway, Singapore, South Africa, South Korea, Syria, Taiwan,

Tunisia and Ukraine. If granted, and not otherwise invalidated, the patents are anticipated to protect the related subject matters until between 2027 and 2030. We have also in-licensed patent applications pending at the World Intellectual Property Organization from SkyePharma for its proprietary drug delivery technology, GeoClock™, which cover tablet geometry and design. If granted, and not otherwise invalidated, the in-licensed patent applications are anticipated to expire between 2024 and 2025. In addition, we purchased from a third-party two issued U.S. patents related to 1 mg and 2 mg delayed release dosage forms of prednisone and to methods of treating RA with such dosage forms which are anticipated to expire in 2020 (U.S. Patent No. 6,488,960 and U.S. Patent No. 6,667,326). We are pursuing our own pending patent applications in the U.S. and those in-licensed from SkyePharma to obtain broader patent coverage on LODOTRA, including the currently marketed 5 mg dose.

We are also seeking to build a broad patent position around DUEXIS. We have filed multiple patent applications claiming the product and methods for its use in the U.S., as well as related applications in Australia, Canada, China, Europe and Japan. If granted, and not otherwise invalidated, the patents are anticipated to expire between 2026 and 2028. Our patent strategy for DUEXIS aims at providing protection specific to DUEXIS for three times daily administration and is intended to prevent direct product copying as well as the use of any other ibuprofen-famotidine single dose products for three times daily to treat patients.

In the U.S., in addition to any patent protection, DUEXIS has been granted three years of marketing exclusivity under a Section 505(b)(2) NDA. We anticipate that LODOTRA will also receive three years of marketing exclusivity upon FDA approval. This marketing exclusivity begins upon marketing approval and runs in parallel with any patents that have issued or we expect to be issued protecting LODOTRA and DUEXIS to provide an additional layer of market protection. In the European Union, LODOTRA has received 10 years of marketing exclusivity protection, beginning with its March 2009 marketing authorization in Germany. We anticipate that DUEXIS will also receive 10 years of marketing exclusivity upon European approval.

We will only be able to protect our technologies and products from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. As such, our commercial success will depend in part on receiving and maintaining patent protection and trade secret protection of our technologies and products as well as successfully defending these patents against third-party challenges.

However, the patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the U.S. The patent situation outside the U.S. is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the U.S. or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:

Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical companies and generic drug companies, although we are not currently aware of any other delayed release prednisone drug

or ibuprofen/famotidine combination drug in development. We believe that the key competitive factors that will affect the development and commercial success of DUEXIS and LODOTRA, as well as future drug candidates that we may develop, are efficacy, safety and tolerability profile, convenience in dosing, price and reimbursement.

DUEXIS will compete with other branded NSAIDs, including Celebrex, marketed by Pfizer Inc., Vimovo, developed by Pozen Inc. and marketed by AstraZeneca AB and Arthrotec, marketed by Pfizer.

Celebrex is an NSAID that selectively inhibits the COX-2 enzyme and is an effective anti-arthritic agent that reduces the risk of ulceration compared to traditional NSAIDs such as ibuprofen. However, two other COX-2 inhibitors, Vioxx and Bextra, have been withdrawn from the market due to safety concerns.

Vimovo is a fixed-dose combination of enteric-coated naproxen plus esomeprazole, a PPI. Enteric-coated naproxen is an NSAID indicated for the treatment of OA and esomeprazole has been recently approved to reduce the risk of NSAID-induced gastric ulcers. We believe DUEXIS may offer competitive advantages over Vimovo due to its delayed onset of pain relief related to the enteric-coated naproxen as well as several recent publications highlighting safety concerns with long-term PPI use.

Arthrotec is a fixed-dose combination of diclofenac sodium and misoprostol, a GI mucosal protective prostaglandin E1 analog. Diclofenac sodium is an NSAID prescribed for pain relief and misoprostol is used to reduce the risk of NSAID-induced upper GI ulcers. We believe DUEXIS may offer competitive advantages over Arthrotec based on a significant increase in GI side effects, including abdominal pain and diarrhea, associated with Arthrotec. Rare instances of profound diarrhea leading to severe dehydration have been reported in patients receiving misoprostol. Arthrotec has additional safety issues associated with its components such as cases of hepatic-related adverse events, none of which have been observed in our clinical trials of DUEXIS. In addition, misoprostol has been associated with miscarriage in pregnant women and is contraindicated in those women who are pregnant or likely to become pregnant.

In general, DUEXIS will also face competition from the separate use of NSAIDs for pain relief and ulcer medications to address the risk of NSAID-induced ulcers. Use of these therapies separately in generic form may be cheaper than we expect to offer DUEXIS. In addition, physicians could begin to prescribe both an NSAID and a GI protectant to be taken together but in separate pills. We expect to compete with the separate use of NSAIDs and ulcer medications primarily through DUEXIS’ advantages in dosing convenience and patient compliance, and by educating physicians about such advantages, including through funding we have provided for the American Gastroenterology Association to help physicians and patients better understand and manage NSAID risks. We expect DUEXIS will be the only product containing a histamine-2 receptor antagonist with an indication to reduce the risk of NSAID-induced upper GI ulcers.

LODOTRA competes and will compete in the U.S., if approved, with a number of pharmaceuticals on the market to treat RA, including NSAIDs (including those described above), corticosteroids, such as prednisone, traditional DMARDs, such as methotrexate, and biologic agents, such as HUMIRA and Enbrel. The majority of RA patients, however, are treated with DMARDs. DMARDs, such as methotrexate, are typically used as initial therapy in patients with RA whereas biologic agents are typically added to DMARDs as combination therapy. It is common for an RA patient to take a combination of a DMARD, an oral glucocorticoid, an NSAID and/or a biologic agent.

The DUEXIS manufacturing process is well-established, and we intend to validate the process in accordance with regulatory requirements prior to commercialization. We have contracted with internationally recognized pharmaceutical companies with operations in North America and Europe for contract manufacturing and packaging. In May 2011, we entered into a long-term supply and manufacturing agreement with sanofi-aventis

U.S. for the manufacture of DUEXIS. The FDA must approve sanofi-aventis U.S. as a manufacturer and supplier of DUEXIS before sanofi-aventis U.S. can manufacture our commercial supply of DUEXIS and we have submitted a supplement to our NDA for DUEXIS to establish and qualify sanofi-aventis U.S. as the manufacturer of record with the FDA. All of the facilities contracted by us are registered with the FDA, EMA and other internationally recognized regulatory authorities. In addition, these facilities have been audited by these agencies within the past two years to confirm compliance. We do not plan to build manufacturing facilities and will scale our operations using our contract manufacturers.

The first active pharmaceutical ingredient, or API, in DUEXIS is ibuprofen in a direct compression blend called DC85, which is manufactured by BASF in Bishop, Texas. DC85 is a proprietary blend of ibuprofen and manufacturing capacity and batch quantities are currently sufficient to meet our forecasted commercial requirements. DC85 is manufactured in compliance with the FDA’s current good manufacturing practices regulations for pharmaceuticals, or cGMPs. The second API in DUEXIS is famotidine, which is readily available from a number of international suppliers. We purchase famotidine manufactured by Dr. Reddy’s in India. Dr. Reddy’s has recently been audited by the FDA and found to be compliant in all aspects of the product. Our personnel have also completed audits of each supplier location and did not identify any cGMP deficiencies. We currently receive both APIs in powder form and each is blended with a number of United States Pharmacopeia inactive ingredients. If sanofi-aventis U.S. is approved by the FDA as a manufacturer of record for DUEXIS, we will purchase DUEXIS in final, packaged form exclusively from sanofi-aventis U.S. for our commercial requirements for DUEXIS in North America and certain countries and territories in Europe, including the European Union member states and Scandinavia, and South America.

Finished tablets will be shipped to a central third-party logistics FDA-compliant warehouse for storage and distribution to the supply chain. Third-party logistics providers specialize in integrated operations that include warehousing and transportation services that can be scaled and customized to our needs based on market conditions and the demands and delivery service requirements for our products and materials. Their services eliminate the need to build dedicated internal infrastructures that would be difficult to scale without significant capital investment. We anticipate that our third-party logistics provider will warehouse all finished product in controlled FDA-registered facilities. Incoming orders will be prepared and shipping coordinated through an order entry system to ensure just in time delivery of the products throughout the U.S. and Europe.

We do not intend to manufacture LODOTRA, and rely instead on well-established and highly regarded third-party manufacturers. In Europe, we retain quality responsibilities for LODOTRA by controlling the final release of products.

We have contracted with Jagotec for the production of LODOTRA tablets. Jagotec produces LODOTRA operating through its affiliate SkyePharma SAS. The SkyePharma SAS production site in Lyon, France, complies with cGMP requirements and has been audited by the FDA for the production of several sustained release tablets employing SkyePharma’s GeoMatrix technology. We consider Jagotec an experienced and reliable contract manufacturer dedicated largely to advanced oral dosage forms. The commercial scale production of LODOTRA tablets was implemented prior to the launch of LODOTRA in Europe in 2009. Jagotec is the exclusive manufacturer of LODOTRA under our manufacturing and supply agreement, but we retain the right to source a second manufacturer under certain conditions, including if Jagotec cannot meet our commercial demand.

Analytical testing of LODOTRA is conducted by PHAST GmbH. PHAST is a German provider of contract analytical services. The packaging of LODOTRA tablets is conducted by Temmler in Munich, Germany.

All sites involved in the manufacturing and control of LODOTRA have been inspected by us and audited by national and international authorities in Europe. In addition, all sites except for Temmler’s packaging site in Munich have been audited by authorities in the U.S., including the FDA.

In both U.S. and foreign markets, our ability to commercialize our products successfully depends in significant part on the availability of adequate coverage and reimbursement from third-party payers, including, in the U.S., government payers such as the Medicare and Medicaid programs, managed care organizations and private health insurers. Third-party payers are increasingly challenging the prices charged for medicines and examining their cost effectiveness, in addition to their safety and efficacy. This is especially true in markets where over the counter and generic options exist. We may need to conduct pharmacoeconomic studies to demonstrate the cost effectiveness of our products for formulary coverage and reimbursement. Even with studies, our products may be considered less safe, less effective or less cost-effective than existing products, and third-party payers may not provide coverage and reimbursement for our product candidates, in whole or in part.

Political, economic and regulatory influences are subjecting the healthcare industry in the U.S. to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our future business. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the PPACA, enacted in March 2010, substantially changes the way healthcare is financed by both governmental and private insurers. Among other cost containment measures, PPACA establishes:

In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products, or the amounts of reimbursement available for our products, and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could materially impact numerous aspects of our business.

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose extensive requirements upon the clinical development, pre-market approval, manufacture, labeling, marketing, promotion, pricing, storage and distribution of pharmaceutical products. These agencies and other regulatory agencies regulate research and development activities and the testing, approval, manufacture, quality control, safety, effectiveness, labeling, storage, recordkeeping, advertising and promotion of drugs. Failure to comply with applicable FDA or foreign regulatory agency requirements may result in Warning Letters, fines, civil or criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

In the U.S., the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations. The process required by the FDA before product candidates may be marketed in the U.S. generally involves the following:

The development and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

The results of preclinical tests (which include laboratory evaluation as well as GLP studies to evaluate toxicity in animals) for a particular product candidate, together with related manufacturing information and analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the proposed clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. IND submissions may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive good clinical practice regulations and regulations for informed consent and privacy of individually identifiable information. Similar requirements to the U.S. IND are required in the EEA and other jurisdictions in which we may conduct clinical trials. Investigator-sponsored or investigator-initiated clinical trials, such as the Phase 2 PMR study of LODOTRA presently being conducted, are studies for which the investigator holds the IND, or equivalent regulatory filing in foreign jurisdictions, and is responsible for compliance with both the investigator and sponsor requirements under applicable law.

Clinical Trials. For purposes of NDA submission and approval, clinical trials are typically conducted in the following sequential phases, which may overlap:

New Drug Applications. The results of drug development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. NDAs also must contain extensive chemistry, manufacturing and control information. An NDA must be accompanied by a significant user fee, which is waived for the first NDA submitted by a qualifying small business. Once the submission has been accepted for filing, the FDA’s goal is to review applications within 10 months of submission or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months from submission. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an

advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations. The FDA may deny approval of an NDA by issuing a Complete Response Letter if the applicable regulatory criteria are not satisfied. A Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time- consuming requirements related to clinical trials, preclinical studies or manufacturing. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaborators interpret data. Approval may occur with Risk Evaluation and Mitigation Strategies, or REMS, that limit the labeling, distribution or promotion of a drug product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase 4 clinical trials, and surveillance programs to monitor the safety effects of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs or other information.

Because DUEXIS is a fixed-combination prescription drug, we had to comply with the FDA’s regulation that requires each component to make a contribution to the claimed effects. This means that our clinical trials for DUEXIS had to adequately evaluate the combination as compared to each component separately and to placebo.

The DUEXIS NDA was submitted, and the LODOTRA NDA is intended to be submitted, under Section 505(b)(2) of the FFDCA. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act. This statutory provision permits the approval of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Act permits the applicant to rely in part upon the FDA’s findings of safety and effectiveness for previously approved products, such as ibuprofen, famotidine and prednisone.

DUEXIS has obtained, and any other products of ours approved by the FDA could obtain, three years of Hatch-Waxman marketing exclusivity, based upon our conducting or sponsoring new clinical investigations that are essential to approval of the respective NDA. Under this form of exclusivity, the FDA would be precluded from approving a generic drug application or, in some cases, another 505(b)(2) application for a drug product for the protected conditions of approval (for example, a product that incorporates the change or innovation represented by our product) for a period of three years, although the FDA may accept and commence review of such applications at any time. However, this form of exclusivity would not prevent the FDA from approving an NDA that relies on its own clinical data to support the change or innovation. Further, if another company obtains approval for either product candidate for the same indication we are studying before we do, our approval could be blocked until the other company’s Hatch-Waxman marketing exclusivity expires.

Other Regulatory Requirements. Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping, annual product quality review and reporting requirements. Adverse event experience with the product must be reported to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events are mandated by the FDA. Our product candidates, if approved by the FDA, may be subject to REMS requirements that affect labeling, distribution or post market reporting. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Following such inspections, the FDA may issue notices on Form 483 and Untitled Letters or Warning Letters that could cause us or our third-party manufacturers to modify certain activities. A Form 483 notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA investigators believe may have violated cGMP or other FDA regulations or guidelines. In addition to Form 483 notices and Untitled Letters or Warning Letters, failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will

be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA requires us to recall a drug from distribution or withdraw approval of the NDA for that drug.

The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, dissemination of off-label information, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new or supplemental NDA, which may require us to develop additional data or conduct additional preclinical studies and clinical trials. Failure to comply with these requirements can result in adverse publicity, Warning Letters, corrective advertising and potential civil and criminal penalties.

Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use. Thus, we may only market DUEXIS and LODOTRA, if approved by the FDA, for their approved indications and we could be subject to enforcement action for off-label marketing.

Outside the U.S., our partners’ ability to market a product is contingent upon obtaining marketing authorization from the appropriate regulatory authorities. The requirements governing marketing authorization, pricing and reimbursement vary widely from country to country.

In the EEA (which is comprised of the 27 Member States of the European Union, plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

Under the procedures described above, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

Under Regulation (EC) No 726/2004/EC and Directive 2001/83/EC (each as amended), the European Union has adopted a harmonized approach to data and marketing exclusivity (known as the 8 + 2 + 1 formula). The approach permits eight years of data exclusivity and 10 years of marketing exclusivity. An additional non-cumulative one-year period of marketing exclusivity is possible if during the data exclusivity period (the first eight years of the 10-year marketing exclusivity period), the MA holder obtains an authorization for one or more new therapeutic indications that are deemed to bring a significant clinical benefit compared to existing therapies.

The data exclusivity period begins on the date of the product’s first MA in the European Union and prevents generics from relying on the marketing authorization holder’s pharmacological, toxicological, and clinical data for a period of eight years. After eight years, a generic product application may be submitted and generic companies may rely on the marketing authorization holder’s data. However, a generic cannot launch until two years later (or a total of 10 years after the first marketing authorization in the European Union of the innovator product), or three years later (or a total of 11 years after the first MA in the European Union of the innovator product) if the MA holder obtains marketing authorization for a new indication with significant clinical benefit within the eight-year data exclusivity period.

The 8 + 2 + 1 exclusivity scheme applies to products that have been authorized in the European Union by either the EMA through the Centralized Procedure or the competent authorities of the Member States of the EEA (under the Decentralized, or Mutual Recognition procedures).

The holder of a Community MA or National MA is subject to various obligations under applicable EEA regulations, such as pharmacovigilance obligations, requiring it to, among other things, report and maintain detailed records of adverse reactions, and to submit periodic safety update reports to the competent authorities. The holder must also ensure that the manufacturing and batch release of its product is in compliance with the applicable requirements. The MA holder is further obligated to ensure that the advertising and promotion of its products complies with applicable laws, which can differ from Member State to Member State of the EEA.

Healthcare Fraud and Abuse Laws. We may be subject to various federal and state laws targeting fraud and abuse in the healthcare industry. For example, in the United States, there are federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services or reward past purchases or recommendations. Violations of these laws can lead to civil and criminal penalties, including fines, imprisonment and exclusion from participation in federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA, such as us, and hospitals, physicians and other potential purchasers of such products.

The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. The reach of the Anti-Kickback Statute was also broadened by PPACA, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b, effective March 23, 2010. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which

imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. The federal Anti-Kickback Statute is broad, and despite a series of narrow safe harbors, prohibits may arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs, and do not contain identical safe harbors.

The federal False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The “qui tam” provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In addition, various states have enacted false claims laws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payer and not merely a federal healthcare program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim.

Also, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including health care fraud, and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private third-party payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.

Healthcare Privacy and Security Laws. We may be subject to, or our marketing activities may be limited by, HIPAA, and its implementing regulations, which established uniform standards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information. The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included sweeping expansion of HIPAA’s privacy and security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effective on February 17, 2010. Among other things, the new law makes HIPAA’s privacy and security standards directly applicable to “business associates”—independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.

As of March 31, 2011, we had 39 full-time employees, 9 of whom hold advanced clinical or scientific degrees. Of our employees as of March 31, 2011, 19 were engaged in development, regulatory and manufacturing activities, seven were engaged in sales and marketing and 13 were engaged in administration, including business development, finance, information systems, facilities and human resources. None of our employees is subject to a collective bargaining agreement. We believe our relationships with our employees are good.

We occupy approximately 8,550 square feet of space in our headquarters in Northbrook, Illinois under a sublease that expires on December 31, 2011. We also occupy approximately 7,388 square feet of office space in Mannheim, Germany under a lease that expires on December 31, 2011 and approximately 3,230 square feet of office space in Reinach, Switzerland under a lease that expires on May 31, 2015. We have no laboratory, research or manufacturing facilities. We believe that our current facilities are adequate for our needs for the immediate future and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.

We were incorporated as Horizon Pharma, Inc. in Delaware on March 23, 2010. On April 1, 2010, we became a holding company that operates primarily through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc., a Delaware corporation, and Horizon Pharma AG, a company organized under the laws of Switzerland. Horizon Pharma AG owns all of the outstanding share capital of its wholly-owned subsidiary, Horizon Pharma GmbH, a company organized under the laws of Germany, through which Horizon Pharma AG conducts most of its European operations.

The following table sets forth information regarding our directors and executive officers as of April 30, 2011:

Timothy P. Walbert. Mr. Walbert has served as chairman of our board of directors and our president and chief executive officer since our inception in March 2010. Mr. Walbert has also served as the president and chief executive officer of Horizon Pharma USA since June 2008 and on its board of directors since July 2008. From May 2007 to June 2009, Mr. Walbert served as president, chief executive officer and director of IDM Pharma, Inc., or IDM, a biopharmaceutical company which was acquired by Takeda America Holdings, Inc., or Takeda, in June 2009. From January 2006 to May 2007, Mr. Walbert served as executive vice president, commercial operations of NeoPharm, Inc., a biopharmaceutical company. From June 2001 to August 2005, Mr. Walbert served as divisional vice president and general manager, Immunology and divisional vice president, global cardiovascular strategy at Abbott Laboratories, a broad-based healthcare company. From April 1998 to June 2001, Mr. Walbert served as director, Celebrex North America and arthritis team leader, Asia Pacific, Latin America and Canada at G.D. Searle & Company, a pharmaceutical company. From 1991 to 1998, Mr. Walbert also held sales and marketing roles with increasing responsibility at Wyeth, G.D. Searle and Merck & Co., Inc. Mr. Walbert received his B.A. in business from Muhlenberg College, in Allentown, Pennsylvania. Mr. Walbert also serves on the board of directors of XOMA Ltd., Raptor Pharmaceuticals Corp., the Biotechnology Industry Organization (BIO), the Illinois Biotechnology Industry Organization (iBIO) and the Greater Chicago Arthritis Foundation. Our board believes that Mr. Walbert’s business expertise, including his prior executive level leadership, give him the operational expertise, breadth of knowledge and valuable understanding of our industry which qualify him to serve as a director and to lead our board as chairman.

Jeffrey W. Bird, M.D., Ph.D. Dr. Bird has served on our board of directors since our inception in March 2010 and has served on the board of directors of Horizon Pharma USA since July 2007. Dr. Bird has been a managing director of the general partner of Sutter Hill Ventures, a California Limited Partnership, a venture capital firm, since July 2003. Dr. Bird also serves on the boards of directors of Artemis Health, Inc., Drais Pharmaceuticals, Inc., NuGen Technologies, Inc., Portola Pharmaceuticals, Inc., Restoration Robotics, Inc.,

Threshold Pharmaceuticals, Inc. and ViroBay, Inc. From 1988 to 1990 and from 1992 to 2000, Dr. Bird served as a Senior Vice President, Business Operations at Gilead Sciences, Inc., a biopharmaceutical company, where he oversaw business development and commercial activities. Dr. Bird received his B.S. in biological sciences from Stanford University and his doctorate in cancer biology and M.D. from Stanford Medical School. Our board believes that Dr. Bird’s drug development and commercialization expertise and experience as a successful venture capitalist will bring important strategic insight and deep drug commercialization expertise to our board, as well as provide experience working with the investment community.

Hubert Birner, Ph.D. Dr. Birner has served on our board of directors since April 2010. Dr. Birner served on the board of directors of Nitec from November 2008 to March 2010. Dr. Birner joined the Munich office of TVM Capital, a venture capital firm, in 2000 and currently serves as a general partner for the firm’s life sciences group. Dr. Birner also serves on the boards of directors of Argos Therapeutics, Inc., Evotec AG, Spepharm Holding BV and Proteon Therapeutics, Inc. and has previously served on the boards of directors of BioXell SA from 2006 through 2010, Direvo Biotech AG from 2000 through 2008, Jerini AG from 2005 through 2008 and Transmolecular, Inc. from 2008 through March 2011. From 1998 to 2000, Dr. Birner served as head of European business development and director of marketing for Germany at Zeneca Agrochemicals, a biopharmaceutical company. Prior to joining Zeneca Agrochemicals, Dr. Birner was a management consultant in McKinsey & Company’s European healthcare and pharmaceutical practice. Dr. Birner received his M.B.A. from Harvard Business School and his doctorate in biochemistry from Ludwig-Maximillians University in Munich, Germany, where he graduated summa cum laude. His doctoral thesis was honored with the Hoffmann-La Roche prize for outstanding basic research in metabolic diseases. Our board believes that Dr. Birner’s leadership experience in the biopharmaceutical industry and his success as a venture capitalist will add valuable expertise and insight to our board of directors.

Louis C. Bock. Mr. Bock has served on our board of directors since our inception in March 2010 and has served on the board of directors of Horizon Pharma USA since October 2005. Mr. Bock has been a managing director of Scale Venture Partners, a venture capital firm, since September 1997. Mr. Bock also serves on the boards of directors of Ascenta Therapeutics, Inc., diaDexus, Inc., Orexigen Therapeutics, Inc., Sonexa Therapeutics, Inc., Zogenix, Inc., New Century Hospice, Inc. and Arizona Technology Enterprises, LLC, a non-profit organization. Mr. Bock has also served as a member of the boards of directors of Cellective Pharmaceuticals, Inc., Dynavax Technologies, Inc., Somaxon Pharmaceuticals, Inc. and SGX Pharmaceuticals, Inc., which was acquired by Eli Lilly and Company, or Lilly, in 2008. From September 1989 to September 1997, Mr. Bock served as a project manager for Gilead Sciences, or Gilead, where he managed Gilead’s approved antiviral drug, Vistide^®. From November 1987 to September 1989, Mr. Bock served as a research associate for Genentech, Inc., a pharmaceutical company. Mr. Bock received his M.B.A. from California State University, San Francisco and his B.S. in biology from California State University, Chico. Our board believes that Mr. Bock’s management experience and his service on other boards of directors in the biotechnology and pharmaceutical industries, including his experience in finance, give him a breadth of knowledge and valuable understanding of our industry which qualify him to serve as a director on our board.

Jean-François Formela, M.D. Dr. Formela has served on our board of directors since April 2010. Dr. Formela is a partner at Atlas Venture, a venture capital firm, which he joined in 1993. Dr. Formela also serves on the boards of directors of ARCA Biopharma, Inc., Cellzome, Inc., Egalet Ltd., Resolvyx Pharmaceuticals, Inc. and f-star Biotechnologische Forschungs- and Entwicklungsges.m.b.H. Dr. Formela has also served as a member of the boards of directors of Achillion Pharmaceuticals, Inc., Biochem Pharma, Inc., DeCode Genetics, Exelexis, Inc., Novexel SA, which was acquired by Astrazeneca PLC in 2010, Nuvelo, Inc., NxStage Medical, Inc. and SGX, which was acquired by Lilly in 2008. Prior to joining Atlas Venture, Dr. Formela served as a senior director of medical marketing and scientific affairs at Schering-Plough Corporation, a pharmaceutical company which merged with Merck & Co., Inc., where he was responsible for the marketing of Intron^®A and directed U.S. Phase 4 clinical trials. Dr. Formela has also practiced emergency medicine at Necker University Hospital in Paris, France. Dr. Formela received his M.B.A. from Columbia University and his M.D. from Paris University School of Medicine. Our board believes that Dr. Formela’s leadership and marketing experience in the pharmaceutical industry and his success as a venture capitalist will bring valuable insight to our board.

Jeff Himawan, Ph.D. Dr. Himawan has served on our board since our inception in March 2010 and has served on the board of directors of Horizon Pharma USA since July 2007. In 1999, Dr. Himawan joined Essex Woodlands Health Ventures, L.P., a venture capital firm, where he now serves as a managing director. Dr. Himawan also serves on the boards of directors of Catalyst Biosciences, Inc., MediciNova, Inc., Light Sciences Oncology, Inc., and Symphogen, Inc. Dr. Himawan also served on the board of directors of Iomai Corporation from 2001 to 2007, when it was acquired by Intercell AG. Dr. Himawan co-founded Seed-One Ventures, a venture capital firm, where from 1996 to 2001 he served as a managing director. From 1983 to 1996, Dr. Himawan was a scientist in academic and industrial settings. Dr. Himawan has written several patents in the fields of wireless communication, biotechnology and protein chemistry. Dr. Himawan received his B.S. in biology from the Massachusetts Institute of Technology and his doctorate in biological chemistry and molecular pharmacology from Harvard University. Our board believes that, as a successful venture capitalist, Dr. Himawan will bring important strategic insight to our board, as well as experience working with the investment community.

Peter Johann, Ph.D. Dr. Johann has served on our board since April 2010. Dr. Johann served on the board of directors of Nitec from March 2007 to March 2010. Since August 2004, Dr. Johann has served as a managing general partner of NGN Capital, a venture capital firm. Dr. Johann also serves on the boards of directors of Micromet, Inc., Vivaldi Biosciences, Inc., Noxxon Pharma AG, Exosome Diagnostics Inc. and Resverlogix Corporation. Dr. Johann also previously served as a director of Jerini AG. From 2000 to 2004, Dr. Johann served as division head of corporate development at Boehringer Ingelheim, a global pharmaceutical company. From 1998 to 2000, Dr. Johann served as global business leader oncology products at F. Hoffman-La Roche, a global pharmaceutical and healthcare company. From 1995 to 1998, Dr. Johann served as head of business development and marketing molecular medicine at Boehringer Mannheim, a pharmaceutical and diagnostic company. Dr. Johann obtained his doctorate from the Technical University in Munich, Germany. Our board believes that Dr. Johann’s management and leadership experience and his success as a venture capitalist give him a valuable understanding of our industry which qualify him to serve as a director on our board.

Robert J. De Vaere. Mr. De Vaere has served as our executive vice president and chief financial officer since our inception in March 2010 and as the executive vice president and chief financial officer of Horizon Pharma USA since October 2008. Mr. De Vaere also currently serves as chief financial officer and director of VisioMedtrics, Inc. From May 2007 to June 2009, Mr. De Vaere served as senior vice president, finance and administration and chief financial officer at IDM, which was acquired by Takeda in 2009. From August 2006 to April 2007, Mr. De Vaere served as chief financial officer at Nexa Orthopedics, Inc., a medical device company, which was acquired by Tornier, Inc. in February 2007. From August 2005 to March 2006, Mr. De Vaere served as vice president, finance and administration and chief financial officer at IDM. From May 2000 to August 2005, Mr. De Vaere served as vice president and chief financial officer at Epimmune Incorporated, a pharmaceutical company focused on the development of vaccines, which was combined with IDM in August 2005. Prior to 2000, Mr. De Vaere served as vice president of finance and administration and chief financial officer at Vista Medical Technologies, Inc., a medical device company. Mr. De Vaere received his B.S. from the University of California, Los Angeles.

Jeffrey W. Sherman, M.D., FACP. Dr. Sherman has served as our executive vice president, development and regulatory affairs and chief medical officer since our inception in March 2010 and as the executive vice president, development and regulatory affairs and chief medical officer of Horizon Pharma USA since June 2009. From June 2009 to June 2010, Dr. Sherman served as president and board member of the Drug Information Association, or DIA, a nonprofit professional association of members who work in the pharmaceutical and medical device industry. Dr. Sherman is presently serving as immediate past president and as a member of the board of directors of DIA. Dr. Sherman is an adjunct assistant professor of Medicine at the Northwestern University Feinberg School of Medicine and is a member of a number of professional societies as well as a diplomat of the National Board of Medical Examiners and the American Board of Internal Medicine. From August 2007 to June 2009, Dr. Sherman served as senior vice president of research and development and chief medical officer at IDM which was acquired by Takeda in 2009. From June 2007 to August 2007,

Dr. Sherman served as vice president of clinical science at Takeda, a pharmaceutical research and development center. From September 2000 to June 2007, Dr. Sherman served as chief medical officer and executive vice president at NeoPharm, Inc., a biopharmaceutical company. From October 1992 to August 2000, Dr. Sherman served as director, senior director and executive director of clinical research and head of oncology global medical operations at Searle/Pharmacia, or Searle, a pharmaceutical company. Prior to joining Searle, Dr. Sherman worked in clinical pharmacology and clinical research at Bristol-Myers Squibb Company, a biopharmaceutical company. Dr. Sherman received his M.D. from the Rosalind Franklin University/Chicago Medical School. Dr. Sherman completed an internal medicine internship, residency and chief medical residency at Northwestern University as well as fellowship training at the University of California, San Francisco, or UCSF. Dr. Sherman was also a research associate at the Howard Hughes Medical Institute at UCSF.

Todd N. Smith. Mr. Smith has served as the senior vice president, marketing and alliance management of Horizon Pharma USA since October 1, 2010. From January 2009 to August 2010, Mr. Smith served as vice president, global marketing, strategy and business development at Fenwal, Inc., a global medical device technology company, and managed a team of approximately 100 people located in the U.S. and abroad. Mr. Smith also served as vice president of automated business from May 2008 to January 2009, and amicus category business unit director from November 2007 to May 2008 at Fenwal. From April 2006 to November 2007, Mr. Smith served as director of marketing, virology franchise, at Abbott Laboratories and managed marketing and field teams of approximately 85 people. From March 2004 to April 2006, Mr. Smith served as director of sales, virology franchise, at Abbott Laboratories managing a sales and training team of approximately 200 people. From April 2003 to April 2004, Mr. Smith served as deputy director – product management, segment markets and managed care, at Bayer Biological Products, a pharmaceutical company. At Bayer Biological Products, Mr. Smith also served as associate director of coagulation products from April 2002 to April 2003. From April 2001 to April 2002, Mr. Smith served as associate director of business development at Achillion Pharmaceuticals, Inc., a biopharmaceutical company focused on infectious disease. Prior to April 2001, Mr. Smith served as a regional sales manager, product manager and sales specialist at Agouron Pharmaceuticals, Inc., a pharmaceutical company, which was acquired by Pfizer Inc. in February 2000. Mr. Smith received his B.A. from Norwich University.

Michael Adatto. Mr. Adatto has served as the senior vice president, sales and managed care of Horizon Pharma USA since August 2, 2010. From November 2005 to July 2010, Mr. Adatto served as director/senior director, managed markets marketing at Takeda Pharmaceuticals North America Inc., a pharmaceutical company, and managed a department of 12 people in the development and execution of a managed markets franchise strategy for multiple products. From December 2003 to October 2005, Mr. Adatto served as vice president, sales and marketing, at Winston Laboratories, Inc., a subsidiary of Winston Pharmaceuticals, Inc., a pharmaceutical company. From November 2001 to December 2003, Mr. Adatto served as practice lead, life science sales and marketing effectiveness, at BearingPoint, Inc., a management consulting firm. Prior to November 2001, Mr. Adatto served as executive director of sales, Midwest business unit, at Searle Pharmaceuticals, Inc., which was acquired by Pfizer Inc. in 2003. Mr. Adatto received his M.B.A. from Northwestern University and his B.B.A from Pace University.

Our board of directors currently consists of seven members. Effective upon the completion of this offering, we will divide our board of directors into three classes, as follows:

At each annual meeting of stockholders to be held after the initial classification, the successors to directors whose terms then expire will serve until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized number of directors may be changed only by

resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. Our directors may be removed for cause by the affirmative vote of the holders of at least 66 2/3% of our voting stock.

Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our board has determined that, with the exception of Mr. Walbert, all of the directors are “independent directors” as defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.

One of the key functions of our board of directors is informed oversight of our risk management process. The board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure and our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements. Our nominating and corporate governance committee monitors the effectiveness of our corporate governance practices, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee.

Our audit committee consists of Dr. Birner, Mr. Bock, Dr. Himawan and Dr. Johann, each of whom is a non-employee director of our board of directors. Mr. Bock serves as the chair of our audit committee. Our board of directors has also determined that each of the directors serving on our audit committee is independent within the meaning of Securities and Exchange Commission, or SEC, regulations and the NASDAQ Listing Rules. The functions of this committee include, among other things:

Our board of directors has determined that Mr. Bock qualifies as an audit committee financial expert within the meaning of SEC regulations and the NASDAQ Listing Rules. In making this determination, our board has considered the formal education and nature and scope of Mr. Bock’s previous experience, coupled with past and present service on various audit committees. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

Our compensation committee consists of Dr. Bird, Dr. Formela, Dr. Himawan and Dr. Johann. Dr. Formela serves as the chair of our compensation committee. Each member of our compensation committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, is an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the IRC, and satisfies the NASDAQ independence requirements. The functions of this committee include, among other things:

Our nominating and corporate governance committee consists of Dr. Bird and Dr. Birner. Our board of directors has determined that each of the members of this committee satisfies the NASDAQ independence requirements. Dr. Bird serves as the chair of our nominating and corporate governance committee. The functions of this committee include, among other things:

No member of our compensation committee has ever been an executive officer or employee of ours. None of our officers currently serves, or has served during the last completed year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors or compensation committee. Prior to establishing the compensation committee, our full board of directors made decisions relating to compensation of our officers.

This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to our named executive officers. Our board of directors has delegated responsibility for creating and reviewing the compensation of our executive officers to the compensation committee of our board of directors, which is composed of independent directors under SEC regulations and the NASDAQ Listing Rules. The role of the compensation committee is to oversee our compensation and benefit plans and policies, to administer our equity incentive plans and to annually review and make recommendations to our board of directors regarding all compensation decisions relating to our executive officers.

We believe in providing a competitive total compensation package to our executive management team through a combination of base salary, discretionary annual bonuses, grants under our equity incentive compensation plan and severance and change in control benefits. Our executive compensation programs are designed to achieve the following objectives:

Our compensation committee believes that our executive compensation programs should include short- and long-term components, including cash and equity-based compensation, and should reward consistent performance that meets or exceeds expectations by increasing base salary levels, awarding cash bonuses and granting additional equity awards, as appropriate. The compensation committee evaluates both performance and compensation to make sure that the compensation provided to our executives remains competitive relative to compensation paid by companies of similar size, geographic location and stage of development operating in the life sciences industries, taking into account our relative performance and our own strategic objectives.

The compensation committee reviews and determines generally on an annual basis the compensation to be paid to our chief executive officer and other executive officers. As part of this process, we conduct an annual review of the aggregate level of our executive compensation, as well as the mix of elements used to compensate our executive officers. As a private company, we have based this review on the extensive experience of the members on our board of directors and compensation committee that are affiliated with venture investment firms, many of whom sit on the boards of directors of numerous portfolio companies in the life sciences and biopharmaceutical fields, and on the Radford Global Life Sciences Survey, a survey of executive compensation paid by life sciences and healthcare services companies.

When setting executive compensation, the compensation committee generally considers compensation paid by life sciences and healthcare services companies included in the Radford Global Life Sciences Survey, together with other information available to it. Our compensation committee has not benchmarked our executive compensation against a particular group of companies that it considers to be comparable to us or any other group of companies. While this information may not always be appropriate as a stand-alone tool for setting compensation due to the aspects of our business and objectives that may be unique to us, the compensation committee generally believes that gathering this information is an important part of our compensation-related decision-making process and typically provides additional context and validation for executive compensation decisions.

Although our compensation committee has used this survey data as a tool in determining executive compensation, it typically has applied its subjective discretion to make compensation decisions and has not benchmarked our executive compensation against any group of companies or used a formula to set our executives’ compensation in relation to this survey data. In addition, our compensation committee has typically taken into account advice from other non-employee members of our board of directors and publicly available data relating to the compensation practices and policies of other companies within and outside our industry.

The compensation committee has also considered and intends to continue to consider key performance objectives and milestones and the achievement level of these performance objectives and milestones by our executive officers in setting their base compensation and discretionary bonus levels, and awarding bonuses and long term incentives.

Our compensation committee intends in the future to retain the services of third-party executive compensation specialists and consultants from time to time, as it sees fit, in connection with the establishment of cash and equity compensation and related policies. In connection with retaining services of executive compensation specialists and consultants, we anticipate that our compensation committee will begin to more formally benchmark our executive compensation against a peer group of life sciences companies and pharmaceutical companies that are more directly comparable to us. The compensation committee may make adjustments, including upward adjustments, in our executive compensation levels in the future as a result of this more formal compensation benchmarking process.

The chief executive officer typically evaluates the performance of other executive officers and employees, along with the performance of the company as a whole against previously determined objectives, on an annual basis and makes recommendations to the board of directors or compensation committee with respect to annual salary adjustments, bonuses and annual stock option grants. The board of directors or compensation committee exercises its own independent discretion in recommending salary adjustments and discretionary cash and equity-based awards for all executive officers. The chief executive officer is not present during deliberations or voting with respect to the compensation for himself.

The compensation program for our executive officers consists principally of base salary, annual cash incentive compensation and long-term compensation in the form of stock options as well as severance protection for certain of our executive officers through employment agreements with those executive officers. As discussed in more detail below, base salary is based primarily on market factors and annual cash incentive compensation is generally a discretionary cash bonus that is a percentage of base salary. The amount of cash compensation and the amount of equity awards granted to our executives are both considered in determining total compensation for our executive officers.

Base Salary. Base salaries for our executives are established based on the scope of their responsibilities and individual experience. Base salaries are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. The board of directors or compensation committee does not apply specific formulas to determine increases, although it has generally awarded increases as a percentage of an executive officer’s then current base salary. In February 2010, our compensation committee and our board of directors approved 3% to 6% increases to the base salaries of our then-current named executive officers, contingent and effective upon the completion of our recapitalization and acquisition of Nitec, in recognition of the significant increase in responsibility of managing the business of the combined entities in the U.S., Switzerland and Germany. As a result, upon the closing of that transaction in April 2010, the annual base salary of Mr. Walbert was increased by 3%, from $437,750 to $450,625, the annual base salary for Mr. De Vaere was increased by 3%, from $315,000 to $324,450 and the annual base salary for Dr. Sherman was increased by 6%, from $315,000 to $333,900. In May 2011, our compensation committee approved an increase to the annual base salary of Mr. Walbert from $450,625 to $550,000, an increase to the annual base salary of Mr. De Vaere from $324,450 to $350,000, an increase to the annual base salary of Dr. Sherman from

$333,900 to $370,000 and 3.5% increases to the annual base salaries of Mr. Adatto and Mr. Smith, but deferred payment of the salary increases contingent upon the completion of this offering or another financing, as determined by the compensation committee. Upon completion of this offering or another financing, these base salary increases will be retroactive to January 1, 2011.

Annual Cash Incentive Compensation. In addition to base salaries, we believe that performance-based cash bonuses play an important role in providing appropriate incentives to our executives to achieve defined annual corporate goals. Pursuant to their employment agreements, each executive officer has an established target cash bonus represented as a percentage of base salary as follows: 50% for Mr. Walbert, 40% for Mr. De Vaere, 30% for Dr. Sherman, 30% for Mr. Adatto and 30% for Mr. Smith. Bonus target percentages are reviewed annually and may be adjusted by the compensation committee in its discretion, although pursuant to the respective employment agreements with Mr. Walbert, Mr. De Vaere and Dr. Sherman, such percentages may not be reduced without the consent of the executive. In May 2011, our compensation committee approved bonus target percentages for our named executive officers for 2011 as follows: 60% for Mr. Walbert, 40% for Mr. De Vaere, 40% for Dr. Sherman, 35% for Mr. Adatto and 35% for Mr. Smith. At the end of each year, the compensation committee reviews and determines the level of achievement for each corporate goal and milestone. Final determinations as to discretionary bonus levels are based in part on the achievement of these corporate goals or milestones, as well as the compensation committee’s assessment as to the overall development of our business and corporate accomplishments. These corporate goals and milestones, and the proportional emphasis placed on each goal and milestone may vary, from time to time, depending on our overall strategic objectives, but relate generally to factors such as achievement of clinical, regulatory, manufacturing and commercialization milestones for product candidates, financial factors such as raising or preserving capital and performance against our operating budget.

In February 2010, our compensation committee recommended and our board of directors approved discretionary bonuses of $175,100 to Mr. Walbert, $100,800 to Mr. De Vaere and $94,500 to Dr. Sherman (pro-rated to $47,250 since Dr. Sherman joined us in June 2009) based upon their assessment of our performance against our corporate goals for 2009, including the achievement of clinical development and regulatory milestones relating to DUEXIS, and a capital raising milestone, and based upon competitive bonus levels. Payment of the bonuses was deferred until and contingent upon the completion of our recapitalization and acquisition of Nitec, which occurred in April 2010.

During 2010, the key corporate objectives and milestones considered by the compensation committee included the achievement of clinical development and regulatory milestones for DUEXIS and LODOTRA, the completion of the acquisition of Nitec and the integration of the businesses following the acquisition, consummation of a licensing transaction for LODOTRA in Asia, the raising of $25,000,000 through a combination of a preferred stock and convertible note financings and the coordination of an additional convertible note financing for the raise of $5,000,000 completed in January 2011, the achievement of the initial filings and related amendments of the registration statement for this offering, the completion of commercial launch plans for the U.S, the hiring of a head of marketing, managed care and sales to execute commercial launch activities, the completion of pricing and reimbursing strategies for the European Union and the U.S. and the completion of validation activities for our primary commercial manufacturer. Specific performance objectives relating to clinical development and regulatory milestones included the submission and acceptance of the NDA for DUEXIS, the submission of LODOTRA CAPRA-2 variation data, the filing of our MAA for DUEXIS in the United Kingdom and the successful participation in an FDA advisory committee meeting relating to the primary endpoint of our DUEXIS Phase 3 clinical trials.

Our board and compensation committee did not determine specific thresholds, targets or maximum levels of achievement of the 2010 performance objectives, nor did they weight any specific objective more than any other objective. Rather, Mr. De Vaere’s, Mr. Adatto’s and Mr. Smith’s performance incentive bonuses were determined based on overall achievement of our objectives and Dr. Sherman’s performance incentive bonus was determined based on achievement of clinical development and regulatory objectives. Mr. Walbert presented recommendations to the compensation committee for Mr. De Vaere, Dr. Sherman, Mr. Adatto and Mr. Smith and certain other employees.

In December 2010, based on management’s recommendations and the compensation committee’s own deliberations, the compensation committee approved discretionary performance incentive bonus amounts of $162,225 for Mr. De Vaere, $125,213 for Dr. Sherman, $79,500 for Mr. Adatto (pro rated to $36,440 since Mr. Adatto joined us in August 2010) and $79,500 for Mr. Smith (pro rated to $21,863 since Mr. Smith joined us in October 2010) based upon its assessment of our performance against our corporate goals for 2010, including the submission and acceptance of the NDA for DUEXIS, the achievement of additional clinical development and regulatory milestones for DUEXIS and LODOTRA, the completion of the acquisition of Nitec, the successful integration of the businesses and financial accounting following the acquisition, the completion of commercial development and manufacturing objectives, the achievement of a capital raising milestone, the completion of the initial filing of the registration statement relating to this offering and competitive bonus levels. The compensation committee deferred the determination of the amount of any discretionary performance incentive bonus for Mr. Walbert. Payment of the discretionary bonuses for Mr. De Vaere, Dr. Sherman, Mr. Adatto and Mr. Smith were deferred until and are contingent upon the completion of this offering or another financing, as determined by the compensation committee.

In May 2011, based upon management’s recommendations and the compensation committee’s own deliberations, the compensation committee approved a discretionary performance incentive bonus amount of $337,969 for Mr. Walbert for 2010. Payment of the discretionary bonus for Mr. Walbert was deferred until and is contingent upon the completion of this offering or another financing, as determined by the compensation committee.

Discretionary bonuses for 2011 will be determined by our compensation committee and our board of directors and paid at the end of 2011 or in early 2012, and may be above or below target bonus levels.

Long-term Incentive Program. We believe that by providing our executives the opportunity to increase their ownership of our stock, the best interests of stockholders and executives will be more aligned and will encourage long-term performance. The stock awards enable our executive officers to benefit from the appreciation of stockholder value, while personally participating in the risks of business setbacks. Our equity benefit plans have provided our executive officers the primary means to acquire equity or equity-linked interests in us.

Prior to this offering, we have granted equity awards primarily through our 2005 stock plan, which was adopted by our board of directors and stockholders to permit the grant of stock options to our officers, directors, employees and consultants. The material terms of our 2005 stock plan are further described under “—Employee Benefit Plans” below.

In February 2010, we granted stock options to our then-current named executive officers in connection with the increases to their base salaries as part of overall compensation. Additional stock option grants were made to Messrs. Walbert, De Vaere and Adatto, and Dr. Sherman and other employees in June 2010 following an equity valuation and to address the impact of dilution from financing activities. In December 2010, we granted a stock option to Mr. Smith pursuant to his employment agreement.

In the absence of a public trading market for our common stock, our board of directors has determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors including our financial condition, the likelihood of a liquidity event, the liquidation preference of our preferred stock, the price at which our preferred stock was sold, the enterprise values of comparable companies, our cash needs, operating losses, market conditions, material risks to our business and valuations prepared in accordance with the methodologies prescribed by the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

All equity awards to our employees, consultants and directors were granted at no less than the fair market value of our common stock as determined in good faith by our board of directors on the date of each award.

The majority of the stock option grants we have historically made vest over four years, with one quarter of the shares subject to the stock option vesting on the one-year anniversary of the vesting commencement date and the remaining shares vesting in equal monthly installments thereafter over three years. Beginning in June 2010, new option grants made to employees who have been employed by us for at least one year vest over four

years, monthly from the date of grant. All options have a 10-year term. Additional information regarding accelerated vesting prior to, upon or following a change in control is discussed below under “—Potential Payments Upon Termination or Change-in-Control.” We do not have any program, plan or obligation that requires us to grant equity compensation on specified dates and, because we have not been a public company, we have not made equity grants in connection with the release or withholding of material non-public information. Authority to make equity grants to executive officers rests with our compensation committee, although our compensation committee does consider the recommendations of our chief executive officer for officers other than himself.

In connection with this offering, our board of directors has adopted new equity benefit plans described under “—Employee Benefit Plans” below. Our 2011 equity incentive plan will replace our existing 2005 stock plan immediately following this offering and, as described below, will afford our compensation committee continued flexibility in making a wide variety of equity awards. Participation in our 2011 equity incentive plan that we have adopted, and which will become effective immediately upon signing of the underwriting agreement for this offering, will also be available thereafter to all executive officers on the same basis as our other employees.

Severance and Change in Control Benefits. Our named executive officers are entitled to certain severance and change in control benefits, the terms of which are described below under “—Potential Payments Upon Termination or Change-in-Control.” We believe these severance and change in control benefits are an essential element of our overall executive compensation package and assist us in recruiting and retaining talented individuals and aligning the executives’ interests with the best interests of the stockholders.

Severance Benefit Plan. In July 2010, our board approved a Severance Benefit Plan for U.S. officers employed by Horizon Pharma USA and/or Horizon Pharma for at least six months at the level of executive vice president, senior vice president or vice president. Severance benefits include payment of three months’ base salary and Consolidated Omnibus Budget Reconciliation Act, or COBRA, health insurance premiums for vice presidents and six months’ base salary and COBRA health insurance premiums for executive vice presidents and senior vice presidents. In addition, stock option and other equity awards are subject to acceleration in the event of a qualifying termination within 90 days prior to or within 18 months following a change in control. Severance benefits are payable if the officer’s employment is involuntarily terminated without cause or constructively terminated under certain circumstances and are intended to keep our officers focused on corporate interests while employed and to ease the consequences to an officer of a termination of employment. The advantages to us also include our receipt of a waiver and release of claims, which the separated officer must provide to us as a condition to receiving benefits. Any payments payable under the Severance Benefit Plan are reduced by severance benefits payable by us under any individual employment agreement or any other agreement, policy, plan, program or arrangement.

Other Compensation. All of our executive officers are eligible to receive benefits offered to our employees generally. Consistent with our compensation philosophy, we intend to continue to maintain the current benefits for our executive officers; however, our compensation committee, in its discretion, may in the future revise, amend or add to the benefits of any executive officer it deems it advisable.

Deductibility of Compensation under Section 162(m). Section 162(m) of the Internal Revenue Code of 1986 as amended, or the IRC, limits our deduction for federal income tax purposes to not more than $1 million of compensation paid to certain executive officers in a calendar year. Compensation above $1 million may be deducted if it is “performance-based compensation.” To maintain flexibility in compensating our executive officers in a manner designed to promote our objectives, the compensation committee has not adopted a policy that requires all compensation to be deductible. However, the compensation committee intends to evaluate the effects of the compensation limits of Section 162(m) on any compensation it proposes to grant, and the compensation committee intends to provide future compensation in a manner consistent with our best interests and those of our stockholders.

The following table provides information regarding the compensation earned during the years ended December 31, 2010, 2009 and 2008 by our Chairman, President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Executive Vice President, Development, Regulatory Affairs and Chief Medical Officer, Senior Vice President, Sales and Managed Care and Senior Vice President, Marketing and Alliance Management, who we collectively refer to as our “named executive officers.”

Payments Made Upon Termination. Regardless of the manner in which a named executive officer’s employment terminates, the named executive officer is entitled to receive amounts earned during his term of employment, including salary and unused vacation pay.

Potential Termination-Based Payments under Employment Arrangements. In July 2010, we entered into an amended and restated employment agreement with Mr. Walbert, our president and chief executive officer, that provides if we terminate Mr. Walbert without cause or if Mr. Walbert resigns for good reason, he will be entitled to (1) be compensated at his then annual base salary for 12 months from his date of termination, (2) receive his target bonus for the previous year, and (3) receive COBRA health insurance premiums for up to 12 months from the date of his termination. In addition, if Mr. Walbert is terminated without cause or if Mr. Walbert resigns for good reason within 90 days prior to or within 18 months following a change in control, 100% of the shares subject to options granted to Mr. Walbert will fully vest as of the termination date. Cause is defined as gross negligence or willful failure to substantially perform duties and responsibilities to us or willful and deliberate violation of any of our policies; conviction of a felony involving commission of any act of fraud, embezzlement or dishonesty against us or involving moral turpitude; the unauthorized use or disclosure of any of our proprietary information or trade secrets and willful and deliberate breach of the executive’s obligations under the employment agreement that cause material injury to us. Resignation for good reason is defined as a material reduction in duties, authority or responsibilities, the relocation of place of employment by more than 50 miles, or a material reduction of salary or annual target bonus opportunity. In the event of termination due to Mr. Walbert’s death or complete disability, he and/or his heirs shall be eligible to receive a pro-rated bonus for the year in which such termination occurs, as determined by our board or compensation committee based on actual performance.

In July 2010, we entered into an amended and restated employment agreement with Mr. De Vaere, our executive vice president and chief financial officer, that provides if we terminate Mr. De Vaere without cause or if Mr. De Vaere resigns for good reason, he will be entitled to be compensated at his then annual base salary for 12 months from his date of termination and will also be entitled to receive COBRA health insurance premiums for up to 12 months from the date of his termination. In addition, if Mr. De Vaere is terminated without cause or resigns for good reason within 90 days prior to or within 18 months following a change in control, 100% of the shares subject to options granted to Mr. De Vaere will fully vest as of the termination date. Cause is defined as gross negligence or willful failure to substantially perform duties and responsibilities to us or willful and deliberate violation of any of our policies; conviction of a felony or the commission of any act of fraud, embezzlement or

dishonesty against us or involving moral turpitude; the unauthorized use or disclosure of any of our proprietary information or trade secrets; and willful and deliberate breach of the executive’s obligations under the employment agreement that cause material injury to us. Resignation for good reason is defined as a material reduction in duties, authority or responsibilities, the relocation of place of employment by more than 50 miles, or a material reduction of salary or annual target bonus opportunity. In the event of termination due to Mr. De Vaere’s death or complete disability, he and/or his heirs shall be eligible to receive a pro-rated bonus for the year in which such termination occurs, as determined by our board or compensation committee based on actual performance.

In July 2010, we entered into an amended and restated employment agreement with Dr. Sherman, our executive vice president of development and regulatory affairs and chief medical officer, that provides if we terminate Dr. Sherman without cause or if Dr. Sherman resigns for good reason, he will be entitled to be compensated at his then annual base salary for 12 months from his date of termination and will also be entitled to receive COBRA health insurance premiums for up to 12 months from the date of his termination. In addition, if Dr. Sherman is terminated without cause or resigns for good reason within 90 days prior to or within 18 months following a change in control, 100% of the shares subject to options granted to Dr. Sherman will fully vest as of the termination date. Cause is defined as gross negligence or failure to substantially perform duties and responsibilities to us or willful violation of any of our policies; conviction of a felony or the commission of any act of fraud, embezzlement or dishonesty against us or involving moral turpitude the unauthorized use or disclosure of any of our proprietary information or trade secrets; and breach of the executive’s obligations under the employment agreement that causes injury to us. Resignation for good reason is defined as the relocation of place of employment by more than 50 miles, or a material reduction of salary or annual target bonus opportunity. In the event of termination due to Dr. Sherman’s death or complete disability, he and/or his heirs shall be eligible to receive a pro-rated bonus for the year in which such termination occurs, as determined by our board or compensation committee based on actual performance.

Our employment agreements with Mr. Adatto and Mr. Smith do not include provisions for potential payments upon termination or change in control. However, because Mr. Adatto and Mr. Smith are both senior vice presidents who have been employed for at least six months they both are eligible for payments under our Severance Benefit Plan.

Change in Control. A change in control under our employment agreements with Mr. Walbert, Mr. De Vaere and Dr. Sherman is defined generally as the sale of all or substantially all of our assets; a merger or consolidation in which we are not the surviving entity and in which the holders of our voting stock immediately prior to such transaction own less than 50% of voting power of the entity surviving the transaction or, where the surviving entity is a wholly-owned subsidiary of another entity, the surviving entity’s parent; a reverse merger in which we are the surviving entity but the shares of common stock outstanding prior to the merger are converted into other property and in which the holders of our voting stock immediately prior to such transaction own less than 50% of the voting power of our stock, or where we are a wholly-owned subsidiary of another entity, of our parent; or an acquisition by any person, entity or group of beneficial ownership of at least 75% of the combined voting power entitled to vote in an election of our directors.

Releases. All termination-based payments (other than due to death or complete disability) to Mr. Walbert, Mr. De Vaere and Dr. Sherman pursuant to their employment agreements are contingent upon (1) the executive’s execution of a standard release of claims in our favor and (2) the executive’s entering into a non-competition agreement to be effective during the period during which the executive receives severance benefits.

Sections 280G and 4999. Any payment or benefit provided under our named executive officers’ employment agreements or otherwise in connection with a change in control may be subject to an excise tax under Section 4999 of the IRC. These payments also may not be eligible for a company tax deduction pursuant to Section 280G of the IRC. If any of these payments or benefits are subject to the excise tax, they may be reduced to provide the individual with the best after-tax result. Specifically, the individual will receive either a reduced amount so that the excise tax is not triggered, or the individual will receive the full amount of the payments and benefits and then be liable for any excise tax.

For more information regarding accelerated vesting of stock options under our equity incentive plans in the event of certain corporate transactions, please see “—Employee Benefit Plans—2005 Stock Plan” and “—2011 Equity Incentive Plan” below.

The following table sets forth potential payments payable to our named executive officers upon a termination of employment without cause or resignation for good reason or termination of employment without cause or resignation for good reason following a change in control. The table below reflects amounts payable to our executive officers assuming their employment was terminated on December 31, 2010 and, if applicable, a change in control also occurred on such date:

All stock options granted to our named executive officers are incentive stock options to the extent permissible under the IRC. The exercise price per share of each stock option granted to our named executive officers was equal to the fair market value of our common stock as determined in good faith by our board of directors on the date of the grant. All stock options were granted under our 2005 stock plan.

The following table sets forth certain information regarding grants of non-equity incentive plan and equity incentive plan-based awards to our named executive officers for 2010.

The following table sets forth certain information regarding outstanding stock options held by our named executive officers on December 31, 2010.

Our named executive officers did not exercise any stock option awards during the fiscal year ended December 31, 2010.

We did not engage in any repricings or other modifications to any of our named executive officers’ outstanding equity awards during the year ended December 31, 2010.

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our compensation committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our best interests.

None of our named executive officers participate in or have account balances in nonqualified deferred contribution plans or other nonqualified deferred compensation plans maintained by us. Our compensation committee may elect to provide our executive officers and other employees with non-qualified defined contribution or other nonqualified deferred compensation benefits in the future if it determines that doing so is in our best interests.

Our board of directors adopted and our stockholders approved our 2005 stock plan, or the 2005 plan, in October 2005. As of March 31, 2011, 5,734 shares of common stock have been issued upon the exercise of options granted under the 2005 plan, options to purchase 1,317,534 shares of common stock were outstanding and 448,021 shares remained available for future grant. We intend that effective upon the signing of the underwriting agreement for this offering, no further option grants will be made under the 2005 plan. Following the signing of the underwriting agreement for this offering and subject to stockholder approval of the 2011 equity incentive plan, or 2011 plan, all future equity awards will be granted under our 2011 plan. However, all stock options granted under the 2005 plan prior to the offering will continue to be governed by the terms of the 2005 plan.

The principal features of the 2005 plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2005 plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

Share Reserve. As of March 31, 2011, an aggregate of 1,771,289 shares of our common stock are authorized for issuance under the 2005 plan.

Shares of our common stock subject to options that have expired or otherwise terminate under the 2005 plan without having been exercised in full will become available for future grant under the 2011 plan. Shares of our common stock issued under the 2005 plan may include previously unissued shares or reacquired shares bought on the market or otherwise.

Administration. The 2005 plan is administered by our board of directors, which has delegated its authority to administer the 2005 plan to our compensation committee. Subject to the terms of the 2005 plan, our compensation committee determines recipients, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, our compensation committee also determines the exercise price of options granted under the 2005 plan.

Eligibility. The 2005 plan permits us to grant stock awards, including options and restricted stock awards to our employees, directors and consultants. Our board of directors and compensation committee have granted only stock options under the 2005 plan. A stock option may be an incentive stock option within the meaning of Section 422 of the IRC or a nonstatutory stock option.

Stock Option Provisions Generally. Stock options will be granted pursuant to stock option agreements. The exercise price for an incentive stock option granted to an employee who is not a 10% holder cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant, and the exercise price for an incentive stock option granted to an employee who is a 10% holder cannot be less than 110% of the fair market value of the common stock subject to the option on the date of grant, except in each case, in connection with a merger or other corporate transaction.

The terms of the 2005 plan provide that the exercise price for a nonstatutory stock option granted to a person who is not a 10% holder on a date on which the common stock is not a listed security cannot be less than 85% of the fair market value of the common stock subject to the option on the date of grant except, the exercise price for a nonstatutory stock option granted to a person who is a 10% holder on a date on which the common stock is not a listed security cannot be less than 110% of the fair market value of the common stock subject to the option on the date of grant, and the exercise price for a nonstatutory stock option granted to any person on a date in which the common stock is a listed security cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant if the option is intended to qualify as performance-based compensation under Section 162(m) of the IRC, except in each case, in connection with a merger or other corporate transaction. We have not granted options with exercise prices less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2005 plan will vest at the rate specified in the option agreement.

The term of stock options granted under the 2005 plan may not exceed 10 years. Unless the terms of an optionholder’s stock option agreement provides for earlier or later termination, if an optionholder’s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options up for to six months, or 12 months in the event of death, after the date the service relationship ends, unless the terms of the stock option agreement provide for earlier termination. If an optionholder’s service relationship with us, or any affiliate of ours, ceases without cause for any reason other than disability or death, the optionholder may exercise any vested options for up to 30 days after the date the service relationship ends, unless the terms of the stock option agreement provide for a longer or shorter period to exercise the option. If an optionholder’s service relationship with us, or any affiliate of ours, ceases with us for cause, the option will terminate at the time the optionholder’s relationship with us ceases. In no event may an option be exercised after its expiration date.

Acceptable forms of consideration for the purchase of our common stock under the 2005 plan include cash, check, delivery of a promissory note, cancellation of indebtedness, shares of stock which have been owned for more than six months, consideration paid through a same-day sale cashless brokered exercise program, or any combination of such consideration.

Generally, an optionholder may not transfer a stock option other than by will, the laws of descent and distribution or pursuant to a domestic relations order or by gift to the optionholder’s immediate family. An optionholder may, however, designate a beneficiary who may exercise the option following the optionholder’s death.

Limitations. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. The options or portions of options that exceed this limit are treated as nonstatutory stock options.

Changes to Capitalization. In the event that there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split, stock dividend or other recapitalization, the number of shares reserved under the 2005 plan and the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards must be appropriately adjusted by the plan administrator.

Corporate Transactions. Unless otherwise provided in the option agreement, in the event of certain corporate transactions, any or all outstanding stock awards under the 2005 plan must be assumed or substituted for by any surviving entity. If the surviving entity elects not to assume or substitute for such awards, such stock awards will be terminated. In the event of our dissolution or liquidation, all outstanding stock awards under the 2005 plan will terminate immediately prior to such event.

Plan Amendments. Our board of directors has the authority to amend, alter, suspend or discontinue the 2005 plan. However, no amendment or termination of the plan may adversely affect any rights under awards already granted to a participant without the affected participant’s consent. We will obtain stockholder approval of any amendment to the 2005 plan as required by applicable law. The 2005 plan will expire in October 2015 unless sooner terminated by our board of directors or in connection with the effective date of this offering and our 2011 plan.

Our board of directors adopted the 2011 plan in July 2010 and approved the final share reserve and evergreen provisions under the 2011 plan in March 2011, and our stockholders approved the 2011 plan in June 2011. The 2011 plan will become effective immediately upon the signing of the underwriting agreement related to this offering. The 2011 plan will terminate in 2021, unless sooner terminated by our board of directors. The purpose of the 2011 plan is to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The 2011 plan is also designed to permit us to make cash-based awards and equity-based awards intended to qualify as “performance-based compensation” under Section 162(m) of the IRC.

Stock Awards. The 2011 plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity compensation, or collectively, stock awards. In addition, the 2011 plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees, subject to certain limitation described below. All other awards may be granted to employees, including officers, as well as directors and consultants.

The principal features of the 2011 plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2011 plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

Share Reserve. Following this offering, initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2011 plan after the 2011 plan becomes effective is 3,366,228 shares, which number is the sum of (1) the number of shares reserved for future issuance under the 2005 plan at the time the 2011 plan becomes effective, (2) an additional number of shares, up to 1,317,534 shares, that are subject to outstanding stock awards granted under the 2005 plan that expire or terminate for any reason prior to their exercise or settlement and would otherwise return to the 2005 Plan reserve and (3) an additional 1,600,673 new shares. Then, the number of shares of our common stock reserved for issuance under the 2011 plan will automatically increase on January 1 of each year, starting on January 1, 2012 and continuing through January 1, 2021, by the least of (a) 5% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (b) 1,474,304 shares, or (c) such lesser number of shares of common stock as determined by our board of directors. The maximum number of shares that may be issued pursuant to the

exercise of incentive stock options under the 2011 plan is 2,106,149 shares plus the number of shares that are added to the 2011 plan share reserve pursuant to annual evergreen increases or pursuant to outstanding 2005 plan awards that expire or terminate prior to exercise or settlement.

No person may be granted stock awards covering more than 1,053,074 shares of our common stock under the 2011 plan during any calendar year pursuant to stock options or stock appreciation rights. In addition, no person may be granted a performance stock award covering more than 631,844 shares or a performance cash award covering more than $3,000,000 in any calendar year. Such limitations are designed to help assure that any deductions to which we would otherwise be entitled with respect to such stock awards will not be subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the IRC.

If a stock award granted under the 2011 plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common stock not acquired pursuant to the stock award again become available for subsequent issuance under the 2011 plan. In addition, the following types of shares under the 2011 plan may become available for the grant of new stock awards under the 2011 plan: (a) shares that are forfeited to or repurchased by us prior to becoming fully vested; (b) shares withheld to satisfy income or employment withholding taxes; (c) shares used to pay the exercise price of an option in a net exercise arrangement; and (d) shares tendered to us to pay the exercise price of an option. As of the date hereof, no shares of our common stock have been issued under the 2011 plan.

Administration. Our board of directors has delegated its authority to administer the 2011 plan to our compensation committee. The compensation committee is required to consist of two or more “outside directors” within the meaning of Section 162(m) of the IRC and/or two or more “non-employee directors” for the purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Subject to the terms of the 2011 plan, our board of directors or an authorized committee, referred to as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted, the consideration (if any) to be paid for restricted stock awards and the strike price of stock appreciation rights.

The plan administrator has the authority to reprice any outstanding stock award (by reducing the exercise price of any outstanding option, canceling an option in exchange for cash or another equity award or any other action that may be deemed a repricing under generally accepted accounting provisions) under the 2011 plan without the approval of our stockholders.

Stock Options. Incentive and nonstatutory stock options are granted pursuant to incentive and nonstatutory stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2011 plan, provided that the exercise price of a stock option cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2011 plan vest at the rate specified by the plan administrator.

The plan administrator determines the term of stock options granted under the 2011 plan, up to a maximum of 10 years, except in the case of certain incentive stock options, as described below. Unless the terms of an optionholder’s stock option agreement provide otherwise, if an optionholder’s relationship with us, or any of our affiliates, ceases for any reason other than for cause, disability or death, the optionholder may exercise any vested options for a period of three months following the cessation of service. If an optionholder’s service relationship with us is terminated for cause, then the option terminates immediately. If an optionholder’s service relationship with us or any of our affiliates ceases due to disability or death, or an optionholder dies within the period (if any) specified in the award agreement following cessation of service, the optionholder or a beneficiary may exercise any vested options for a period of 12 months in the event of disability and 18 months in the event of death. The option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its maximum term.

Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (a) cash, check, bank draft or money order, (b) a broker-assisted cashless exercise, (c) the tender of common stock previously owned by the optionholder, (d) a net exercise of the option and (e) other legal consideration approved by the plan administrator.

Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionholder may, however, designate a beneficiary who may exercise the option following the optionholder’s death.

Limitations on Incentive Stock Options. Incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock comprising more than 10% of our total combined voting power or that of any of our affiliates unless (a) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (b) the term of the incentive stock option does not exceed five years from the date of grant.

Restricted Stock Awards. Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the plan administrator. Restricted stock awards may be granted in consideration for (a) cash, check, bank draft or money order, (b) past or future services rendered to us or our affiliates, or (c) any other form of legal consideration. Shares of common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option or forfeiture restriction in our favor in accordance with a vesting schedule to be determined by the plan administrator. Rights to acquire shares under a restricted stock award may be transferred only upon such terms and conditions as set by the plan administrator. Except as otherwise provided in the applicable award agreement, restricted stock awards that have not vested will be forfeited or subject to repurchase upon the participant’s cessation of continuous service for any reason.

Restricted Stock Unit Awards. Restricted stock unit awards are granted pursuant to restricted stock unit award agreements adopted by the plan administrator. Restricted stock unit awards may be granted in consideration for any form of legal consideration. A restricted stock unit award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Except as otherwise provided in the applicable award agreement, restricted stock units that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason.

Stock Appreciation Rights. Stock appreciation rights are granted pursuant to stock appreciation rights agreements adopted by the plan administrator. The plan administrator determines the strike price for a stock appreciation right which generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Upon the exercise of a stock appreciation right, we will pay the participant an amount equal to the product of (a) the excess of the per share fair market value of our common stock on the date of exercise over the strike price, multiplied by (b) the number of shares of common stock with respect to which the stock appreciation right is exercised. A stock appreciation right granted under the 2011 plan vests at the rate specified in the stock appreciation right agreement as determined by the plan administrator.

The plan administrator determines the term of stock appreciation rights granted under the 2011 plan, up to a maximum of 10 years. If a participant’s service relationship with us, or any of our affiliates, ceases, then the participant, or the participant’s beneficiary, may exercise any vested stock appreciation right for three months (or such longer or shorter period specified in the stock appreciation right agreement) after the date such service relationship ends. In no event, however, may a stock appreciation right be exercised beyond the expiration of its term.

Performance Awards. The 2011 plan permits the grant of performance stock awards and performance cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of

the IRC. To assure that the compensation attributable to performance-based awards will so qualify, our committee can structure such awards so that stock will be issued or paid pursuant to such award only upon the achievement of certain pre-established performance goals during a designated performance period. The maximum benefit number of shares that may be granted to a participant in any calendar year attributable to performance stock awards may not exceed 631,844 shares of common stock and the maximum value that may be granted to a participant in any calendar year attributable to performance cash awards may not exceed $3,000,000.

Other Stock Awards. The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the award and all other terms and conditions of such awards.

Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split, appropriate adjustments will be made to (a) the class and maximum number of shares reserved under the 2011 plan, (b) the maximum number of shares by which the share reserve may increase automatically each year, (c) the class and maximum number of shares subject to options, stock appreciation rights and performance stock awards that can be granted in a calendar year, (d) the class and maximum number of shares that may be issued upon exercise of incentive stock options and (e) the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards.

Corporate Transactions. The 2011 plan provides that, in the event of a sale, lease or other disposition of all or substantially all of the assets of us or specified types of mergers or consolidations (each, a “corporate transaction”), any surviving or acquiring corporation shall either assume awards outstanding under the 2011 plan or substitute similar awards for those outstanding under the 2011 plan. If any surviving corporation declines to assume awards outstanding under the 2011 plan or to substitute similar awards, then, with respect to participants whose service with us has not terminated prior to the time of such corporate transaction, the vesting and the time during which such awards may be exercised will be accelerated in full, and all outstanding awards will terminate if the participant does not exercise such awards at or prior to the corporate transaction. With respect to any awards that are held by other participants that terminated service with us prior to the corporate transaction, the vesting and exercisability provisions of such awards will not be accelerated and such awards will terminate if not exercised prior to the corporate transaction.

Changes in Control. Our board of directors has the discretion to provide that a stock award under the 2011 plan will immediately vest as to all or any portion of the shares subject to the stock award (a) immediately upon the occurrence of certain specified change in control transactions, whether or not such stock award is assumed, continued or substituted by a surviving or acquiring entity in the transaction or (b) in the event a participant’s service with us or a successor entity is terminated actually or constructively within a designated period following the occurrence of certain specified change in control transactions. Stock awards held by participants under the 2011 plan will not vest automatically on such an accelerated basis unless specifically provided in the participant’s applicable award agreement.

For purposes of the 2011 plan, a change in control is the occurrence of one or more of the following events:

Dissolution or Liquidation. In the event of our dissolution or liquidation, except as otherwise provided in the award agreement, all outstanding stock awards under the 2011 plan will terminate immediately prior to the completion of such dissolution or liquidation and shares of common stock subject to our repurchase rights or to a forfeiture condition may be repurchased or reacquired by us. Our board of directors may, however, in its sole discretion, cause some or all such stock awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture before the dissolution or liquidation is completed, but contingent upon its completion.

Plan Suspension, Termination. Our board of directors has the authority to suspend or terminate the 2011 plan at any time provided that such action does not impair the existing rights of any participant.

Securities laws and federal income taxes. The 2011 plan is designed to comply with various securities and federal tax laws as follows:

Securities laws. The 2011 plan is intended to conform to all provisions of the Securities Act of 1933, as amended, and Exchange Act and any and all regulations an rules promulgated by the SEC thereunder, including, without limitation, Rule 16b-3. The 2011 plan will be administered, and options will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.

Section 409A of the IRC. Certain awards under the 2011 plan may be considered “nonqualified deferred compensation” for purposes of Section 409A of the IRC, which imposes certain additional requirements regarding the payment of deferred compensation. Generally, if at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements of Section 409A, or is not operated in accordance with those requirements, all amounts deferred under the 2011 plan and all other equity incentive plans for the taxable year and all preceding taxable years, by any participant with respect to whom the failure relates, are includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. If a deferred amount is required to be included in income under Section 409A, the amount also is subject to interest and an additional income tax. The interest imposed is equal to the interest at the underpayment rate plus one percentage point, imposed on the underpayments that would have occurred had the compensation been includible in income for the taxable year when first deferred, or if later, when not subject to a substantial risk of forfeiture. The additional federal income tax is equal to 20% of the compensation required to be included in gross income. In addition, certain states, including California, have laws similar to Section 409A, which impose additional state penalty taxes on such compensation.

Section 162(m) of the IRC. In general, under Section 162(m) of the IRC, income tax deductions of publicly held corporations may be limited to the extent total compensation (including, but not limited to, base salary, annual bonus, and income attributable to stock option exercises and other non-qualified benefits) for certain executive officers exceeds $1,000,000 (less the amount of any “excess parachute payments” as defined in Section 280G of the IRC) in any taxable year of the corporation. However, under Section 162(m), the deduction limit does not apply to certain “performance-based compensation” established by an independent compensation committee that is adequately disclosed to, and approved by, stockholders. In particular, stock options and SARs will satisfy the “performance-based compensation” exception if the awards are made by a qualifying compensation committee, the 2011 plan sets the maximum number of shares that can be granted to any person within a specified period and the compensation is based solely on an increase in the stock price after the grant date. Specifically, the option exercise price must be equal to or greater than the fair market value of the stock subject to the award on the grant date.

We have attempted to structure the 2011 plan in such a manner that the compensation attributable to stock options, SARs and other performance-based awards which meet the other requirements of Section 162(m) will not be subject to the $1,000,000 limitation. We have not, however, requested a ruling from the IRS or an opinion of counsel regarding this issue.

Our board of directors adopted our 2011 employee stock purchase plan, or the 2011 purchase plan, in July 2010 and approved the final share reserve and evergreen provisions under the 2011 plan in March 2011, and our stockholders approved the 2011 purchase plan in June 2011. The purpose of the 2011 purchase plan is to assist

us in retaining the services of new employees and securing the services of new and existing employees while providing incentives for such individuals to exert maximum efforts toward our success.

Share Reserve. Following this offering, the 2011 purchase plan authorizes the issuance of 463,352 shares of our common stock pursuant to purchase rights granted to our employees or to employees of our subsidiaries. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2012 through January 1, 2021, by the least of (a) 4% of the total number of shares of our common stock outstanding on December 31st of the preceding calendar year, (b) 1,053,074 shares, or (c) a number determined by our board of directors that is less than (a) or (b). The 2011 purchase plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the IRC. As of the date hereof, no shares of our common stock have been purchased under the 2011 purchase plan.

Administration. Our board of directors has delegated its authority to administer the 2011 purchase plan to our compensation committee. The 2011 purchase plan is implemented through a series of offerings of purchase rights to eligible employees. Under the 2011 purchase plan, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances.

Payroll Deductions. Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in the 2011 purchase plan and may contribute, normally through payroll deductions, up to 15% of their earnings for the purchase of our common stock under the 2011 purchase plan. Unless otherwise determined by our board of directors, common stock will be purchased for accounts of employees participating in the 2011 purchase plan at a price per share equal to the lower of (a) 85% of the fair market value of a share of our common stock on the first date of an offering or (b) 85% of the fair market value of a share of our common stock on the date of purchase.

Limitations. Employees may have to satisfy one or more of the following service requirements before participating in the 2011 purchase plan, as determined by our board of directors: (a) customarily employed for more than 20 hours per week, (b) customarily employed for more than five months per calendar year or (c) continuous employment with us or one of our affiliates for a period of time not to exceed two years. No employee may purchase shares under the 2011 purchase plan at a rate in excess of $25,000 worth of our common stock based on the fair market value per share of our common stock at the beginning of an offering for each year such a purchase right is outstanding. Finally, no employee will be eligible for the grant of any purchase rights under the 2011 purchase plan if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value pursuant to IRC Section 424(d).

Changes to Capital Structure. In the event that there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make appropriate adjustments to (a) the number of shares reserved under the 2011 purchase plan, (b) the maximum number of shares by which the share reserve may increase automatically each year and (c) the number of shares and purchase price of all outstanding purchase rights.

Corporate Transactions. In the event of certain significant corporate transactions, including a sale of all our assets, the sale or disposition of 90% of our outstanding securities, or the consummation of a merger or consolidation where we do not survive the transaction, any then-outstanding rights to purchase our stock under the 2011 purchase plan may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such purchase rights, then the participants’ accumulated payroll contributions will be used to purchase shares of our common stock within 10 business days prior to such corporate transaction, and such purchase rights will terminate immediately.

Plan Amendments, Termination. Our board has the authority to amend or terminate the 2011 purchase plan at any time. If our board determines that the amendment or terminating of an offering is in our best interests and the best interests of our stockholders, then our board may terminate any offering on any purchase date, establish a new purchase date with respect to any offering then in progress, amend the 2011 purchase plan and the ongoing offering to refuse or eliminate detrimental account treatment or terminate any offering and refuse any money contributed back to the participants. We will obtain stockholder approval of any amendment to the 2011 purchase plan as required by applicable law.

We maintain a defined contribution employee retirement plan for our U.S. employees. The plan is intended to qualify as a tax-qualified plan under Section 401(k) of the IRC so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. The 401(k) plan provides that each participant may contribute up to 80% of his or her pre-tax compensation, up to a statutory limit, which is $16,500 for 2011. Participants who are at least 50 years old can also make “catch-up” contributions, which in 2011 may be up to an additional $5,500 above the statutory limit. Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The 401(k) plan also permits us to make discretionary profit sharing contributions and discretionary matching contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary profit sharing or discretionary matching contributions to the plan on behalf of participating employees.

None of our non-employee directors received fees, stock options, or any other compensation for services as a director during the fiscal year ended December 31, 2010. Our compensation committee may in the future grant stock options to our non-employee directors if it determines that doing so is in our best interests.

Our board of directors has adopted a compensation policy for our non-employee directors who are not affiliated with any holder of more than 5% of our common stock, which will become effective upon the completion of this offering. The policy provides for an annual board service retainer, payable in quarterly installments, of $40,000 for a non-executive chairman of the board or lead independent director and $30,000 for all other eligible non-employee directors and committee member service fees ranging from $3,750 to $15,000 per year. In addition, eligible non-employee directors elected to the board after the completion of this offering will receive a stock option for 10,530 shares, vesting in equal installments over 36 month from the date of grant. Thereafter, at each annual meeting of our shareholders, eligible non-employee directors will automatically receive stock option grants of 5,265 shares, vesting in equal installments over 12 months from the date of grant.

Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:

Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, does not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, which remain available under Delaware law. These limitations also do not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state or federal laws. Our amended and restated bylaws, which will become effective upon the

completion of this offering, provide that we will indemnify our directors and officers, and may indemnify, employees and other agents, to the extent not prohibited by law. Our amended and restated bylaws also provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding and also permit us to secure insurance on behalf of any officer, director, employee or other agent required or permitted to be indemnified by our amended and restated bylaws. We have obtained a policy of directors’ and officers’ liability insurance.

We have entered, and intend to continue to enter, into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our amended and restated bylaws. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.

The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

The following is a description of transactions since January 1, 2007 and certain transactions prior to that date to which we have been a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or to our knowledge, beneficial owners of more than 5% of our capital stock, including any of their immediate family members, and any entity owned or controlled by such persons, had or will have a direct or indirect material interest, other than compensation, termination and change-in-control arrangements, which are described under “Executive and Director Compensation.” We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions with unrelated third parties.

We have adopted a written Related-Person Transactions Policy that sets forth our policies and procedures regarding the identification, review, consideration, approval and oversight of “related-person transactions.” For purposes of our policy only, a “related-person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A “related person” is any executive officer, director or nominee to become director, a holder of more than 5% of our common stock, including any immediate family members of such persons or any entity owned or controlled by such persons. Any related-person transaction may only be consummated if our audit committee has approved or ratified the transaction in accordance with the policy guidelines set forth below.

The policy imposes an affirmative duty upon each director and executive officer to identify, and we will request that significant stockholders identify, any transaction involving them, their affiliates or family members that may be considered a related-party transaction before such person engages in the transaction. Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to our audit committee (or, where review by our audit committee would be inappropriate, to another independent body of our board of directors) for review. The presentation must include a description of, among other things, the material facts, the direct and indirect interests of the related persons, the benefits of the transaction to us and whether any alternative transactions are available. In considering related-person transactions, our audit committee takes into account the relevant available facts and circumstances including, but not limited to:

In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval process. Before the recent adoption of our Related-Person Transactions Policy, we did not have a formal policy concerning transactions with related persons.

The following directors are affiliated with our principal stockholders as indicated in the table below:

In April 2010, we acquired Nitec Pharma AG, or Nitec (now Horizon Pharma AG). In connection with the acquisition, we effected a recapitalization pursuant to which the outstanding shares of Horizon Therapeutics, Inc. (now Horizon Pharma USA, Inc.) were converted into shares of Horizon Pharma, Inc. and Horizon Therapeutics, Inc. became a wholly-owned subsidiary of Horizon Pharma, Inc. We refer to this transaction as the recapitalization. We issued an aggregate of 633,144 shares of our common stock and an aggregate of 11,239,887 shares of our Series A preferred stock to the stockholders of Horizon Pharma USA in connection with the recapitalization. Additionally, we assumed 600,728 outstanding options of Horizon Pharma USA which became exercisable for shares of our common stock, and warrants to purchase shares of preferred stock of Horizon Pharma USA which became exercisable for shares of our Series A preferred stock.

To effect the acquisition of Nitec and concurrently with the recapitalization, we entered into a Share Exchange Agreement with Nitec, Horizon Pharma USA, Horizon MergerSub, Inc., the shareholders of Nitec and their representative and certain stockholders of Horizon Pharma USA and their representative. Pursuant to the Share Exchange Agreement, we acquired all of the capital stock of Nitec in exchange for newly-issued shares of our capital stock and Nitec became our wholly-owned subsidiary. We refer to this transaction as the Nitec acquisition. We issued an aggregate of 857,400 shares of our common stock and 11,211,413 shares of our Series A preferred stock to the stockholders of Nitec in connection with the Nitec acquisition. Additionally, the outstanding options to purchase shares of Nitec were cancelled in connection with the Nitec acquisition and exchanged for options to purchase an aggregate of 328,074 shares of our common stock. Upon completion of this offering, the shares issued pursuant to the recapitalization and Nitec acquisition will represent approximately 10,947,674 shares of our common stock.

In connection with the Nitec acquisition, we also issued a warrant to purchase 118,496 shares of our Series A preferred stock at an exercise price per share of $0.01 pursuant to a credit facility Nitec originally entered into with Kreos Capital III (UK) Limited, or Kreos, and which was subsequently amended in connection with the Nitec acquisition. The warrant will become exercisable for an aggregate of 49,914 shares of our common stock at an exercise price equal to $0.03 per share upon completion of this offering. The warrant is exercisable until its expiration on April 1, 2020 unless terminated earlier as a result of certain reorganizations or changes in control.

The participants in the recapitalization and Nitec acquisition included the following directors, executive officers and holders of more than 5% of our capital stock or entities affiliated with them. The following table presents the number of options and shares issued to these related parties in the recapitalization and Nitec acquisition. Each share of preferred stock identified in the table below will convert into 0.4 shares of our common stock upon completion of this offering.

Preferred Stock Financings Prior to the Recapitalization and Nitec Acquisition

In October 2005, our wholly-owned subsidiary, Horizon Pharma USA, entered into a Series A Preferred Stock Purchase Agreement pursuant to which it issued and sold to investors an aggregate of 1,192,118 shares of Series A preferred stock at a purchase price of $5.075 per share, for net proceeds of approximately $6.0 million. Of these 1,192,118 shares of Series A preferred stock, 246,305 shares were converted into Special preferred stock of Horizon Pharma USA in connection with Horizon Pharma USA’s Series D preferred stock financing

that occurred in December 2009, or the Series D financing. The remaining 945,813 shares of Series A preferred stock were converted into an equal number of shares of our Series A preferred stock in connection with the recapitalization. All of the 246,305 shares of Special preferred stock were converted into an equal number of shares of our common stock in connection with the recapitalization.

In November 2006, Horizon Pharma USA entered into a Series B Preferred Stock Purchase Agreement pursuant to which it issued and sold to investors an aggregate of 1,482,213 shares of Series B preferred stock at a purchase price of $10.12 per share, for net proceeds of approximately $14.9 million. Of these 1,482,213 shares of Series B preferred stock, 247,035 shares were converted into Special preferred stock of Horizon Pharma USA in connection with the Series D financing. The remaining 1,235,178 shares of Series B preferred stock were converted into 1,525,122 shares of our Series A preferred stock in connection with the recapitalization. All of the 247,035 shares of Special preferred stock were converted into an equal number of shares of our common stock in connection with the recapitalization.

In July 2007, Horizon Pharma USA entered into a Series C Preferred Stock Purchase Agreement pursuant to which it issued and sold to investors an aggregate of 2,109,706 shares of Series C preferred stock at a purchase price of $14.22 per share, for net proceeds of approximately $29.9 million. Of these 2,109,706 shares of Series C preferred stock, 17,580 shares were converted into Special preferred stock of Horizon Pharma USA in connection with the Series D financing. The remaining 2,092,126 shares of Series C preferred stock were converted into 2,782,448 shares of our Series A preferred stock in connection with the recapitalization. All of the 17,580 shares of Special preferred stock were converted into an equal number of shares of our common stock in connection with the recapitalization.

Between October 2008 and October 2009, Horizon Pharma USA sold $17.0 million in aggregate principal amount of convertible promissory notes, or the bridge notes, and issued warrants, or the bridge warrants, exercisable for shares of Horizon Pharma USA’s capital stock to investors in four closings. The bridge notes accrued interest at 8% per year and were convertible into shares of Horizon Pharma USA’s preferred stock in the event Horizon Pharma USA completed a preferred stock financing of at least $25.0 million, in the event of the sale of Horizon Pharma USA or in certain other circumstances. The bridge warrants were exercisable for a number of shares of capital stock of Horizon Pharma USA determined based on the number and type of shares into which the bridge notes were to be converted. In connection with the Series D financing, the bridge notes converted into an aggregate of 3,440,463 shares of Series D preferred stock of Horizon Pharma USA and the bridge warrants became exercisable for an aggregate of 490,290 shares of Series D preferred stock of Horizon Pharma USA.

In December 2009, Horizon Pharma USA entered into a Series D Preferred Stock Purchase Agreement pursuant to which it issued and sold to investors, in a series of closings between December 2009 and January 2010, an aggregate of 4,978,674 shares of Series D preferred stock at a purchase price of $5.201 per share, for net proceeds of approximately $25.8 million, $17.9 million of which was received in the form of cancellation of principal and accrued interest under the bridge notes. Of these 4,978,674 shares of Series D preferred stock issued, 3,440,463 shares were issued pursuant to the conversion of the bridge notes. In connection with the recapitalization, all of the 4,978,674 shares of Series D preferred stock were converted into an equal number of shares of our Series A preferred stock.

The participants in these preferred stock and note and warrant financings included the following holders of more than 5% of our capital stock or entities affiliated with them. The following table presents the number of shares issued to these related parties in these financings. All shares of preferred stock and warrants to purchase shares of preferred stock reflected in the table below were subsequently converted into shares of our Series A preferred stock or warrants to purchase shares of Series A preferred stock, as applicable, in connection with the recapitalization and are described in the table included under the heading “Recapitalization and Nitec Acquisition” above.

In connection with Horizon Pharma USA’s various preferred stock and note and warrant financings, Horizon Pharma USA entered into amended and restated investor rights, voting and right of first refusal and co-sale agreements containing voting rights, information rights, rights of first refusal and registration rights, among other things, with the holders of its preferred stock and certain holders of its common stock. These stockholder agreements were terminated in connection with the recapitalization and Nitec acquisition.

Preferred Stock Financings Concurrently with or Following the Recapitalization and Nitec Acquisition

In April 2010, and concurrently with the recapitalization and Nitec acquisition, we entered into a Series B Preferred Stock and Subordinated Convertible Note Purchase Agreement pursuant to which we issued and sold to investors, in a first closing, an aggregate of 2,510,040 shares of our Series B preferred stock at a purchase price of $7.968 per share, for aggregate consideration of approximately $20.0 million. Additional detail regarding the notes issued under the Series B Preferred Stock and Subordinated Convertible Note Purchase Agreement is provided in the sections entitled “2010 Convertible Note Financing” and “2011 Convertible Note Financing” below.

The participants in this financing included the following holders of more than 5% of our capital stock or entities affiliated with them. The following table presents the number of shares issued to these related parties in the Series B preferred stock financing (each share of Series B preferred stock in the table below will convert into one share of our common stock upon completion of this offering):

In connection with our Series B preferred stock financing, we entered into investor rights, voting and right of first refusal and co-sale agreements containing voting rights, information rights, rights of first refusal and registration rights, among other things, with certain holders of our preferred stock and certain holders of our common stock. These stockholder agreements will terminate upon the completion of this offering, except for the registration rights granted under our amended and restated investor rights agreement, as more fully described below in “Description of Capital Stock—Registration Rights.”

In July 2010, pursuant to the Series B Preferred Stock and Subordinated Convertible Note Purchase Agreement, we issued $10.0 million in aggregate principal amount of subordinated convertible promissory notes, or the 2010 notes, in a private placement to holders of our Series B preferred stock. The 2010 notes are subordinate to the indebtedness under a debt facility with Oxford and Silicon Valley Bank and other indebtedness we may incur to certain lenders and are convertible into equity securities upon the occurrence of certain events. The 2010 notes accrue interest at a rate of 10% per annum and have a maturity date of the earliest of August 12, 2011 or the date we sell all or substantially all of our assets or we are acquired, provided, however, that upon the written consent of the holders of at least 60% of then outstanding principal of the 2010 notes and the additional notes we issued in January and April 2011, as described below, the maturity date may be extended. The 2010 notes are convertible, upon the consent of the holders of at least 60% of the then outstanding principal of the 2010 notes and 2011 notes, into shares of (a) any new class or series of equity securities issued by us in any subsequent round of financing, (b) our Series B preferred stock, if the election to convert is made prior to this offering, or (c) our common stock, if the election to convert is made in connection with this offering, at the lesser of (1) the price per share to the public of our common stock sold in this offering or (2) $18.92.

Purchasers of our 2010 notes included the following holders of more than 5% of our capital stock, or entities affiliated with them. The following table sets forth the principal amount of the 2010 notes purchased by such holders:

In January 2011, pursuant to an amendment to the Series B Preferred Stock and Subordinated Convertible Note Purchase Agreement, we issued $5.0 million in aggregate principal amount of subordinated convertible promissory notes, or the January 2011 notes, in a private placement to holders of our Series B preferred stock. Additionally, in April 2011, pursuant to an amendment to the Series B Preferred Stock and Subordinated Convertible Note Purchase Agreement, we issued $1.7 million in aggregate principal amount of subordinated promissory notes, or the April 2011 notes, in a private placement to holders of our Series B preferred stock. The January 2011 notes and April 2011 notes are subordinate to the indebtedness under a debt facility with Oxford and Silicon Valley Bank and other indebtedness we may incur to certain lenders and are convertible into equity securities upon the occurrence of certain events. The January 2011 notes and April 2011 notes accrue interest at a rate of 10% per annum. The January 2011 notes and April 2011 notes have a maturity date of the earliest of January 7, 2012 or April 23, 2012, respectively, or the date we sell all or substantially all of our assets or we are acquired, provided, however, that upon the written consent of the holders of at least 60% of then outstanding principal of the 2010 notes, January 2011 notes and April 2011 notes, the maturity date may be extended. The January 2011 notes and April 2011 notes are convertible, upon the consent of the holders of at least 60% of the then outstanding principal of the 2010 notes, January 2011 notes and April 2011 notes into shares of (a) any new class or series of equity securities issued by us in any subsequent round of financing, (b) our Series B preferred stock, if the election to convert is made prior to this offering, or (c) our common stock, if the election to convert is made in connection with this offering, at the lesser of (1) the price per share to the public of our common stock sold in this offering or (2) $18.92.

Purchasers of our January 2011 notes and April 2011 notes included the following holders of more than 5% of our capital stock, or entities affiliated with them. The following table sets forth the principal amount of the January 2011 notes and April 2011 notes purchased by such holders:

We have entered into employment arrangements with our executive officers, as more fully described in “Executive Compensation—Potential Payments Upon Termination or Change in Control—Potential Termination-Based Payments Under Employment Arrangements.”

We have entered into consulting agreements with George Tidmarsh and Barry Golombik, both of whom previously served as directors of Horizon Pharma USA and currently hold shares of our common and preferred stock.

Dr. Tidmarsh receives a monthly consulting fee of $33,000 per month pursuant to the terms of his consulting agreement which expires on September 30, 2011 unless extended by us and Dr. Tidmarsh. The consulting agreement also provides for the payment of at least $300,000 upon achievement of two performance milestones (neither of which were achieved) or, in the event either or both milestones are not achieved, a discretionary milestone payment at the sole discretion of our Chief Executive Officer.

Mr. Golombik receives a monthly consulting fee of $24,500 per month, which will be reduced to $15,000 per month beginning on October 1, 2011, pursuant to the terms of his consulting agreement which expires on September 30, 2012 unless extended by us and Mr. Golombik. Mr. Golombik’s current consulting agreement superseded a prior consulting agreement entered into with us dated October 18, 2005, as amended. The consulting agreement also provides for the payment of at least $200,000 upon achievement of two performance milestones (neither of which were achieved) or, in the event either or both milestones are not achieved, a discretionary milestone payment at the sole discretion of our Chief Executive Officer.

We have granted stock options to our executive officers, as more fully described in the section entitled “Executive Compensation.”

We have entered into indemnification agreements with each of our directors and executive officers, as described in “Executive Compensation—Limitation of Liability and Indemnification.”

The following table sets forth information regarding beneficial ownership of our capital stock outstanding as of April 30, 2011 by:

The number of shares and percentage of shares beneficially owned before the offering shown in the table is based upon 1,496,278 shares of common stock outstanding as of April 30, 2011 and also assumes (1) the conversion of all of our outstanding shares of preferred stock into an aggregate of 10,514,431 shares of common stock upon the completion of this offering and (2) the issuance by us of 1,636,273 shares of common stock upon the completion of this offering upon an assumed conversion of outstanding convertible promissory notes in the aggregate principal amount of $10.0 million (plus interest accrued thereon) that we issued in July 2010, or the 2010 notes, $5.0 million (plus interest accrued thereon) that we issued in January 2011, or the January 2011 notes, and $1.7 million (plus interest accrued thereon) that we issued in April 2011, or the April 2011 notes, assuming a conversion price of $11.00 per share and assuming a conversion date of June 29, 2011. The number of shares and percentage of shares beneficially owned after the offering also gives effect to the issuance by us of 5,500,000 shares of common stock in this offering. The percentage ownership information assumes no exercise of the underwriters’ overallotment option.

Entities affiliated with Atlas Venture, Essex Woodlands Health Ventures, Scale Venture Partners, NGN Biomed, Sutter Hill Ventures, Global Life Science Ventures and TVM Life Science Ventures, each of which is a current stockholder, have indicated an interest in purchasing an aggregate of approximately $15.0 million of shares of our common stock in this offering, to be allocated pro rata among them based on each such stockholder’s current beneficial ownership of our outstanding capital stock. The information set forth in the table below does not reflect the potential purchase of any shares in this offering by these stockholders.

Each individual or entity shown in the table has furnished to us information with respect to their respective beneficial ownership. We have determined beneficial ownership in accordance with the Securities and Exchange Commission’s rules. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, in calculating beneficial ownership, the rules require us to include shares of common stock issuable pursuant to the exercise of stock options, warrants or other rights that are either immediately exercisable or exercisable within 60 days of a practicable date. We have reflected the shares of common stock issuable pursuant to the exercise of stock options, warrants or other rights that are exercisable as of June 29, 2011, which is 60 days after April 30, 2011. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

Except as otherwise noted below, the address for each person or entity listed in the table is c/o Horizon Pharma, Inc., 1033 Skokie Boulevard, Suite 355, Northbrook, Illinois 60062.

Upon completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.

The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our amended and restated certificate of incorporation and amended and restated bylaws, which have been filed as exhibits to the registration statement of which this prospectus is a part.

Outstanding Shares. On March 31, 2011, there were 1,496,278 shares of common stock outstanding, held of record by 31 stockholders. This amount excludes (1) our outstanding shares of preferred stock, which will convert into 10,514,431 shares of common stock upon completion of this offering and (2) our issuance of 1,636,273 shares of common stock upon the completion of this offering upon an assumed conversion of outstanding convertible promissory notes in the aggregate principal amount of $10.0 million (plus interest accrued thereon) that we issued in July 2010, or the 2010 notes, $5.0 million (plus interest accrued thereon) that we issued in January 2011, or the January 2011 notes, and $1.7 million (plus interest accrued thereon) that we issued in April 2011, or the April 2011 notes, assuming a conversion price of $11.00 per share and assuming a conversion date of June 29, 2011. Based on 13,646,982 shares of common stock outstanding as of March 31, 2011, which assumes (a) the conversion of all outstanding shares of our preferred stock and (b) the conversion of all outstanding 2010 notes, January 2011 notes and April 2011 notes, there will be 19,146,982 shares of common stock outstanding upon completion of this offering, assuming the issuance by us of 5,500,000 shares of common stock in this offering.

As of March 31, 2011, there were 1,317,534 shares of common stock issuable upon exercise of outstanding options under our 2005 stock plan and 821,564 shares of preferred stock issuable upon the exercise of outstanding warrants.

Voting Rights. Each holder of common stock is entitled to one vote for each share of common stock on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and amended and restated bylaws do not provide for cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election.

Dividends. Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

Liquidation. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.

Rights and Preferences. Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

Fully Paid and Nonassessable. All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, duly authorized, validly issued, fully paid and nonassessable.

On March 31, 2011, there were 24,961,340 shares of preferred stock outstanding, held of record by 65 stockholders. Upon completion of this offering, all outstanding shares of preferred stock will be converted into

10,514,431 shares of our common stock. After this offering, our board of directors will have the authority under our amended and restated certificate of incorporation, without further action by our stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences, privileges and restrictions of the shares of each wholly unissued series, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and sinking fund terms, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding).

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock or otherwise adversely affect the rights of holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change of control and may adversely affect the market price of our common stock. Upon completion of this offering, no shares of preferred stock will be outstanding, and we have no current plans to issue any shares of preferred stock.

As of March 31, 2011, there were outstanding warrants to purchase the following shares of our capital stock:

In December 2007, in connection with a loan and security agreement entered into with Hercules Technology Growth Capital, or Hercules, and Comerica Bank, which we refer to as the Hercules facility, Horizon Pharma USA, Inc. issued to Comerica Bank a warrant to purchase an aggregate of 5,626 shares of its Series C preferred stock at an initial exercise price of $14.22 per share, or the 2007 Comerica warrant. In November 2008, in consideration for increasing the maximum loan amount available under Hercules facility to $12.0 million, Horizon Pharma USA issued an additional warrant to Comerica Bank to purchase an aggregate of 1,125 shares of its Series C preferred stock at an initial exercise price of $14.22 per share, or the 2008 Comerica warrant. These warrants were subsequently adjusted pursuant to the recapitalization and are exercisable for an aggregate of 8,978 shares of our Series A preferred stock at an exercise price of $10.692 per share. These warrants will become exercisable for an aggregate of 3,781 shares of our common stock at an exercise price equal to $25.39 per share upon completion of this offering. The 2007 Comerica warrant is exercisable until its expiration on December 18, 2014. The 2008 Comerica warrant is exercisable until November 21, 2015.

Also, in December 2007, in connection with the Hercules facility, Horizon Pharma USA issued to Hercules a warrant to purchase an aggregate of 33,333 shares of its Series C preferred stock at an initial exercise price of $14.22 per share, or the 2007 Hercules warrant. In November 2008, in consideration for increasing the maximum loan amount available under the Hercules facility to $12.0 million, Horizon Pharma USA issued an additional warrant to Hercules to purchase an aggregate of 6,667 shares of its Series C preferred stock at an initial exercise price of $14.22 per share, or the 2008 Hercules warrant. These warrants were subsequently adjusted pursuant to the recapitalization and are exercisable for an aggregate of 53,198 shares of our Series A preferred stock at an exercise price of $10.692 per share. These warrants will become exercisable for an aggregate of 22,408 shares of our common stock at an exercise price equal to $25.39 per share upon completion of this offering. The 2007 Hercules warrant is exercisable until its expiration on December 18, 2014, and the 2008 Hercules warrant is exercisable until November 21, 2015.

Between October 2008 and October 2009, in connection with the issuance of the bridge notes, Horizon Pharma USA issued the bridge warrants exercisable for shares of Horizon Pharma USA’s capital stock to investors in four closings. The bridge warrants were exercisable for a number of shares of capital stock of Horizon Pharma USA determined based on the number and type of shares into which the bridge notes were to

be converted. In connection with the Series D financing, the bridge warrants became exercisable for an aggregate of 490,290 shares of Series D preferred stock of Horizon Pharma USA. All of the bridge warrants were subsequently adjusted pursuant to the recapitalization and are exercisable for an aggregate of 490,290 shares of our Series A preferred stock at an exercise price of $5.201 per share. These warrants will become exercisable for an aggregate of 206,506 shares of our common stock at an exercise price equal to $12.35 per share upon completion of this offering. These warrants are exercisable until their applicable expirations, which range from October 2015 to September 2016, unless terminated earlier as a result of certain corporate transactions.

In April 2010, we issued a warrant to Kreos Capital III (UK) Limited, or Kreos, to purchase 118,496 shares of our Series A preferred stock at an initial exercise price of $0.01 per share, pursuant to a credit facility that Nitec Pharma AG (now Horizon Pharma AG) originally entered into with Kreos, or the Kreos facility, and which was subsequently amended in connection with the acquisition of Nitec Pharma AG. The warrant will become exercisable for an aggregate of 49,914 shares of our common stock at an exercise price equal to $0.03 per share upon completion of this offering. The warrant is exercisable until its expiration on April 1, 2020 unless terminated earlier as a result of certain reorganizations or changes in control as set forth in the warrant.

Also, in April 2010, in connection with a debt facility entered into with Silicon Valley Bank, or SVB, Kreos, Horizon Pharma USA and Horizon Pharma AG, we issued a warrant to each of SVB and Kreos to purchase 75,301 shares of our Series B preferred stock at an initial exercise price of $0.01 per share. The warrants will become exercisable for an aggregate of 63,438 shares of our common stock at an exercise price equal to $0.03 per share upon completion of this offering. The warrant issued to SVB is exercisable until the earlier of April 1, 2020 or five years from the offering date set forth on the cover page of this prospectus. The warrant issued to Kreos is exercisable until its expiration on April 1, 2020 unless terminated earlier as a result of certain reorganizations or changes in control.

Subsequent to March 31, 2011 and in connection with a loan and security agreement we entered into in June 2011 with Oxford Finance LLC, or Oxford, and SVB, or the Oxford facility, we issued three warrants to Oxford to initially purchase an aggregate of 56,475 shares (18,825 shares per warrant) of our Series B preferred stock and a warrant to SVB to purchase 23,532 shares of our Series B preferred stock. These warrants will become warrants to purchase an aggregate number of shares of our common stock equal to (1) $637,500 divided by (2) the lower of the price per share to the public of our common stock sold in this offering or $18.92. The warrants will have a per share exercise price that is the lower of (1) the price per share to the public of our common stock sold in this offering or (2) $18.92. Assuming the price per share to the public at which our common stock is sold in this offering is $11.00, the warrants will become exercisable for an aggregate of 57,953 shares of our common stock at an exercise price equal to $11.00 per share upon completion of this offering. The warrants are exercisable until their expiration on June 2, 2021, unless terminated earlier as a result of certain acquisitions or changes in control as set forth in the warrants.

Subsequent to March 31, 2011, we also issued a warrant to Kreos to purchase 100,000 shares of our Series B preferred stock at an exercise price of $0.01 per share, which was issued in exchange for Kreos’ consent to enter into the Oxford facility. The warrant will become exercisable for an aggregate of 42,122 shares of our common stock at an exercise price equal to $0.03 per share upon completion of this offering. The warrant is exercisable until its expiration on June 2, 2021 unless terminated earlier as a result of certain reorganizations or changes in control.

Each of these warrants, except for the 2007 Comerica Warrant and the 2008 Comerica Warrant, has a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. Each of these warrants also contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations and reclassifications and consolidations.

The holders of certain of these warrants are entitled to registration rights under our amended and restated investor rights agreement, as described in “Registration Rights” below.

According to the terms of our investor rights agreement entered into in April 2010, certain investors are entitled to demand, “piggyback” and Form S-3 registration rights. The stockholders who are a party to the investor rights agreement will hold an aggregate of 13,635,860 shares, or 71.2%, of our common stock upon completion of this offering and the resulting conversion of all of our existing preferred stock into shares of our common stock. In addition, six months after the public offering date set forth on the cover page of this prospectus, Oxford SVB, Kreos and all holders of the bridge warrants, or their transferees, have Form S-3 registration rights and “piggyback” registration rights as described below, with respect to an aggregate of 419,933 shares of common stock issuable upon exercise of their warrants.

Demand Registration Rights. At any time beginning six months after the completion of this offering, the holders of at least 30% of the shares having demand registration rights have the right to make up to two demands that we file a registration statement to register all or a portion of their shares so long as the aggregate number of shares requested to be sold under such registration statement is at least $10 million, subject to specified exceptions, conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.

Form S-3 Registration Rights. If we are eligible to file a registration statement on Form S-3, holders of registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of shares to be sold under the registration statement on Form S-3 is at least $1 million, subject to specified exceptions, conditions and limitations.

“Piggyback” Registration Rights. If we register any securities for public sale, holders of registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 30% of the total number of shares included in the registration statement, except this offering with respect to which the holders have waived any and all rights to have their shares included.

Expenses of Registration. Generally, we are required to bear all registration and selling expenses incurred in connection with the demand, piggyback and Form S-3 registrations described above, other than underwriting discounts and commissions.

Expiration of Registration Rights. The demand, piggyback and Form S-3 registration rights discussed above will terminate upon the earlier of (1) five years following the closing of this offering or (2) with respect to any holder of less than 1% of our capital stock entitled to these registration rights, on the date when such holder is able to sell all of its registrable common stock in a single three-month period under Rule 144 of the Securities Act of 1933, as amended.

Delaware Anti-Takeover Law and Provisions of Our Amended and Restated Certificate of Incorporation and Bylaws

Our amended and restated certificate of incorporation and our amended and restated bylaws, which will become effective upon the completion of this offering, contain certain provisions that could have the effect of delaying, deterring or preventing another party from acquiring control of us. These provisions and certain provisions of the Delaware General Corporation Law which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate more favorable terms with an unfriendly or unsolicited acquirer outweigh the disadvantages of potentially discouraging a proposal to acquire us.

Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with

an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Amended and Restated Certificate of Incorporation and Bylaws. Among other things, our amended and restated certificate of incorporation and bylaws:

The amendment of any of these provisions would require approval by the holders of at least 66²/3% of our then outstanding common stock.

The provisions of the Delaware General Corporation Law and the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as effective upon the closing of this offering, could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they might also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions might also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests.

We have applied for listing on The NASDAQ Global Market under the symbol “HZNP,” subject to official notice of issuance.

The transfer agent and registrar for our common stock is BNY Mellon Shareowner Services. The transfer agent and registrar’s address is 201 Columbine Street, Suite 200, Denver, Colorado, 80206.

Immediately prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect the prevailing market prices of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price for our common stock as well as our ability to raise equity capital in the future.

Based on the number of shares of common stock outstanding as of March 31, 2011, upon completion of this offering, 19,146,982 shares of common stock will be outstanding, assuming no exercise of the underwriters’ overallotment option and no exercise of outstanding options or warrants. All of the shares sold in this offering will be freely tradable unless held by an affiliate of ours. Except as set forth below, the remaining 13,646,982 shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, any person who is not an affiliate of ours and has held their shares for at least six months, including the holding period of any prior owner other than one of our affiliates, may sell shares without restriction, provided current public information about us is available. In addition, under Rule 144, any person who is not an affiliate of ours and has held their shares for at least one year, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. Beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a number of restricted shares within any three-month period that does not exceed the greater of:

Sales of restricted shares under Rule 144 held by our affiliates are also subject to requirements regarding the manner of sale, notice and the availability of current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted shares have entered into lock-up agreements as described below and their restricted shares will become eligible for sale at the expiration of the restrictions set forth in those agreements.

Under Rule 701, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, by:

As of March 31, 2011, options to purchase a total of 1,317,534 shares of common stock were outstanding, of which 617,758 were vested. Of the total number of shares of our common stock issuable under these options, all are subject to contractual lock-up agreements with us or the underwriters described below and will become eligible for sale at the expiration of those agreements.

Our officers, directors and substantially all of our security holders have agreed, subject to specified exceptions, not to directly or indirectly sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise dispose of any shares of our common stock, options or warrants to acquire shares of our common stock, or securities exchangeable or exercisable for or convertible into shares of our common stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by such person, or publicly announce an intention to do any of the foregoing. We have also agreed, subject to specified exceptions, not to directly or indirectly sell (including, without limitation, any short sale), offer, contract or grant any option to sell, pledge, transfer or establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of our common stock, options, rights or warrants to acquire shares of our common stock, or securities exchangeable or exercisable for or convertible into shares of common stock, or publicly announce the intention to do any of the foregoing.

These restrictions terminate after the close of trading of the shares on and including the 180th day after the date of this prospectus. The underwriters may, in their sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. However, subject to specified exceptions, if (1) during the last 17 days of the 180-day period, we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, then in each case the 180-day period will be extended until the expiration of the 18-day period beginning on the date of the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless the underwriters waive, in writing, such extension.

Upon completion of this offering, the holders of 13,635,860 shares of our common stock and up to 419,933 shares of our common stock issuable upon exercise of warrants to purchase our common stock have rights with respect to the registration of their shares under the Securities Act, subject to the lock-up arrangement described above. Each holder’s rights with respect to registration of its shares expire upon the earlier of (1) five years after the completion of this offering or (2) such time after the completion of this offering that the holder may sell all of its shares within a three-month period pursuant to Rule 144 or another similar exemption, provided that the holder owns less than 1% of our outstanding capital stock. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Description of Capital Stock—Registration Rights.”

We intend to file one or more registration statements on Form S-8 under the Securities Act after the closing of this offering to register the shares of our common stock that are issuable pursuant to our 2005 stock plan, 2011 equity incentive plan and 2011 employee stock purchase plan. The registration statements are expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statements will be available for sale in the open market following their effective dates, subject to Rule 144 volume limitations, if applicable, and the lock-up arrangements described above, if applicable.

Under the terms and subject to the conditions contained in an underwriting agreement dated , 2011 by and among us and the underwriters named below, the underwriters have agreed to purchase, and we have agreed to sell to them, the number of shares of common stock indicated in the table below:

The underwriters are offering the common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriting agreement provides that the underwriters are obligated to take and pay for all of the common stock if any such shares are purchased, other than those shares covered by the overallotment option described below.

The underwriters have advised us that they propose to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. After the offering, the public offering price and concession to dealers may be reduced by the underwriters. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part.

The following table shows the public offering price, the underwriting discounts and commissions payable to the underwriters by us and the proceeds, before expenses, to us. The following table shows the public offering price, the underwriting discounts and commissions payable to the underwriters by us and the proceeds, before expenses, to us.

We estimate expenses payable by us in connection with the offering of common stock, other than the underwriting discounts and commissions referred to above, will be approximately $ .

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 825,000 additional shares at the same price they are paying for the shares shown

in the table above. The underwriters may exercise this option at any time and from time to time, in whole or in part, within 30 days after the date of this prospectus. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $ and the total proceeds to us, before expenses, will be $ .

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act. We have also agreed to contribute to payments that the underwriters may be required to make in respect of those liabilities.

These restrictions terminate after the close of trading of the shares on and including the 180th day after the date of this prospectus. The underwriters may, in their sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. However, subject to specified exceptions, if (i) during the last 17 days of the 180-day period, we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, then in each case the 180-day period will be extended until the expiration of the 18-day period beginning on the date of the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless the underwriters waive, in writing, such extension.

This prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters of the offering, or by their affiliates. Other than the prospectus in electronic format, the information on the underwriters’ websites and any information contained in any other website maintained by the underwriters is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters and should not be relied upon by investors.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “HZNP,” but there has been no public market for the shares prior to this offering. The offering price for the shares has been determined by us and the representatives, based on the following factors:

We cannot assure you that the initial public offering price will correspond to the price of which our common stock will trade in the public market after this offering or that an active trading market for the common stock will develop and continue after this offering.

Until the distribution of the shares of common stock is completed, Securities and Exchange rules may limit the underwriters from bidding for and purchasing shares of our common stock.

In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or make short sales of our common stock and may purchase our common stock on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. The underwriters may close out any short position by purchasing shares in the open market or by exercising their overallotment option.

A short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. A “stabilizing bid” is a bid for or the purchase of common stock on behalf of the underwriters in the open market prior to the completion of this offering for the purpose of fixing or maintaining the price of the shares of common stock. A “syndicate covering transaction” is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our shares or preventing or retarding a decline in the market price of our shares. As a result, the price of our shares may be higher than the price that might otherwise exist in the open market.

In connection with this offering, the underwriters may also engage in passive market making transactions in our common stock on The NASDAQ Global Market in accordance with Rule 103 of Regulation M during a period before the commencement of offers or sales of shares of our common stock in this offering and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

In the future, the underwriters and their affiliates may provide various investment banking, commercial banking, financial advisory and other services to us and our affiliates for which services they have received, and may in the future receive, customary fees. In the course of their businesses, the underwriters and their affiliates may actively trade our securities or loans for their own accounts or for the accounts of customers, and, accordingly, the underwriters and their affiliates may at any time hold long or short positions in such securities or loans.

The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of our common stock to a non-U.S. holder that acquires our common stock pursuant to this offering. For the purpose of this discussion, a non-U.S. holder is any beneficial owner of our common stock that, for U.S. federal income tax purposes, is not a partnership or a United States person. For purposes of this discussion, the term U.S. person means:

If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, we urge partnerships that hold our common stock and partners in such partnerships to consult their tax advisors.

This discussion assumes that a non-U.S. holder will hold our common stock issued pursuant to this offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of a non-U.S. holder’s special tax status or special tax situations. Certain former citizens or residents of the U.S., life insurance companies, tax-exempt organizations, dealers in securities or currencies, banks or other financial institutions and investors that hold common stock as part of a hedge, straddle, conversion transaction, synthetic security or other risk reduction strategy are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, or the IRC, and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Accordingly, we urge each non-U.S. holder to consult a tax advisor regarding the U.S. federal, state and local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

As described above under “Dividend Policy,” we have not paid any dividends on our common stock and we do not plan to pay any dividends in the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent distributions exceed our current and accumulated earnings and profits, the distributions will constitute a return of capital and will first reduce a holder’s adjusted tax basis in the common stock, but not below zero, and then will be treated as gain from the sale of the common stock as described below under “—Gain on Disposition of Common Stock.”

Dividends paid (out of earnings and profits) to a non-U.S. holder of common stock generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty, unless the dividend is effectively connected with the conduct of a trade or business of the non-U.S. holder within the U.S. To receive a reduced rate of withholding under a tax treaty, a non-U.S. holder must provide us with an Internal Revenue Service, or IRS, Form W-8BEN or other appropriate version of Form W-8 certifying qualification for the reduced rate.

Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder (and, if required by an applicable tax treaty, attributable to a permanent establishment maintained in the U.S. by such holder) generally are not subject to withholding tax, provided certain certifications are met. Such effectively connected dividends, net of certain deductions and credits, are taxed at the graduated U.S. federal income tax rates applicable to U.S. persons, unless an applicable tax treaty provides otherwise. To claim an exemption from withholding because the income is effectively connected with a U.S. trade or business of the non-U.S. holder, the non-U.S. holder must provide us with a properly executed IRS Form W-8ECI, or such successor form as the IRS has designated prior to the payment of dividends. In addition to the graduated tax described above, dividends that are effectively connected with a U.S. trade or business of a corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.

A non-U.S. holder of common stock may obtain a refund or credit of any excess amounts withheld if an appropriate claim for refund is timely filed with the IRS.

Subject to the discussion below under “—Backup Withholding, Information Reporting and Pending Tax Withholding Rules,” a non-U.S. holder generally will not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale or other disposition of our common stock unless:

Unless an applicable tax treaty provides otherwise, gain described in the first bullet point above will be subject to U.S. federal income tax on a net basis at the graduated U.S. federal income tax rate applicable to U.S. persons. In the case of a corporate holder, the branch profits tax may also apply, at a rate of 30% (or such rate as may be specified by an applicable tax treaty) of such holder’s effectively connected earnings and profits for the taxable year, as adjusted for certain items. Gain described in the second bullet point above (which may be offset by certain U.S. source capital losses) will be subject to a flat 30% U.S. federal income tax or such lower rate as may be specified by an applicable tax treaty.

If we are or were to become a U.S. real property holding corporation at any time during the applicable period described in the third bullet point above, any gain recognized on a disposition of our common stock by a non-U.S. holder would be subject to U.S. federal income tax at the graduated U.S. federal income tax rates applicable to U.S. persons if the non-U.S. holder owned (directly, indirectly or constructively) more than 5% of our common stock during the applicable period or our common stock were not “regularly traded on an established securities market” (within the meaning of Section 897(c)(3) of the IRC). We believe that our stock will be treated as so traded after the offering.

Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.

Payments of dividends or of proceeds on the disposition of stock made to a non-U.S. holder may be subject to backup withholding (currently at a rate of 28%) unless the non-U.S. holder establishes an exemption, for

example, by properly certifying its non-U.S. status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the beneficial owner is a U.S. person.

Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is timely furnished to the IRS.

Legislation enacted in 2010 may impose withholding taxes on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities. Under this legislation, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to foreign intermediaries and certain non-U.S. Holders. The legislation imposes a 30% withholding tax on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a foreign financial institution or to a foreign non-financial entity, unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-financial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. If the payee is a foreign financial institution, it must enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements. The legislation would apply to payments made after December 31, 2012. Prospective investors should consult their tax advisors regarding this legislation.

The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley LLP, San Diego, California. Latham & Watkins LLP, San Diego, California, is counsel for the underwriters in connection with this offering.

The consolidated financial statements of Horizon Pharma, Inc. (formerly Horizon Therapeutics, Inc.) as of December 31, 2009 and 2010 and for each of the three years in the period ended December 31, 2010 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Horizon Pharma AG (formerly Nitec Pharma AG) as of June 30, 2008 and 2009 and for the years then ended included in this prospectus have been so included in reliance on the report of Ernst & Young Ltd, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

We have filed with the Securities and Exchange Commission, or SEC, a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the shares of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, you should refer to the registration statement and the exhibits filed as part of that document. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You may also request a copy of these filings, at no cost, by writing or telephoning us at: 1033 Skokie Boulevard, Suite 355, Northbrook, Illinois 60062, (224) 383-3000.

Upon completion of this offering, we will be subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and we will file periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We also maintain a website at http://www.horizonpharma.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Horizon Pharma, Inc. (formerly Horizon Therapeutics, Inc.) and its subsidiaries (the “Company”), at December 31, 2009 and 2010, and the consolidated results of operations and of cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses from operations since its inception and negative cash flow from operations that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

March 31, 2011, except for the second paragraph of Note 16 as to which the date is July 7, 2011.

The accompanying notes are an integral part of these consolidated financial statements.

Horizon Therapeutics, Inc. was incorporated in Delaware in June 2005. On April 1, 2010, Horizon Therapeutics, Inc. effected a recapitalization pursuant to which it formed a holding company, Horizon Pharma, Inc. (previously a subsidiary of Horizon Therapeutics, Inc.), and all of the share capital of Horizon Therapeutics, Inc. was converted into share capital of Horizon Pharma, Inc. Horizon Therapeutics, Inc. survived as a wholly-owned subsidiary of Horizon Pharma, Inc. and changed its name to Horizon Pharma USA, Inc. Also on April 1, 2010, Horizon Pharma, Inc. acquired all of the outstanding share capital of Nitec Pharma AG (“Nitec”) in exchange for newly-issued shares of Horizon Pharma, Inc.’s share capital. As a result of the acquisition, Nitec became a wholly-owned subsidiary of Horizon Pharma, Inc. and changed its name to Horizon Pharma AG.

Following the recapitalization and acquisition of Nitec, Horizon Pharma, Inc. is organized as a holding company that operates primarily through its two wholly-owned subsidiaries, Horizon Pharma USA, Inc., a Delaware corporation, and Horizon Pharma AG, a company organized under the laws of Switzerland. Horizon Pharma AG owns all of the outstanding share capital of its wholly-owned subsidiary, Horizon Pharma GmbH, a company organized under the laws of Germany and formerly known as Nitec Pharma GmbH, through which Horizon Pharma AG conducts most of its European operations.

Horizon Pharma, Inc., together with its subsidiaries, is hereafter referred to as “the Company.” The consolidated financial statements of the Company will be presented for all periods subsequent to March 31, 2010. The financial statements for all periods up to and including March 31, 2010, are the consolidated financial statements of Horizon Therapeutics, Inc., now known as Horizon Pharma USA, and its subsidiary, Horizon Pharma, Inc. For all periods, the financial statements are labeled “Horizon Pharma, Inc.”

The Company is a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. On April 23, 2011, the U.S. Food and Drug Administration (“FDA”) approved DUEXIS^® (formerly HZT-501), a novel tablet formulation containing a fixed-dose combination of ibuprofen and famotidine in a single pill. DUEXIS is indicated for the relief of signs and symptoms of rheumatoid arthritis (“RA”) and osteoarthritis (“OA”) and to decrease the risk of developing upper gastrointestinal ulcers on patients who are taking ibuprofen for these indications. The Company plans to launch DUEXIS in the U.S. in the fourth quarter of 2011. The Company submitted a Marketing Authorization Application (“MAA”) for DUEXIS in the United Kingdom, the Reference Member State, through the Decentralized Procedure in October 2010 and the Company anticipates a decision on the MAA in the first half of 2012. The Company’s other product, LODOTRA, is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by its distribution partner, Mundipharma International Corporation Limited (“Mundipharma”), for the treatment of moderate to severe, active RA in adults when accompanied by morning stiffness. The Company has successfully completed multiple Phase 3 clinical trials of LODOTRA and the Company intends to submit a new drug application (“NDA”) for LODOTRA to the FDA in the third quarter of 2011. The Company has worldwide marketing rights for DUEXIS and has retained exclusive marketing rights in the U.S. for all of its products. The Company’s strategy is to commercialize its products in the U.S., to explore co-promotion opportunities for DUEXIS in the U.S., and to enter into licensing or additional distribution agreements for commercialization of its products outside the U.S.

The Company maintains its corporate headquarters in Northbrook, Illinois. Since inception the Company has devoted substantially all of its efforts to research and development and raising capital. In the course of its development activities, the Company has sustained significant operating losses and anticipates that operating losses will substantially increase over the next several years.

The Company is subject to risks common to biopharmaceutical companies, including, but not limited to obtaining regulatory approval for its product candidates, dependence upon market acceptance of its products, risks associated

with intellectual property, pricing and reimbursement, intense competition, development of markets and distribution channels and dependence on key personnel. The Company has limited operating history and has yet to generate significant revenues. To date, the Company has been funded predominantly by convertible preferred stock and debt financings. The Company’s ultimate success is dependent upon its ability to successfully develop and market its products.

In April 2010, in connection with the Company’s recapitalization and acquisition of Nitec, Horizon Pharma, Inc. completed a Series B convertible preferred stock financing raising approximately $19,844, net of issuance costs, and entered into a new $12,000 credit facility. Upon entry into this facility, the Company borrowed $7,000 that the Company was initially eligible to borrow in April 2010 and subsequently borrowed the remaining $5,000 in September 2010. The initial $7,000 loan under the new facility was used to repay the outstanding balance under a previously existing credit facility of Horizon Pharma USA with a different lender. Additionally, in connection with the new credit facility, the Company issued warrants to purchase 150,602 shares of Series B convertible preferred stock. Also in April 2010, Horizon Pharma AG renegotiated the payment terms of an existing EUR 7,500 credit facility and the Company issued a warrant to purchase 118,496 shares of Series A convertible preferred stock in exchange for the lender’s existing warrant to purchase shares of Nitec’s capital stock.

These financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. The Company has incurred net operating losses and negative cash flows from operations during every year since inception. At December 31, 2010 and March 31, 2011 (unaudited) the Company had an accumulated deficit of $107,052 and $114,723, respectively, and currently does not have financing sufficient for continued operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue its operations, the Company must achieve profitable operations and/or obtain additional debt or equity financing. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to the Company or at all. Management is currently pursuing financing alternatives. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The issuance of additional equity securities by the Company could result in a significant dilution in the equity interests of the Company’s existing stockholders. Obtaining debt financing, assuming such debt would be available, will increase liabilities and future cash commitments. Management is currently working toward its objective of realizing revenues and then profitability by obtaining regulatory approval to commercialize its products. The failure of the Company to obtain approval of its products by regulatory authorities in a timely manner, or at all, could have a material adverse effect on its business, results of operations, future cash flows, financial condition, and ability to continue as a going concern.

The Company has evaluated subsequent events through July 11, 2011, the date on which the annual financial statements were issued for inclusion in the Company’s registration statement on Form S-1. The Company has evaluated subsequent events through July 11, 2011, the date on which the unaudited interim financial statements were issued for inclusion in the Company’s registration statement on Form S-1.

Since its inception in 2005, the Company has focused on raising capital and developing and commercializing its products. Through December 31, 2009, the Company was classified as a development stage enterprise. During 2010, the Company acquired Nitec and began recognizing revenues from the sale of LODOTRA. In 2010, the Company also focused on its marketing efforts by hiring marketing and sales personnel in anticipation of the potential commercial launches of DUEXIS and LODOTRA in the United States. Therefore, the Company exited the development stage as of December 31, 2010.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

The consolidated financial statements prior to March 31, 2010, include the accounts of Horizon Therapeutics, Inc. and its wholly-owned subsidiaries, and after March 31, 2010, include the Company’s accounts and those of its wholly-owned subsidiaries: Horizon Pharma USA, Inc. in Northbrook, IL, Horizon Pharma AG in Reinach, Switzerland and Horizon Pharma GmbH in Mannheim, Germany. All intercompany accounts and transactions have been eliminated.

The accompanying consolidated balance sheet as of March 31, 2011, the consolidated statements of operations and of cash flows for the three months ended March 31, 2010 and 2011, and the consolidated statement of stockholders’ equity (deficit) for the three months ended March 31, 2011 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of March 31, 2011 and results of operations and cash flows for the three months ended March 31, 2010 and 2011. The financial data and other information disclosed in these notes to the consolidated financial statements related to the three month periods are unaudited. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011, for any other interim period or for any future year.

In July 2010, the Board of Directors of the Company authorized management to file a registration statement with the Securities and Exchange Commission for the parent holding company, Horizon Pharma, Inc., to sell shares of its common stock to the public. Each share of convertible preferred stock will automatically convert into shares of common stock upon the earlier of (1) the sale of Horizon Pharma, Inc.’s common stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate gross cash proceeds of at least $50,000 and the shares of common stock sold being listed on the New York Stock Exchange, NASDAQ Global Select Market or NASDAQ Global Market, or (2) the date specified by written consent or agreement of the holders of at least 66.67% of the then outstanding shares of convertible preferred stock, voting together as a single class on an as-converted basis. Any outstanding warrants to purchase convertible preferred stock will automatically become warrants to purchase common stock upon conversion of the convertible preferred stock to common stock. Unaudited pro forma stockholders’ equity, as adjusted for the assumed conversion of the convertible preferred stock, are set forth on the accompanying consolidated balance sheet.

The Company operates as one segment. Management uses one measure of profitability and does not segment its business for internal reporting.

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The U.S. dollar is the functional currency for the Company’s U.S. based businesses, and the Euro is the functional currency for its subsidiaries in Switzerland and Germany. Foreign currency-denominated assets and liabilities of these subsidiaries are translated into U.S. dollars based on exchange rates prevailing at the end of the period, revenues and expenses are translated at average exchange rates prevailing during the corresponding fiscal period, and stockholders’ equity accounts are translated at historical exchange rates as of the date of any equity transaction. The effects of foreign exchange gains and losses arising from the translation of assets and liabilities of those entities where the functional currency is not the U.S. dollar are included as a component of accumulated other comprehensive gain (loss).

Gains and losses resulting from foreign currency transactions are reflected in net loss and have not been significant for any period presented. To date, the Company has not undertaken hedging transactions to cover its foreign currency exposure.

Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of the Company’s agreements contain multiple elements and in accordance with these agreements, the Company may be eligible for upfront license fees, marketing or commercial milestones and payment for product deliveries.

As of April 1, 2010, as a result of the acquisition of Nitec, the Company began recognizing revenues from the sale of LODOTRA. The Company anticipates revenues will continue to result from distribution, marketing, manufacturing and supply agreements with third parties in Europe and certain Asian and other countries. The Company will also recognize revenues related to up-front license fees, milestone receipts and product deliveries. During the year ended December 31, 2010 and the three months ended March 31, 2011 (unaudited) all revenues recognized were related to the sale of LODOTRA to the Company’s distribution partners under existing arrangements (Note 15).

The Company recognizes revenues consisting of payments of non-refundable, up-front license fees. In situations where the licensee is able to obtain stand-alone value from the license and no further performance obligations exist on the Company’s part, revenues are recognized on the earlier of when payments are received

or collection is assured. Where continuing involvement by the Company is required in the form of technology transfer, product manufacturing or technical support, revenues are deferred and recognized over the term of the agreement.

Milestone payments are recognized as revenue based on achievement of the associated milestones, as defined in the relevant agreements. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from the Company’s partner, provided that (1) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (2) the milestone represents the culmination of an earnings process and (3) the milestone payment is non-refundable. If all of these criteria are not met, revenue from the milestone achievement is recognized over the remaining minimum period of the Company’s performance obligations under the agreement.

Upon initial launch of a product, the Company recognizes revenues based on the amount of product sold through to the end user consumer until such time as a reasonable estimate of allowances for product returns, rebates and discounts can be made. Upon establishing the ability to reasonably estimate such allowances, the Company recognizes revenue from the delivery of its products to its distribution partners when delivery has occurred, title has transferred to the partner, the selling price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations. The Company records product sales net of allowances for product returns, rebates and discounts. The Company is required to make significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, the Company will be required to make adjustments to these allowances in the future.

Given the limited sales history, the Company is unable to estimate returns from distribution partners with whom the Company has no understanding of product return history. Therefore, the Company has determined that shipments of LODOTRA made to the Company’s distribution partner, Mundipharma International Corporation Limited (“Mundipharma”), do not meet the criteria for revenue recognition at the time of shipment, and such shipments are accounted for using the sell-through method. Under the sell-through method, the Company recognizes revenue based on an estimate of the amount of product sold through to the customers of our distribution partners and end users. Through March 31, 2011 (unaudited) the Company has had no refunds or returns.

On April 1, 2010, as a result of the acquisition of Nitec, the Company began to recognize cost of goods sold in connection with its sale of LODOTRA. Cost of sales includes all costs directly related to the manufacture and delivery of product and out-licensing of distribution and marketing rights to third parties. Cost of goods sold also includes amortization of developed technology related to the acquisition of Nitec.

The cost in connection with product delivery to the Company’s distribution partners consists of raw material costs, costs associated with third-party manufacturers who manufacture LODOTRA for the Company, supply chain costs, royalty payments to third parties for the use of certain licenses patents, and applicable taxes. The cost of sales associated with deferred product revenues are recorded as deferred cost of goods sold, which are included in other current assets, until such time the deferred revenue is recognized.

The Company accounts for acquired businesses using the acquisition method of accounting in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”), which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired and liabilities assumed over the purchase price is recorded as a bargain purchase gain. The fair value of intangible assets, including developed technology and in-process research and development (“IPR&D”), is based on significant judgments made by management. The valuations and useful life assumptions are based on information available near the acquisition date and are based on expectations and assumptions that are considered reasonable by management. In the Company’s assessment of the fair value of identifiable intangible assets acquired in the Nitec acquisition, management used valuation techniques and made various assumptions. The Company’s analysis and financial projections were based on management’s prospective operating plans and the historical performance of the acquired business. In connection with the acquisition of Nitec on April 1, 2010, the Company engaged consultants to assist management in the following:

All work performed by consultants was discussed, reviewed in detail by management to determine the estimated fair values of the intangible assets and approved by management. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s financial statements.

The Company reviews indefinite-lived intangible assets, primarily IPR&D that have an indefinite useful life, for impairment at least annually in the fourth fiscal quarter, or more frequently if an event occurs creating the potential for impairment, until such time as the research and development efforts are completed or abandoned. If the research and development efforts are completed successfully, the IPR&D will be reclassified to identified intangible assets and amortization of the fair value of the assets will begin. The Company amortizes the cost of identified intangible assets using amortization methods that reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized or on a straight-line basis if no other pattern is more representative of the expected benefits. The Company reviews intangible assets that have finite useful lives when an event occurs creating the potential for impairment. The Company reviews for impairment by examining facts or circumstances, either external or internal, indicating that the Company may not recover the carrying value of the asset. The Company measures impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. The Company measures fair value generally based on the estimated future cash flows. The Company’s analysis is based on available

information and on assumptions and projections that it considers to be reasonable and supportable. If necessary, the Company will perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Inventory is stated at the lower of cost (first-in, first-out) or market and includes raw materials, work-in-process and finished goods. Inventories include the direct purchase cost for materials and/or services processed in the current production stage (finished and work-in-process). For production stages that include internal costs, direct internal costs are capitalized and allocated to the product.

All raw materials and production supplies are purchased from third parties. Contract manufacturing and other supply chain services are rendered by third parties under corresponding agreements. These costs are capitalized in a manner similar to the purchase of materials.

If current market prices and/or limited usability of products indicate any impairment, the value of the inventory is written down to net realizable value.

The Company’s preclinical studies and clinical trials have been conducted by third-party contract research organizations and other vendors. Preclinical study and clinical trial expenses are based on the services received from these contract research organizations and vendors. Payments under some of the contracts the Company has with such parties depend on factors such as the milestones accomplished, successful enrollment of certain numbers of patients and site initiation. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual accordingly. To date the Company has had no significant adjustments to accrued clinical expenses.

Carrying amounts of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities. Based on the borrowing rates available to the Company for loans with similar terms and consideration of non-performance and credit risk, the carrying value of its notes payable approximates their fair value. The carrying amounts of the convertible preferred stock warrant liabilities represent their fair value.

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Restricted cash consists of an interest-bearing money market account which is used as security for the corporate employee credit card program.

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.

Upon retirement or sale of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Repairs and maintenance costs are charged to expenses as incurred and improvements are capitalized.

Leasehold improvements are amortized on a straight-line basis over the terms of the lease, or the useful life of the assets, whichever is shorter. Depreciation and amortization periods for the Company’s property and equipment are as follows:

Software includes internal-use software that is acquired and modified to meet the Company’s internal needs. Amortization commences when the software is ready for its intended use.

The Company periodically evaluates its long-lived assets for impairment by comparing the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows. In 2008, the Company acquired manufacturing equipment and management subsequently determined that it would not be utilized in the Company’s core business and thus wrote down the asset to fair value and recognized an impairment loss of $427.

Research and development expenses include, but are not limited to, payroll and other personnel expenses, consultant expenses, expenses incurred under agreements with contract research and manufacturing organizations to conduct clinical trials and expenses incurred to manufacture clinical trial materials. Costs related to research, design and development of products are charged to research and development expense as incurred.

Sales and marketing expenses consist principally of business development expenses, trade show expenses, pre-launch marketing activities and payroll and other personnel-related expenses.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. The Company’s cash and cash equivalents are invested in deposits with three banks in the United States of America, Switzerland and Germany that management believes are creditworthy. At times, deposits in these banks may exceed the amount of insurance provided on such deposits. To date, the Company has not experienced any losses on its deposits of cash and cash equivalents.

Subsequent to its acquisition of Nitec, the Company’s sales contracts are principally denominated in Euros and therefore, its revenues are subject to significant foreign currency risk. The Company also incurs certain operating expenses in currencies other than the U.S. dollar through its Horizon Pharma AG operating

subsidiary; therefore, it is subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes in the Euro. To date, the Company has not entered into any hedging contracts since exchange rate fluctuations have had minimal impact on its results of operations and cash flows.

The products developed by the Company require approvals from the FDA or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s products will obtain the necessary regulatory approvals. If the Company’s products were denied such approvals or such approvals were delayed, it could have a material adverse effect on the Company’s operations.

As a result of the Nitec acquisition, the Company has one product, LODOTRA, available for sale in Europe through distribution partners. As of March 31, 2011, the Company had no other products available for sale. The Company intends to submit an NDA for LODOTRA to the FDA in the third quarter of 2011. The Company’s other lead product, DUEXIS, was approved for marketing by the FDA on April 23, 2011. The Company also submitted an MAA for DUEXIS in the United Kingdom, the Reference Member State, through the Decentralized Procedure in October 2010.

To achieve profitable operations, the Company must successfully develop, obtain regulatory approval for, manufacture and market its products. There can be no assurance that any such products can be developed, will be approved for marketing by the regulatory authorities, or can be manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed by the Company. These factors could have a material adverse effect on the Company’s operations.

The Company relies on third parties to manufacture its clinical trial and commercial supplies of DUEXIS. The Company also relies on third parties to manufacture its commercial supplies of LODOTRA for sale in Europe. The commercialization of any of its products or product candidates could be stopped, delayed or made less profitable if those third parties fail to provide the Company with sufficient quantities of product or fail to do so at acceptable quality levels or prices.

The Company’s accounts receivable are currently derived from customers located in Europe. The Company performs ongoing credit evaluations of its customers, does not require collateral and maintains allowances for potential credit losses on customer accounts when deemed necessary. To date, there have been no such losses and the Company has not recorded an allowance for doubtful accounts.

In 2009, the Company did not have any customers as it did not sell any products or services. During the year ended December 31, 2010 and the three months ended March 31, 2011 (unaudited), 93% of the Company’s accounts receivable were from Mundipharma, the Company’s distribution partner for LODOTRA in Europe (excluding Germany and Austria) and certain Asian and other countries, and 72% were from Merck Serono GmbH and Merck GesmbH, the Company’s exclusive distribution partners for LODOTRA in Germany and Austria, respectively. During the year ended December 31, 2010 and the three months ended March 31, 2011 (unaudited), 98% and 78%, respectively, of the Company’s revenues were from Merck Serono GmbH.

The Company was subject to income taxes only in the U.S. through March 31, 2010, and beginning on April 1, 2010, in both the U.S. and certain foreign jurisdictions as a result of the Nitec acquisition. The Company uses estimates in determining its provision for income taxes.

The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability accounts are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are

expected to reverse. Valuation allowances are established to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets.

The Company adopted the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken in a tax return, in the consolidated financial statements. Additionally, the guidance also prescribes treatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained.

The Company adopted Accounting Standards Codification (“ASC”) Topic 718 Compensation-Stock Compensation, using the “straight-line” attribution method for allocating compensation costs and recognizing the fair value of each stock option on a straight-line basis over the requisite service period.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505-50, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to periodic adjustment as the underlying equity instruments vest.

The Company applies the provisions of ASC 220, Reporting Comprehensive Income, which provides rules for the reporting and display of comprehensive income (loss) and its components. Comprehensive loss is comprised of net loss and other comprehensive income (loss) (“OCI”). OCI includes certain changes in stockholders’ equity (deficit) that are excluded from net loss such as foreign currency translation adjustments. Comprehensive income (loss) has been reflected in the Company’s consolidated statements of operations. The components of accumulated OCI consist solely of foreign currency translation adjustments.

Freestanding warrants and other similar instruments that may contingently obligate the Company to redeem underlying convertible preferred stock in the future are accounted for in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Freestanding warrants that are exercisable for the Company’s convertible preferred stock and that contain net share settlement features which require the Company to settle the warrants based on a fixed monetary amount known at inception and require the Company to issue a variable number of shares in the future, are classified as liabilities on the balance sheet. The fair value of such warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other income or expense. The Company adjusts the liability for changes in fair value of such warrants until the earlier of the exercise or expiration of the warrants, sale of the Company’s common stock in a firm commitment underwritten public offering or lapsing of the net share settlement feature which is based on a fixed monetary amount, at which time all warrants will be automatically adjusted to become warrants to purchase common stock and the liability will be reclassified to stockholders’ equity (deficit).

Basic net loss per share is computed by dividing net loss attributed to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The weighted average number of shares of common stock used to calculate the basic net loss per share of common stock excludes those shares subject to repurchase. The Company’s potential dilutive shares, which include shares issuable upon the exercise of outstanding common stock options and warrants to purchase convertible preferred stock and shares issuable upon conversion of outstanding convertible preferred stock and subordinated convertible promissory notes, have not been included in the computation of diluted net loss per share for all periods presented as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. The Company’s net loss per share has been retroactively adjusted for all periods presented to give effect to the recapitalization described in Note 1. Specifically, retroactive adjustment was given to the conversion of each share of common stock into 0.496 shares of common stock and 0.504 shares of Series A convertible preferred stock, as well as the conversion of each share of special preferred stock (“Special Preferred”) into one share of common stock, each of which occurred on April 1, 2010.

In circumstances where there has been a stock dividend, stock split or reverse stock split subsequent to the close of an accounting period but prior to issuance of financial statements, ASC 260, Earnings Per Share, requires the computation of loss per share to give retroactive recognition to an appropriate equivalent change in capital structure for all periods presented based on the new number of shares. The Company’s April 2010 recapitalization resulted in a similar change in capital structure and therefore the Company has applied the guidance in ASC 260 in order to show a loss per share amount calculated on a basis that is more comparable to the basis on which it is expected to be calculated in future periods. In the recapitalization, the existing common stock, which had a liquidation preference relative to a special class of preferred stock, was exchanged for a mixture of common stock and Series A preferred stock as described above. The number of shares outstanding in computing net loss per share was determined by calculating the weighted average shares outstanding in accordance with ASC 260 after applying the exchange ratio from the recapitalization to the common stock and Special Preferred outstanding for all accounting periods presented. The Company believes that by giving effect to the recapitalization of the common stock, the historical loss per share reflects the portion of the pre-recapitalization common stock that effectively was common stock and permits a consistent presentation of loss per share on a period by period basis. The recapitalization was not retroactively reflected in the statement of stockholders’ equity (deficit), because the Company believes that replacing the historical capitalization with the simplified post-recapitalization capital structure would misrepresent the legal rights and privileges of the stockholders throughout the historical periods presented. Prior to the recapitalization, the Company had five series of preferred stock and a class of common stock and a complex structure for the distribution of the proceeds of a liquidation or deemed liquidation. The Company’s complex capital structure was simplified in the recapitalization through the issuance of a single series of preferred stock and common stock without any liquidation preference.

Upon issuance, the Company’s Special Preferred had liquidation preferences that were junior to those of the common stock and no other preferences. As a result, Special Preferred was equivalent to common stock for the period in which it was outstanding, as it had no rights that would make it preferred stock under the Delaware General Corporation Law. The Special Preferred was named “special preferred” as a convenience to distinguish it from the common stock, to which it was junior. The special preferred stock was issued in exchange for outstanding preferred stock held by preferred stockholders that chose not to participate pro rata in the Company’s Series D convertible preferred stock financing. As a result of this exchange, the non-participating

preferred stockholders gave up the liquidation preferences of the pre-existing preferred stock that was exchanged for Special Preferred. The Company believes the treatment afforded to the capital contribution is consistent with the guidance in ASC 260-10-S55, which, upon redemption of preferred stock, requires the difference between (1) the fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock on the balance sheet (net of issuance costs) to be added to the net loss to arrive at net loss available to common stockholders in the calculation of earnings per share. The amount recorded by the Company as a contribution adjusting net loss to net loss attributable to common stockholders of $3,489 represents the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock on the balance sheet at the time of issuance of the Special Preferred. The carrying value of the preferred stock that was exchanged was $4,000 and the fair value of the Special Preferred that was issued to investors who did not participate in the Series D financing was valued at $511. In light of the fact that the Special Preferred is junior to the common stock in a liquidation and otherwise has the same rights as the common stock, the Company believes that the substance of the transaction was the redemption of preferred stock for common stock (i.e., the Special Preferred with the lowest rights and privileges) at fair value that was below the existing carrying amount of the preferred stock. The nature of the transaction and accounting treatment is consistent with ASC 260-10-S55. The fair value used to derive the amount of the contribution was determined using an option pricing model as of December 31, 2009, the date of the exchange.

Upon the sale of the Company’s common stock in a qualifying firm commitment underwritten public offering, all outstanding convertible preferred stock will be converted into shares of common stock. The unaudited pro forma basic and diluted net loss per share for the years ended December 31, 2010 and the three months ended March 31, 2011 (unaudited) reflects the automatic conversion of all outstanding shares of convertible preferred stock to common stock. The unaudited pro forma stockholders’ equity and pro forma basic and diluted net loss per share do not give effect to the issuance of shares from the planned initial public offering nor do they give effect to potential dilutive securities where the impact would be anti-dilutive, other than the conversion of convertible preferred stock to common stock.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows (in thousands, except share and per share amounts):

The weighted-average common shares used to compute basic and diluted net loss per share was computed as follows:

In addition to outstanding subordinated convertible promissory notes which are convertible into shares of convertible preferred stock, the following outstanding options to purchase common stock, convertible preferred stock and warrants to purchase convertible preferred stock were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued amended guidance on fair value measurements and disclosures. The new guidance requires additional disclosures regarding fair value measurements, amends disclosures about postretirement benefit plan assets, and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, the Company adopted this amendment on January 1, 2010, except for the additional Level 3 requirements which were adopted in 2011 without any material impact on the Company’s consolidated financial statements.

On April 1, 2010, pursuant to a share exchange agreement, the Company completed the acquisition of Nitec Pharma AG, a privately held biopharmaceutical company that currently markets LODOTRA, a proprietary programmed release formulation of low-dose prednisone, in Europe through certain distribution partners. In connection with the acquisition, Horizon Therapeutics, Inc. was recapitalized and became a wholly-owned subsidiary of Horizon Pharma, Inc. Pursuant to the recapitalization and under the terms of the share exchange agreement (together, “the Transactions”), all existing shares of common and convertible preferred stock of Nitec and Horizon Therapeutics, Inc. were exchanged for shares of the Company’s common stock and Series A convertible preferred stock. Immediately following the completion of the Transactions, the former stockholders and optionholders of Horizon Therapeutics, Inc. and Nitec owned 51% and 49%, respectively, of Horizon Pharma, Inc. on a fully diluted basis. Also, in connection with the Transactions, Horizon Therapeutics, Inc. changed its name to Horizon Pharma USA, Inc. and Nitec changed its name to Horizon Pharma AG. The Company incurred a total of $3,071 of transaction costs in connection with the Nitec acquisition. In connection with and following the Transactions, Horizon Pharma, Inc. also completed a Series B convertible preferred stock financing raising $19,844, net of issuance costs.

As consideration in the acquisition, the Company paid a total purchase price of approximately $119,317 ($112,828, net of cash received of $6,489) consisting of the following: 857,400 shares of common stock valued at $11,050, 11,211,413 shares of Series A convertible preferred stock valued at $88,904, a discount of $2,044 on the sale of 1,229,920 shares of Series B convertible preferred stock sold to former stockholders of Nitec, warrants to purchase 118,496 shares of Series A convertible preferred stock valued at $894, options to purchase up to 328,074 shares of common stock valued at $2,137, and $14,288 in assumed liabilities and long-term debt. The financial position and operating results of Horizon Pharma AG have been included in the Company’s financial position and operating results from the date of the acquisition.

The fair value of the common stock and Series A and B convertible preferred stock was determined with the assistance of consultants using an income approach.

Under the “acquisition” method of accounting, the total purchase price is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair market values as of the acquisition date. The Company performed appraisals necessary to derive preliminary fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and liabilities arising from contingencies, and the amount of goodwill or bargain purchase gain to be recognized as of the acquisition date, and the related preliminary allocation of the purchase price. The table below shows how the Company originally allocated the total purchase price of approximately $119,317, net of cash acquired of $6,489, over the fair value of the assets acquired and liabilities assumed, the revisions the Company made as a result of subsequent information indicating a correction to a lower expected tax rate in Switzerland, and the final allocation of the purchase price:

The initial tax rate used to determine the amount of the deferred tax liability as of April 1, 2010 (the date of the Nitec acquisition) was the statutory tax rate in Switzerland of 27.5%. This is comprised of the Swiss Federal and Cantonal tax rates. Upon gaining a better understanding of the Swiss tax laws, it was later determined that the Company would receive a deduction on each of its Swiss Federal and Cantonal tax returns for taxes paid to the other jurisdiction, which would lead to a lower overall effective tax rate from what was initially used. According, the deferred tax liability was adjusted to reflect the appropriate effective tax rate.

The valuation of the developed technology acquired was based on management’s estimates, information available at the time of the acquisition and reasonable and supportable assumptions. The allocation was generally based on the Company’s estimated fair value of the rights to payments with respect to the Company’s marketed product LODOTRA in Europe which were acquired in the acquisition of Nitec, determined using an income approach under the discounted cash flow method. Significant assumptions used in valuing the developed technology included revenue projections through 2026 based on existing partnerships in Europe and assumptions relating to pricing and reimbursement rates and market size and market penetration rates, cost of goods sold based on current manufacturing experience, allocated general and administrative expense without any sales and marketing expense as the product was fully out licensed in Europe, research and development expenses for clinical and regulatory support for obtaining reimbursement approval in Europe through 2010, a 39.3% blended tax rate, a 100% probability of cash flows as the product was already marketed in Europe, and a discount rate of 16%. The discount rate was selected based on a rate of return that reflects the relative risk of the investment as well as the time value of money. Of the total purchase price, $43,500 was allocated to developed technology, which was being amortized to cost of goods sold using a straight-line method over an initial estimated useful life of nine years. In connection with the Company’s fourth quarter 2010 review of acquired intangible assets, the Company determined the useful life of the developed technology was twelve years after updating its expectations for market exclusivity based on data regarding intellectual property exclusivity in the pharmaceutical industry. As of December 31, 2010, developed technology had decreased $3,510 to $39,990 due to $2,634 of amortization expense, which was recorded in cost of goods sold, and $876 due to foreign exchange rate effects of the Euro to U.S. dollar translation. During the three months ended March 31, 2011 (unaudited), developed technology increased by a net amount of $1,606 to $41,596 due to an increase of $2,533 related to foreign exchange rate effects of the Euro to U.S. dollar translation, partially offset by amortization expense of $927 for the three months ended March 31, 2011.

The Company also recorded $110,900 for IPR&D related to the U.S. rights to LODOTRA which were acquired as a result of the Company’s acquisition of Nitec. The value of acquired IPR&D was determined using an income approach. Significant assumptions used in valuing the IPR&D included revenue projections from 2012 through 2026 based on management’s experience with products in the same category and the overall market size, cost of goods sold based on then-current manufacturing experience with the product in Europe, allocated general and administrative expense and sales and marketing expense based on the Company’s intention to market the product directly in the U.S., estimated research and development expenses to complete submissions and approvals and for ongoing clinical and regulatory maintenance costs, a 39.3% blended tax rate, management’s estimated probability of cash flows based on similar products that have completed Phase 3 trials, and a discount rate of 17%.

The IPR&D assets were initially recognized at fair value and will be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The IPR&D will not be amortized as the development efforts related to LODOTRA in the U.S. are ongoing. As of December 31, 2010, IPR&D had decreased $2,154 to $108,746 due to the foreign exchange rate effects of the Euro to U.S.

dollar translation. During the three months ended March 31, 2011 (unaudited), IPR&D increased by $6,942 to $115,688 due to the foreign exchange rate effects of the Euro to U.S. dollar transaction.

After a preliminary assessment on April 1, 2010 (acquisition date) of (1) whether all of the assets acquired and liabilities assumed had been identified and recognized and (2) the consideration transferred in the Nitec acquisition, the Company initially recognized a bargain purchase gain, representing the amount by which the fair value of the identifiable net assets exceeded the purchase price, of approximately $14,735.

In accordance with its established accounting policies regarding review of intangible assets, in the fourth quarter of 2010 the Company performed its initial annual impairment test for IPR&D acquired in the Nitec acquisition and considered whether a triggering event had occurred which would necessitate performing an impairment test relating to its long-lived assets, primarily developed technology. As a result, the Company determined there was no impairment in the carrying amounts of the assets acquired. The Company’s review of the intangible assets in the fourth quarter of 2010 also indicated that the useful lives of the assets were longer than originally believed, based on information the Company received subsequent to the acquisition date regarding average market exclusivity periods for similarly situated assets. This information summarized actual litigation outcome data from 2003-2009 in cases involving generic challenges to branded drugs. The information showed that makers of branded drugs won a larger percentage of cases than generic drug challenges which supported a longer period of exclusivity for branded drugs and for branded drugs with issued patents, than what we originally assumed in our projections leading us to increase the useful lives of our acquired assets. As a result, the Company incorporated the longer utilization period of those assets into the cash flow analysis used in its impairment test.

Also in the fourth quarter of 2010, the Company revised the value of its deferred tax liabilities to reflect the appropriate effective tax rate in Switzerland, which resulted in the reduction in the original amount of deferred tax liabilities recorded in connection with the acquired intangible assets. This correction to its expected effective tax rate in Switzerland resulted in a net decrease in the initial amount of deferred tax liabilities of $4,591 to a revised amount of $26,012, and a net increase of $4,591 to the bargain purchase gain the Company had originally recorded, to $19,326.

Unaudited pro forma financial information is presented below as if the acquisition of Nitec occurred at the beginning of fiscal year 2010. The pro forma information presented below does not purport to present what the actual results would have been achieved had the acquisition in fact occurred at the beginning of fiscal 2010, nor does the information project results for any future period. Further, the pro forma results exclude any benefits that may result from the acquisition due to synergies that were derived from the elimination of any duplicative costs. In addition, the consolidated results of Nitec were adjusted to reflect reclassifications and certain adjustments to conform with the Company’s presentation under U.S. GAAP (in thousands, except per share data).

In September 2006, the FASB issued new guidance now codified as ASC 820, Fair Value Measurements and Disclosures. The new guidance defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements and was adopted by the Company in 2008. In February 2008, the FASB issued new guidance now codified in ASC 820 which delays the effective date for non-financial assets and liabilities that are not measured or disclosed on a recurring basis to fiscal years beginning after November 15, 2008 and was adopted by the Company in 2009.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its money market funds. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table sets forth the Company’s financial assets and liabilities at fair value on a recurring basis as of December 31, 2009 and 2010 and March 31, 2011 (unaudited) (in thousands):

The Company values its convertible preferred stock warrant liabilities (Note 10) using the Black-Scholes option pricing model. The contractual term of the warrants truncates if certain events occur. Accordingly, the term assumption has been determined incorporating these potential outcomes. The expected volatility

assumption was determined by examining the historical volatility for industry peers, as the Company does not have trading history for its common stock. The risk-free rate assumption is based on U.S. Treasury investments whose term is consistent with the expected term of the warrants. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

The change in the fair value of the convertible preferred stock warrant liabilities is summarized below (in thousands):

At December 31, 2009, in connection with the issuance of the Series D convertible preferred stock (upon which the convertible preferred stock warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price), the aggregate fair value of the convertible preferred stock warrants was reclassified from liabilities to stockholders’ equity and the periodic fair value adjustments were discontinued. The Company had no assets or liabilities classified as Level 3 during 2010 or as of March 31, 2011 (unaudited).

Prepaid expenses and other current assets consisted of the following (in thousands):

Depreciation expense for the years ended December 31, 2008, 2009, and 2010 was $35, $77 and $237, respectively. Depreciation expense for the three months ended March 31, 2010 and 2011 (unaudited) was $25 and $100, respectively.

The Company’s developed technology, an identifiable intangible asset, was acquired in connection with the acquisition of Nitec (see Note 3). Of the total purchase price, $43,500 has been allocated to developed technology, which is being amortized to cost of goods sold using a straight-line method over an estimated useful life of twelve years. As of December 31, 2010, developed technology had decreased $3,510 to $39,990 due to $2,634 of amortization expense, which the Company recorded in cost of goods sold, and $876 due to

foreign exchange rate effects of the Euro to U.S. dollar translation. During the three months ended March 31, 2011 (unaudited), developed technology increased by a net amount of $1,606 to $41,596 due to an increase of $2,533 related to foreign exchange rate effects of the Euro to U.S. dollar translation, partially offset by amortization expense of $927 for the three months ended March 31, 2011.

As of December 31, 2010, the total expected future amortization related to the developed technology was as follows (in thousands):

As of March 31, 2011 (unaudited), the total expected future amortization related to the developed technology was as follows (in thousands):

The Company has also recorded $110,900 for IPR&D related to the U.S. rights to LODOTRA which were acquired as a result of the Company’s acquisition of Nitec. The IPR&D assets were initially classified as indefinite-lived assets and will continue to be so classified until the successful completion or abandonment of the associated research and development efforts. As of December 31, 2010, IPR&D had decreased $2,154 to $108,746 due to foreign exchange rate effects of the Euro to U.S. dollar translation. During the three months ended March 31, 2011 (unaudited), IPR&D increased by $6,942 to $115,688 due to foreign exchange rate effects of the Euro to U.S. dollar translation.

In April 2009, the Company entered into a sublease agreement for its corporate headquarters in Northbrook, Illinois at a rate of $15 per month, expiring in April 2010. In January 2010, the Company exercised an option to extend the lease for an additional 20 months through December 31, 2011 at a monthly rent of $15 for the first 12 months of the renewal period and $16 per month for the last eight months of the renewal period.

Effective October 1, 2008, the Company leased its Palo Alto offices from a stockholder under a month-to-month operating sublease at a rate of $3 per month, which is terminable by either party upon 30 days’ written notice. In January 2010, the Company terminated the sublease agreement with the stockholder and entered into a month-to-month operating lease directly with the landlord at a rate of $2 per month which is terminable by either party upon 30 days’ notice.

The Company also leases its offices in Reinach, Switzerland and in Mannheim, Germany. The Reinach office lease rate is $7 (7 CHF) per month, expiring on May 31, 2015. The Mannheim office lease rate is approximately $10 (7 EUR) per month, expiring on December 31, 2011, with the option to renew annually.

Additionally the Company leases several company cars for its Reinach and Mannheim offices. All of these lease contracts expire no later than July 2013.

The Company recognizes rent expense on a monthly basis over the lease term based on a straight line method. Rent expense for the years ended December 31, 2008, 2009 and 2010, was $55, $162 and $355, respectively. Rent expense for the three months ended March 31, 2010 and 2011 (unaudited) was $54 and $105, respectively.

The aggregate future minimum lease payments under noncancelable operating leases as of December 31, 2010 were as follows (in thousands):

The aggregate future minimum lease payments under noncancelable operating leases as of March 31, 2011 (unaudited) were as follows (in thousands):

In August 2007, the Company entered into a manufacturing and supply agreement with Jagotec AG. Under the agreement, Jagotec or its affiliates manufacture and supply LODOTRA exclusively to the Company in bulk. The Company committed to a minimum purchase of LODOTRA tablets from Jagotec for five years from the date of first launch of LODOTRA in a major country, as defined in the agreement, which was in April 2009. As of December 31, 2010 and March 31, 2011 (unaudited), the minimum remaining purchase commitment was $3,763 and $3,545, respectively, based on tablet pricing in effect under the agreement as of December 31, 2010 and March 31, 2011, respectively.

In November 2009, the Company entered into an agreement for $1,350 for engineering studies, installation qualification of equipment, validation batches and stability studies in connection with the manufacturing of DUEXIS. As of December 31, 2009 and 2010, the Company recorded research and development expenses of $300 and $1,237, respectively, for milestones achieved under this agreement. Remaining total payments for stability studies of $113 are due over six years, of which $83 was due as of March 31, 2011 (unaudited).

In connection with the August 2004 development and license agreement with SkyePharma and Jagotec AG, a wholly-owned subsidiary of SkyePharma, regarding certain proprietary technology and know-how owned by SkyePharma, Jagotec is entitled to receive a single digit percentage royalty on net sales of LODOTRA and on any sub-licensing income, which includes any payments not calculated based on the net sales of LODOTRA, such as license fees, and lump sum and milestone payments. During the year ended December 31, 2010 and the three months ended March 31, 2011 (unaudited), $352 and $141, respectively, of royalty expense was recognized in cost of goods sold.

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

In accordance with its amended and restated certificate of incorporation and amended and restated bylaws, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. Additionally, the Company has entered, and intends to continue to enter, into separate indemnification agreements with its directors and executive officers. These agreements, among other things, require the Company to indemnify its directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of the Company’s directors or executive officers, or any of the Company’s subsidiaries or any other company or enterprise to which the person provides services at the Company’s request. There have been no claims to date and the Company has a director and officer insurance policy that enables it to recover a portion of any amounts paid for future potential claims.

In October 2008, the Company entered into a Note and Warrant Purchase Agreement (the “Bridge Purchase Agreement”) under which the Company issued and sold convertible promissory notes (“Bridge Notes”) with existing preferred stockholders for an aggregate amount of $8,000. Under the terms of the agreement, the first loan amount of $1,300 would become payable to the Company no later than November 7, 2008 and the second loan for the remaining $6,700 would become payable to the Company upon receipt of positive clinical trial data on DUEXIS on or before November 15, 2008. The Bridge Notes bore interest at a fixed rate of 8% per annum compounded annually and originally had a maturity date of April 30, 2009. The Bridge Notes and accrued interest thereon were convertible into convertible preferred stock issued in the next “Qualified Financing,” as defined in the Bridge Notes, or into Series C convertible preferred stock or common stock for non-fully participating investors. If the Bridge Notes did not convert prior to April 30, 2009, the Bridge Notes and accrued interest thereon would become due and payable on that date. Prior to November 15, 2008, the Company

received positive clinical trial data on DUEXIS and an additional $6,700 in proceeds from the Bridge Notes for a total of $8,000, with all investors fully participating. In April 2009, the maturity date of the Bridge Notes was extended to June 30, 2009.

In July 2009, the Company amended the Bridge Purchase Agreement to borrow an additional $4,000 in Bridge Notes from existing preferred shareholders, with a fixed interest rate of 8% and on the same terms and conditions as the previously issued Bridge Notes, and to extend the maturity date on all Bridge Notes to August 31, 2009.

In September 2009, the Company further amended the Bridge Purchase Agreement to borrow an additional $5,000 in Bridge Notes from existing preferred shareholders with a fixed interest rate of 8% and on the same terms and conditions as the previously issued Bridge Notes, and to extend the maturity date on all Bridge Notes to November 30, 2009.

In connection with the Bridge Purchase Agreement, the Company issued warrants to purchase shares of convertible preferred stock (the “Bridge Warrants”) to the holders of the Bridge Notes at an exercise price equal to the price paid by investors in the next “Qualified Financing” or the price per share of the Series C convertible preferred stock (Note 10).

In December 2009, the Company issued Series D convertible preferred stock (which constituted a Qualified Financing) at $5.201 per share, and as a result, the principal of $17,000 under the Bridge Notes and accrued interest of $894 thereon were converted into 3,440,463 shares of Series D convertible preferred stock.

In July 2010, the Company issued $10,000 of subordinated convertible promissory notes (the “2010 Notes”) and in January 2011 the Company issued an additional $5,030 of subordinated convertible promissory notes (the “January 2011 Notes”), each in private placements to certain of its existing investors in accordance with the Series B Preferred Stock and Convertible Note Purchase Agreement dated April 1, 2010, as amended by the First Amendment and Second Amendment to Series B Preferred Stock and Convertible Note Purchase Agreement. The subordinated convertible notes are considered hybrid instruments, which consist of a debt host instrument together with a conversion feature, thus giving the holder of a subordinated convertible note an option to convert into an equity instrument providing the holder a residual interest in the Company. Each holder of a subordinated convertible note also has the option to present its subordinated convertible note to the Company and demand payment under the terms of the convertible note after a certain date (defined as the maturity date) or upon the occurrence of certain events such as the failure of the Company to make a payment on the convertible note when due, bankruptcy or certain other liquidation events. The terms of the subordinated convertible notes require that the conversion price be adjusted (reduced) upon occurrence of certain events (for example, upon issuance of convertible preferred stock at a price less than the conversion price of the outstanding preferred stock series, or upon an IPO). The Company has concluded that the subordinated convertible notes will be accounted for as a typical debt instrument with related interest expense recorded in the Company’s consolidated statement of operations. If the contingency is met and the conversion feature is considered “beneficial” in a future accounting period, an additional cost of financing charge will be recorded for the beneficial conversion feature in the Company’s consolidated statement of operations at that time. The 2010 Notes and January 2011 Notes, including accrued interest, may convert into shares of the Company’s Series B preferred stock prior to the closing of this offering or the Company’s common stock in connection with this offering at the lesser of the price offered to the public in this offering or $18.92 per share. The 2010 Notes and January 2011 Notes bear interest at a fixed rate of 10% per annum and mature on August 12, 2011 and January 7, 2012, respectively, if not converted earlier. As of December 31, 2010 and March 31, 2011

(unaudited), $471 and $832 of interest expense was accrued in connection with the 2010 Notes and January 2011 Notes, respectively.

In December 2007, the Company entered into a Loan and Security Agreement (“Loan and Security Agreement”) with two financial institutions which provided for total proceeds of up to $10,000 or up to $12,000 upon receipt of evidence showing certain positive clinical trial results.

The principal balance of each loan under the Loan and Security Agreement bore interest at a fixed rate based upon the prime rate on the date of the loan plus 1.10%. Interest was originally payable monthly through October 31, 2008 (January 31, 2009 as a result of extending the loan availability period). The loan was repayable in 30 equal monthly payments of principal and interest. An inception fee of $117 was withheld from the initial proceeds and is being amortized over the term of the loan to interest expense. The Company was also required to make an additional payment of $300 at the earlier of the maturity date of July 31, 2011 or upon prepayment of the loan. The additional payment is being amortized over the term of the loan at an effective interest rate of 14.6%. The loan amounts were collateralized by all of the Company’s assets, excluding intellectual property.

The Loan and Security Agreement included customary covenants including financial reporting requirements, delivery of audited financial statements, limitations on further indebtedness or investments, and limitations on certain corporate transactions.

In December 2007, the Company borrowed $2,000 under the Loan and Security Agreement at a fixed interest rate of 8.35% per annum. In June and July 2008, the Company borrowed an additional $8,000 under the Loan and Security Agreement at a fixed interest rate of 6.1% per annum, for a total loan balance of $10,000.

In October 2008, the Company amended the Loan and Security Agreement (“First Amendment”) which required the Company to raise $8,000 in bridge financing and to receive positive clinical data regarding its lead product, DUEXIS before November 15, 2008, at which time the Company could borrow an additional $2,000. Also, under the terms of the First Amendment, payments of principal and interest in equal monthly installments would commence November 15, 2008, if positive clinical data was not received by November 15, 2008.

In November 2008, the Company received positive clinical data and borrowed the additional $2,000 at a fixed annual interest rate of 5.1% for a total of $12,000 outstanding under the Loan and Security Agreement.

In connection with the December 2007 and November 2008 advances under the Loan and Security Agreement, the Company issued warrants to the lending institutions to purchase 38,959 and 7,792 shares of Series C convertible preferred stock, respectively (Note 10).

On April 1, 2010, in connection with the recapitalization and acquisition of Nitec, the Company repaid the outstanding principal of $6,635, accrued interest of $36 and end-of loan fee of $300 under its Loan and Security Agreement.

Also on April 1, 2010, in connection with the Transactions, the Company, Horizon Pharma USA, and Horizon Pharma AG entered into a new Loan and Security Agreement (“Kreos-SVB Facility”) with two financial institutions allowing for borrowings of up to $12,000 at a 12.9% interest rate, an initial loan commitment fee of $120, end of loan fee of 1% of the principal borrowed and loan prepayments of $467. The first loan of $7,000 was advanced on April 1, 2010, with 36 remaining equal monthly payments of $233 for

principal and interest. The Kreos-SVB Facility is secured by a lien on substantially all of the assets, including intellectual property. The Company issued warrants to purchase 150,602 shares of Series B convertible preferred stock at an exercise price of $0.01 per share (Note 11). On September 3, 2010, the second loan for $5,000 was advanced with 36 equal monthly payments of $166 of principal and interest.

Also in connection with the Transactions, Horizon Pharma AG renegotiated the payment terms of an existing EUR 7,500 debt facility (“Kreos Facility”). The Company pays interest amounting to EUR 50 per calendar month, beginning May 2010 through December 2010. Thereafter, the Company is required to pay 35 equal monthly payments of EUR 184, consisting of principal and interest. The Kreos Facility is secured by a lien on all of Horizon Pharma AG’s trade receivables and intellectual property. Furthermore, the lender’s warrant to purchase up to 37,244 shares of Nitec capital stock was cancelled and exchanged for a warrant to purchase up to 118,496 shares of the Company’s Series A convertible preferred stock at an exercise price of $0.01 per share (Note 11).

The Kreos Facility restricts the Company’s ability to incur additional indebtedness, incur liens, pay dividends and engage in significant business transactions, such as a change of control, so long as the Company owes any amounts to the lender under the related loan agreement. If the Company defaults under its debt facility, the lender may accelerate all of the Company’s repayment obligations and take control of the Company’s pledged assets. The lender could declare a default under the Company’s debt facility upon the occurrence of any event that the lender interprets as having a material adverse effect upon the Company as defined under the loan agreement, thereby requiring the Company to repay the loan immediately or to attempt to reverse the lender’s declaration through negotiation or litigation.

The future minimum payments under the Kreos-SVB Facility and Kreos Facility as of December 31, 2010 were as follows (in thousands):

The future minimum payments under the Kreos-SVB Facility and Kreos Facility as of March 31, 2011 (unaudited) were as follows (in thousands):

In June 2011, in connection with the $17,000 debt facility entered into with Oxford Finance LLC (“Oxford”) and SVB, the Company repaid all outstanding amounts of its Kreos-SVB Facility of $8,455 which included $7,842 of principal, $443 of interest and $170 of loan fees, and paid Kreos Capital III (UK) Limited (“Kreos”) $1,450 (1,000 Euros) in exchange for Kreos’ consent to a partial assignment of the Kreos Facility to Horizon Pharma, Inc. As a result, Horizon Pharma, Inc. is now a co-lender with Kreos to Horizon Pharma AG (Note 17).

The Company had the following unexercised convertible preferred stock warrants outstanding as of December 31, 2009:

At December 31, 2009, in connection with the issuance of the Series D convertible preferred stock (upon which the Bridge Warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price), the aggregate fair value of the Bridge Warrants was reclassified from liabilities to equity and the periodic fair value adjustments were discontinued.

In connection with the Loan and Security Agreement (Note 9), the Company issued warrants in December 2007 and November 2008 to purchase 38,959 and 7,792 shares of Series C convertible preferred stock, respectively. The fair value of the warrants was estimated at $158 and $50, respectively, using the Black-Scholes option pricing model with the following assumptions at the date of issuance: expected volatility of 56%, risk-free interest rate of 3.11% and 0.88%, respectively, contractual term of 1.5 and 1.6 years,

respectively, and expected dividend yield of 0%. The warrants have an exercise price of $14.22 per share and expire on the earlier date of seven years from date of issuance, five years after the closing of the Company’s initial public offering of its common stock pursuant to a Registration Statement on Form S-1, or consummation of a merger event.

The fair value of the warrants was recorded as a debt issuance cost and is being amortized to interest expense over the term of the loan. Interest expense associated with the debt issuance cost and loan facility fees for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2010 (unaudited) was $124, $125, $76 and $22, respectively. On April 1, 2010, in connection with the recapitalization and acquisition of Nitec, the Company repaid the outstanding principal.

In connection with the Bridge Note financing (Note 8), in October and November 2008, the Company issued Bridge Warrants to purchase 13,713 and 70,675 shares of convertible preferred stock in connection with the $1,300 and $6,700 Bridge Notes, respectively, at an exercise price equal to the price paid by the investors in the next “Qualified Financing” or the issuance price of Series C convertible preferred stock. The aggregate purchase price was equal to 15% of the face value of the Bridge Notes held by each warrant holder. In the absence of the per share fair value of the next equity financing, the exercise price at issuance was considered to be $14.22 per share, which was the issuance price of the Series C convertible preferred stock. In connection with the Series D financing in December 2009, which was a Qualified Financing, the exercise price of the Bridge Warrants was set at $5.201 per share, which was the issuance price of the Series D convertible preferred stock, and the number of shares issuable upon exercise of the Bridge Warrants was adjusted to 37,493 and 193,232, respectively. The Bridge Warrants expire on the earlier date of seven years from date of issuance, or the consummation of a corporate transaction. Upon conversion of all outstanding shares of convertible preferred stock to common stock in the event of the sale of the Company’s common stock in a firm commitment underwritten public offering or the occurrence of an event which results in the automatic or voluntary conversion, redemption or retirement of all convertible preferred stock, the Bridge Warrants, if not previously exercised shall be exercisable for common stock. The initial fair value of the Bridge Warrants was estimated at an aggregate value of $351 using the Black-Scholes option pricing model with the following assumptions at date of issuance: expected volatility of 56%, risk-free interest rate of 1.59%, contractual term of 1.6 years and dividend yield of 0%. The fair value of the Bridge Warrants was recorded as a debt issuance cost and was amortized to interest expense over the term of the loan. A total of $98, $254 and $0 was amortized to interest expense during the years ended December 31, 2008, 2009, and 2010, respectively. In connection with the issuance of Series D convertible preferred stock in December 2009 (upon which the Bridge Warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price) the aggregate fair value of the Bridge Warrants was reclassified from liabilities to equity.

In July and September 2009, the Company issued additional Bridge Warrants to purchase 42,194 and 52,743 shares of convertible preferred stock in connection with the $4,000 and $5,000 Bridge Note financings, respectively, at an initial exercise price of $14.22 per share, the issuance price of the Series C convertible preferred stock. In connection with the Series D financing in December 2009, which was a Qualified Financing, the exercise price of the Bridge Warrants was set at $5.201 per share, which was the issuance price of the Series D convertible preferred stock, and the number of shares issuable upon exercise of the Bridge Warrants was adjusted to 115,362 and 144,203, respectively. The initial fair value of the Bridge Warrants was estimated at an aggregate value of $283 using the Black-Scholes option pricing model with the following assumptions at date of issuance: expected volatility of 56%, risk-free interest rate of 0.31% and 0.49%, respectively, contractual term of 0.75 and 1.0 year, respectively, and dividend yield of 0%. The fair value of the Bridge Warrants was recorded as a debt issuance cost and was amortized to interest expense over the term of the loan. A total of $284

and $0 was amortized to interest expense during the year ended December 31, 2009 and 2010, respectively. In connection with the issuance of Series D convertible preferred stock in December 2009 (upon which the Bridge Warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price) the aggregate fair value of the Bridge Warrants was reclassified from liabilities to equity.

The fair values of the Bridge Warrants outstanding were classified as a liability and were revalued at each reporting period with the resulting gains and losses recorded in other income (expense), net. In connection with the issuance of Series D convertible preferred stock in December 2009 (upon which the Bridge Warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price) the aggregate fair value of the Bridge Warrants was reclassified from liabilities to stockholders’ equity and the periodic fair value adjustments were discontinued. The exercise price of the Bridge Warrants that remain outstanding in conjunction with the transactions are no longer subject to adjustment except for stock dividends, stock splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations and liquidations. The change in carrying value of the warrants resulted in expense (income) of $72 and ($481) for the years ended December 31, 2008 and 2009, respectively. There was no change in carrying value of the Bridge Warrants for the year ended December 31, 2010 and for the three months ended March 31, 2010 and 2011 (unaudited), as the fair value of the Bridge Warrants was reclassified to stockholders’ equity as of the end of 2009. Upon the sale of the Company’s common stock in a firm commitment underwritten initial public offering, all of the warrants, if not previously exercised, will automatically be adjusted to become warrants to purchase common stock.

Convertible preferred stock at December 31, 2009 consisted of the following (in thousands, except share, issue price and dividend rate):

In connection with the closing of the Company’s Series D convertible preferred stock financing in December 2009, certain preferred stock investors who did not participate pro rata in the Series D convertible preferred stock financing had their prior shares of convertible preferred stock converted to Special Preferred on a one-for-one basis in the same percentage as their non-participation in the Series D preferred stock financing. The Special Preferred was not eligible to receive dividends or a conversion price adjustment for dilutive financings. In the event of liquidation, dissolution or winding up of the company, the holders of Special Preferred would have only shared in the remaining assets or surplus funds on a pro rata basis among the holders of the outstanding common stock and convertible preferred stock assuming conversion of all convertible preferred

stock, after all other series of convertible preferred stock and common stock liquidation preferences had been paid. The Special Preferred had no liquidation or other redemption rights and, in fact, had rights that were junior to those of the common stock at the time the Special Preferred was issued. Additionally, the same characteristics that resulted in treatment of the Series A through Series D convertible preferred stock as permanent equity also apply to the Special Preferred. The Company determined that the exchange of Special Preferred, having a significantly lower fair value than the carrying value of the convertible preferred stock held immediately prior to the exchange, represented an extinguishment of convertible preferred stock with the Special Preferred (i.e., a new legal equity instrument), thereby resulting in a new basis of accounting. The difference between (1) the fair value of the consideration transferred to the holders of the convertible preferred stock and (2) the carrying amount of the convertible preferred stock in the Company’s balance sheet (net of issuance costs) is subtracted from net loss to arrive at the loss attributable to common stockholders in the calculation of earnings per share. The fair value of the Special Preferred issued to investors who did not participate in the Series D financing was $3,489 less than the carrying amount of the convertible preferred stock exchanged for such Special Preferred. This difference was recorded in equity as a decrease to additional paid-in capital and an increase to additional paid-in capital in a manner similar to a shareholder contribution.

The holders of Series A, B, C and D convertible preferred stock were entitled to receive noncumulative dividends prior to and in preference to any declaration of payment of any dividends on the common stock of the Company, at the rate of 8% per annum. Such dividends were payable only when, and if declared by the Board of Directors. No dividends on convertible preferred stock were declared by the Board from inception through March 31, 2010.

In the event of liquidation, dissolution, or winding up of the Company, the holders of the Series C and Series D convertible preferred stock were entitled to receive on a pari passu basis, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of Series A or B convertible preferred, Special Preferred and common stock, an amount per share equal to $14.22 and $5.20, respectively, for each outstanding share of Series C and D convertible preferred stock (as adjusted for stock splits, stock dividends, combinations or other recapitalizations), plus all declared and unpaid dividends on such shares. After distribution to the holders of Series C and Series D convertible preferred stock, holders of Series A convertible preferred stock were entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of Series B convertible preferred stock, Special Preferred and common stock, an amount per share equal to $5.075 for each outstanding share of Series A convertible preferred stock (as adjusted for stock splits, stock dividends, combinations or other recapitalizations), plus all declared and unpaid dividends on such shares.

Thereafter, if assets or surplus funds remained in the Company, the holders of Series B convertible preferred stock and common stock were entitled to receive on a pari passu basis, an amount per share equal to $10.12 for each outstanding share of Series B convertible preferred stock (as adjusted for stock splits, stock dividends, combinations or other recapitalizations), plus all declared and unpaid dividends on such shares and an amount per share equal to $5,310 divided by the number of shares of common stock outstanding as of the date of liquidation for each outstanding share of common stock. After distribution to the holders of Series B convertible preferred stock, holders of common stock were entitled to an amount per share equal to $11,488 divided by the number of shares of common stock outstanding as of such liquidation date plus all declared and unpaid

dividends on such shares. For the purpose of the foregoing calculation, the shares of common stock repurchased by the Company would have been deemed to be outstanding and the Company would have been considered to be the holder of such repurchased common stock.

All remaining assets or surplus funds of the Company were to be distributed on a pro-rata basis among the holders of the outstanding common stock and convertible preferred stock on an as converted to common stock basis for the convertible preferred stock, including Special Preferred.

Any merger or consolidation which would result in the Company’s stockholders immediately prior to such transaction not holding at least 50% of the voting power of the surviving, continuing or purchasing entity, or the sale or lease of all or substantially all of the assets of the Company, was deemed to be a liquidation, dissolution or winding up. Upon this event, holders of all shares of Series A, Series B, Series C and Series D convertible preferred stock, as well as holders of the Company’s common stock would have receive their liquidation preference, including any declared and unpaid dividends as of the liquidation date. As in an ordinary liquidation, no class or series of the Company’s equity securities had a right to receive a particular form of consideration (e.g., cash or shares) upon a deemed liquidation event. Accordingly, because the holders of the Company’s convertible preferred stock and Special Preferred did not have a right to receive a cash redemption of their shares, the convertible preferred stock and Special Preferred were classified as permanent equity.

The holder of each share of Series A, B, C and D convertible preferred stock had the option to convert each share into such number of fully paid and non-assessable shares of the Company’s common stock equal to the product of the number of such Series A, B, C and D convertible preferred stock outstanding times the quotient of (i) the Series A, Series B, Series C and Series D convertible preferred stock liquidation preference price per share divided by (ii) the conversion price of $5.075 per share for Series A, $8.196 per share for Series B, $10.692 per share for Series C and $5.201 per share for Series D convertible preferred stock, which conversion price was subject to weighted average antidilution adjustment in the event that the Company issued shares of common stock (or was deemed to have issued shares of common stock by issuing common stock equivalents) at a price less than the applicable conversion price, subject to certain exceptions. Shares of Special Preferred were not convertible at the option of the holder. If an antidilution trigger occurs in the future pursuant to the terms of the convertible preferred stock, the Company will calculate the new number of shares of common stock into which the convertible preferred stock will convert after the antidilution adjustment. If the value of the adjusted number of shares of common stock into which the convertible preferred stock was convertible, based on the market price of the common stock on the date the convertible preferred stock was issued, was greater than the value of the number of shares of common stock into which the convertible preferred stock was convertible prior to such adjustment, based on the market price of the common stock on the date the convertible preferred stock was issued, the Company will recognize a beneficial conversion feature associated with the convertible preferred stock. Because the beneficial conversion feature meets the requirements for equity classification (i.e., is not required to be accounted for as a liability pursuant to either ASC 815 or ASC 480), such future beneficial conversion feature charge will be recorded as a preferred stock dividend and the amount will be presented in a reconciliation of “net loss” to arrive at “net loss attributable to common shareholders” on the face of the Company’s Consolidated Statements of Operations.

Each share of Series A, Series B, Series C, Series D convertible preferred stock and Special Preferred was subject to automatic conversion into common stock upon the earlier of (i) the Company’s sales of its common stock in a firm commitment underwritten public offering pursuant to a registration statement under the

Securities Act of 1933, as amended, with gross cash proceeds to the Company of at least $50,000 and at a per share offering that is not less than $13.00, or (ii) the date specified by written consent of holders of at least 67% of the then outstanding shares of Series A, Series B, Series C and Series D convertible preferred stock, voting together as a single class on an as-converted basis.

Each share of Series A and D convertible preferred stock and Special Preferred would have converted approximately on a 1:0.42 basis into common stock while Series B and C convertible preferred stock would have converted approximately on a 1:0.52 and 1:0.56 basis, respectively. At December 31, 2009, the Company had reserved sufficient shares of common stock for issuance upon conversion of the convertible preferred stock.

The Series A, B, C, D convertible preferred stock and Special Preferred were not redeemable.

On December 7, 2009, the Company entered into the amended and restated voting agreement with certain holders of Series A, B, C and D convertible preferred stock and common stock, which amended the voting agreement entered into on July 18, 2007. The agreement guaranteed Board representations for certain holders of convertible preferred stock and common stock. In addition, the agreement stipulated that two independent directors would be selected by three of the directors.

The holders of each share of convertible preferred stock were entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock were convertible.

On April 1, 2010, in connection with the recapitalization of Horizon Therapeutics, Inc., each share of Series A, B, C and D of convertible preferred of Horizon Therapeutics, Inc. was exchanged for Series A convertible preferred stock of Horizon Pharma, Inc., the parent entity. Each share of common stock of Horizon Therapeutics, Inc. was exchanged for 0.209 shares of common stock and 0.504 shares of Series A convertible preferred stock of Horizon Pharma, Inc. Each share of Special Preferred of Horizon Therapeutics, Inc. was exchanged for 0.421 shares of common stock of Horizon Pharma, Inc. Each share of Series A and D convertible preferred stock and Special Preferred was converted approximately on a 1:0.42 basis into common stock while Series B and C convertible preferred stock were converted approximately on a 1:0.52 and 1:0.56 basis, respectively. Also on April 1, 2010, in connection with the acquisition of Nitec, Horizon Pharma Inc. issued 11,211,413 shares of Series A convertible preferred stock to the former Nitec stockholders and 857,400 shares of common stock to the former Nitec stockholders. The Company also issued 2,510,040 shares of Series B convertible preferred stock on April 1, 2010 to certain investors for total net proceeds of $19,844.

Convertible preferred stock at March 31, 2010 outstanding and as converted to Series A convertible preferred stock on April 1, 2010 was as follows:

Convertible preferred stock at December 31, 2010 and March 31, 2011 (unaudited) consisted of the following (in thousands, except shares, issue price and dividend percentage rate):

The holders of Series A and B convertible preferred stock are entitled to receive noncumulative dividends prior to and in preference to any declaration of payment of any dividends on the common stock of the Company, at the rate of $0.55944 and $0.63744 per annum for Series A and B, respectively. Such dividends shall be payable only when, and if declared by the Board of Directors. No dividends on convertible preferred stock have been declared by the Board from inception through March 31, 2011 (unaudited).

In the event of liquidation, dissolution, or winding up of the Company, the holders of the Series B convertible preferred stock shall be entitled to receive, by ownership thereof, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of Series A and common stock, an amount per share equal to $7.968, for each outstanding share of Series B (as adjusted for stock splits, stock dividends, combinations or other recapitalizations), plus all declared and unpaid dividends on such shares. After distribution to the holders of Series B convertible preferred stock, holders of Series A convertible preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock, an amount per share equal to $6.993 for each outstanding share of Series A convertible preferred stock (as adjusted for stock splits, stock dividends, combinations or other recapitalizations), plus all declared and unpaid dividends on such shares.

All remaining assets or surplus funds of the Company shall be distributed on a pro-rata basis among the holders of the outstanding common stock and convertible preferred stock assuming full conversion of the convertible preferred stock.

Any merger or consolidation which will result in the Company’s stockholders immediately prior to such transaction not holding at least 50% of the voting power of the surviving, continuing or purchasing entity, or the sale or lease of all or substantially all of the assets of the Company, shall be deemed to be a liquidation, dissolution or winding up. Upon this event, holders of all shares of Series A and Series B shall receive their liquidation preference, including any declared and unpaid dividends as of the liquidation date. As in an ordinary liquidation, no class or series of the Company’s equity securities has a right to receive a particular form of consideration (e.g., cash or shares) upon a deemed liquidation event. Accordingly, because the Company’s convertible preferred stock does not have a right to receive a cash redemption of their shares, the convertible preferred stock has been classified as permanent equity.

The holder of each share of Series A and B convertible preferred stock has the option to convert each share into such number of fully paid and non-assessable shares of the Company’s common stock equal to the product of the number of such Series A and B convertible preferred stock outstanding times the quotient of (i) the Series A and Series B convertible preferred stock liquidation preference price per share divided by (ii) the conversion price of $16.601 per share for Series A and $18.916 per share for Series B, which conversion price is subject to weighted average antidilution adjustment in the event that the Company issues shares of common stock (or is deemed to have issued shares of common stock by issuing common stock equivalents) at a price less than the applicable conversion price, subject to certain exceptions. If an antidilution trigger occurs in the future pursuant to the terms of the convertible preferred stock, the Company will calculate the new number of shares of common stock into which the convertible preferred stock will convert after the antidilution adjustment. If the value of the adjusted number of shares of common stock into which the convertible preferred stock was convertible, based on the market price of the common stock on the date the convertible preferred stock was issued, was greater than the value of the number of shares of common stock into which the convertible preferred stock was convertible prior to such adjustment, based on the market price of the common stock on the date the convertible preferred stock was issued, the Company will recognize a beneficial conversion feature associated with the convertible preferred stock. The convertible preferred stock has no stated redemption rights or mandatory dividends (i.e., there are only dividends when-and-if-declared), and because the holders of the convertible preferred stock have the right to participate in residual net assets in excess of the liquidation preferences, if any, it was determined to be an equity host instrument. Therefore, the embedded conversion feature, representing a call right to purchase common stock, is considered clearly and closely related to the host preferred stock instrument and is not required to be bifurcated as an embedded derivative. Because the beneficial conversion feature meets the requirements for equity classification (i.e., is not required to be accounted for as a liability pursuant to either ASC 815 or ASC 480, such future beneficial conversion feature charge will be recorded as a preferred stock dividend and the amount will be presented in a reconciliation of “net loss” to arrive at “net loss attributable to common shareholders” on the face of the Company’s Consolidated Statements of Operations.

Each share of Series A and Series B convertible preferred stock shall automatically be converted into common stock upon the earlier of (i) the Company’s sales of its common stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, with gross cash proceeds to the Company of at least $50,000 and (ii) the shares of the common stock sold are listed on the NYSE, the NASDAQ Global Select Market, or the NASDAQ Global Market or the date specified by written consent of holders of at least 66 2/3% of the then outstanding shares of Series A and Series B convertible preferred stock, voting together as a single class on an as-converted basis.

Each share of Series A and B convertible preferred stock will convert approximately on a 1 to 0.42 basis into common stock. At March 31, 2011 (unaudited), the Company had reserved sufficient shares of common stock for issuance upon conversion of the convertible preferred stock.

The holders of each share of convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock may be converted. The holders of convertible preferred stock, voting together as a single class on an as-converted basis, shall be entitled to elect six directors of the Company.

The following unexercised convertible preferred stock warrants were outstanding and classified as permanent equity as of December 31, 2009 and 2010 and March 31, 2011 (unaudited):

In connection with the issuance of Series D convertible preferred stock in December 2009 (upon which the Bridge Warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price which was not subject to further adjustment except for stock dividends, stock splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations and liquidations), the aggregate fair value of the Bridge Warrants of $459 was reclassified from liabilities to permanent equity on December 31, 2009. The Company concluded that all these events that may trigger adjustment in the future would be taken into account with the use of a fixed-for-fixed forward or option pricing model. Therefore, these contingent adjustment features were considered to be indexed to the Company’s own stock.

On April 1, 2010, in connection with the recapitalization of Horizon Therapeutics, Inc., the Series C and Series D convertible preferred stock warrants were converted on a 1:1.33 and 1:1 basis, respectively, into Series A convertible preferred stock warrants.

On April 1, 2010, in connection with the Kreos-SVB Facility, the Company issued warrants to purchase 150,602 shares of Series B convertible preferred stock. Also in connection with Kreos Facility, the lender’s warrant to purchase up to 37,244 shares of Nitec capital stock was cancelled and exchanged for a warrant to purchase up to 118,496 shares of the Company’s Series A convertible preferred stock (“replacement warrant”).

Both the Series A and B warrants have an exercise price of $0.01 per share and expire on April 1, 2020 unless terminated earlier as a result of certain reorganizations or changes in control. The fair value of warrants was recorded as a debt issuance cost and is being amortized to interest expense over the term of the loans. The initial fair value of the Kreos-SVB Facility and the Kreos Facility warrants was estimated at an aggregate value of $1,200 and $936, respectively, using the Black-Scholes option pricing model with the following assumptions at the date of issuance: expected volatility of 56%, risk-free interest rate of 4.19%, contractual term of 10 years and dividend yield of 0%. During the year ended December 31, 2010, interest expense related to the amortization of debt discount was $811. The warrants are classified as permanent equity.

The fair value of the replacement warrant issued to Kreos was equivalent to the fair value of the warrant Kreos held immediately prior to the warrant exchange, therefore, no additional accounting was required by the warrant exchange. The warrant fair value was recorded as equity in connection with the transaction for the following reasons:

Because the warrant was determined to be classified as equity, no fair market value adjustments will be required in future periods.

The fair value of the original warrant issued to Kreos in connection with the Kreos Facility was treated as a discount on the EUR 7,500 loan in the historical Nitec standalone financial statements and was being amortized (using the effective interest method) to interest expense over the term of the debt. On April 1, 2010, in connection with the acquisition of Nitec, the Company recorded all assets and liabilities of Nitec at their fair value, including the remaining balance of the loan with Kreos. As a result, the fair value of the loan (i.e., including the amount of discount necessary for the loan to reflect market terms on the date of acquisition) was recorded such that future interest charges, representing the contractual interest rate together with the amortization of the discount recorded in the acquisition transaction, represent market interest charges.

Because all assets and liabilities were recorded at fair market value in connection with the acquisition of Nitec, the remaining unamortized discount on the original Kreos loan was not carried forward in the consolidated financial statements of Horizon Pharma, Inc.

In June and September 2005, the Company issued an aggregate of 1,010,950 shares of common stock valued at $0.0001 per share to the founders of the Company in exchange for technology know how.

On April 1, 2010, in connection with the recapitalization of Horizon Therapeutics, Inc., each share of common stock of Horizon Therapeutics, Inc. was exchanged for 0.209 shares of common stock and 0.504 shares of Series A convertible preferred stock of Horizon Pharma, Inc. Also on April 1, 2010, in connection with the acquisition of Nitec, Horizon Pharma Inc. issued 11,211,413 shares of Series A convertible preferred stock and 857,400 shares of common stock to the former Nitec stockholders.

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to

the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared by the Board from inception through March 31, 2011 (unaudited). The Company’s amended and restated certificate of incorporation as of December 31, 2010 and March 31, 2011 (unaudited) authorizes the Company to issue a total of 35,400,000 and 36,175,000 shares, respectively, of $0.0001 par value common stock.

In the event of a liquidation dissolution, or winding up of the Company, after distribution to the holders of the Series A and B convertible preferred stock, all remaining assets or surplus funds of the Company shall be distributed on a pro-rata basis among the holders of the outstanding common stock and convertible preferred stock assuming full conversion of the convertible preferred stock.

On September 30, 2005 the Company repurchased 168,492 shares of $0.0001 par value common stock. The shares were not retired when bought back by the Company.

On April 1, 2010, in connection with the recapitalization of Horizon Therapeutics, Inc., each share of treasury stock of Horizon Therapeutics, Inc. was cancelled.

In October 2005, the Company adopted the 2005 Stock Plan (the “Plan”). The Plan provides for the granting of stock options to employees, consultants and advisors of the Company. Options granted under the Plan may be either incentive stock options (“ISO”) or nonqualified stock options (“NSO”). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, consultants and advisors. As of December 31, 2010 and March 31, 2011 (unaudited), the Company has reserved 1,771,289 shares of common stock for issuance under the Plan.

Options under the Plan may be granted for periods of up to ten years and at prices no less than 110% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options generally vest over four years at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48^th per month thereafter.

The options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled in connection with the acquisition of Nitec.

The following table summarizes the Company’s outstanding stock options at December 31, 2010 and March 31, 2011 (unaudited):

The weighted average grant date fair value of options granted was $6.87, $3.57, $7.82 and $13.21 during the years ended December 31, 2008, 2009, 2010 and the three months ended March 31, 2011 (unaudited), respectively.

The total fair value of options granted to employees that vested during the years ended December 31, 2008, 2009, 2010 and the three months ended March 31, 2011 (unaudited) was $3, $397, $1,927 and $911, respectively.

As of December 31, 2010 and March 31, 2011 (unaudited) the unrecognized stock-based compensation costs related to employee stock options expected to vest was $6,584 and $5,857, respectively, and will be recognized over an estimated weighted average amortization period of 3.6 and 2.8 years, respectively.

The fair value of each option grant was estimated on the date of grant using the following assumptions:

The replacement stock options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled. The substituted options were issued with the same vesting schedule and terms as the cancelled Nitec options, with continuous service with Nitec credited towards the original vesting period and share amounts adjusted in a manner consistent with the share exchange agreement. The Company estimated the fair value of the stock options using the Black-Scholes option pricing model with the following assumptions as of April 1, 2010: expected volatility of 75%, risk-free interest rate of 1.03%, expected term of 2.3 years and expected dividend yield of 0%.

The Company determined the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate as of the date of grant.

The Company used an average historical stock price volatility of comparable companies to be representative of future stock price volatility as the Company did not have any trading history for its common stock.

Given the Company’s limited historical exercise behavior, the expected term of options granted was determined using the “simplified” method since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Under this approach, the expected term is presumed to be the average of the vesting term and the contractual life of the option.

The Company has never paid dividends and does not anticipate paying any dividends in the near future.

As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures based on actual forfeiture experience, analysis of employee turnover and other factors. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

In connection with the preparation of the financial statements, the Company determined the estimated fair value of its common stock in light of the expected completion of its initial public offering. All options granted were intended to be exercisable at a price per share not less than fair market value of the shares of the Company’s common stock underlying those options on their respective dates of grant. The Board of Directors determined these fair market values in good faith based on the best information available to the Board of Directors and Company’s management at the time of the grant. The Board of Directors considered numerous objective and subjective factors in determining the fair value of its common stock at each option grant date, including but not limited to, the following factors: (i) prices of the Series A, Series B, Series C and Series D convertible preferred stock issued by the Company primarily to outside investors in arm’s-length transactions, and the rights, preferences and privileges of the convertible preferred stock relative to the common stock, (ii) the status of research and product development efforts, (iii) stage of development and business strategy, including regulatory review status with regulatory authorities, (iv) valuations of the common stock and (v) the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of the Company, given prevailing market conditions. The Company performed various valuation analyses, including analyses with the assistance of third parties and valued its common stock at $13.46, $5.20, $12.94, $16.97, $20.77, $17.21 and $18.52 per share as of December 31, 2008 and 2009, April 1, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011 (unaudited), respectively.

The Company granted stock options to employees, net of cancellations, with weighted average values as follows:

The Company estimated the fair value of stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards.

Stock-based compensation expense related to options granted to employees was allocated to the following departments (in thousands):

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the service received. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model using the following assumptions:

The replacement stock options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled. The substituted options were issued with the same vesting schedule and terms as the cancelled Nitec options, with continuous service with Nitec credited towards the original vesting period and share amounts adjusted in a manner consistent with the share exchange agreement. The Company estimated the fair value of the stock options using the Black-Scholes option pricing model with the following assumptions as of April 1, 2010: expected volatility of 75%, risk-free interest rate of 1.05%, expected term of 1.8 years and expected dividend yield of 0%.

Stock based compensation expense will fluctuate as the fair value of the common stock fluctuates. Stock-based compensation expense charged to operations for options granted to non-employees for the years ended December 31, 2008, 2009 and 2010 was $37, $36 and $214, respectively. Stock-based compensation expense for options granted to non-employees for the three months ended March 31, 2010 and 2011 (unaudited) was $11 and $47, respectively.

During the year ended December 31, 2010 and the three months ended March 31, 2011 (unaudited) the Company granted options to purchase up to 46,135 shares and 2,527 shares, respectively, of common stock to non-employees with a weighted average share price of $11.93 and $17.22, respectively.

The Company has entered into consulting agreements with three stockholders, two of whom previously served as directors of Horizon Pharma USA. For the years ended December 31, 2008, 2009 and 2010, the Company paid $881, $775 and $996, respectively, in consulting fees to the related parties. For the three months ended March 31, 2010 and 2011 (unaudited), the Company paid $173 and $225, respectively, in consulting fees to the related parties.

For the years ended December 31, 2008, 2009 and 2010, under the sublease agreement with a stockholder (Note 7), the Company paid $36, $32 and $0, respectively, for rent. In January 2010, the Company terminated the sublease agreement with the stockholder and entered into a month-to-month operating lease directly with the landlord.

The components of the provision for (benefit from) income taxes were as follows for the years ended December 31, 2008, 2009 and 2010 (in thousands):

A reconciliation between the statutory federal income tax and the Company’s effective tax is as follows (in thousands):

The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands):

As of December 31, 2010, the Company had net operating loss carryforwards of approximately $98,129, $102,672 and $71,255 available to reduce future taxable income, if any, for federal, state and foreign income tax purposes, respectively. The federal, state and foreign tax net operating loss carryforwards begin to expire in 2026, 2016 and 2012, respectively.

As of December 31, 2010, the Company had research and development credit carryforwards of approximately $2,617 and $323 available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal tax credit carryforwards will expire beginning 2027 if not utilized.

Utilization of the net operating loss carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization. The Company determined that there was an ownership change as of April 1, 2010, and that it will be subject to annual limits on its ability to utilize net operating loss carryforwards. These annual limits are estimated to be $31,770, $18,119, $18,119, $16,907 and $13,214 for 2011, 2012, 2013, 2014 and 2015, respectively, and are cumulative such that any use of the carryforwards below the limitation in one year will result in a corresponding increase in the limitation for the subsequent tax year.

The Company has provided a full valuation allowance for its deferred tax assets at December 31, 2010 due to the uncertainty surrounding the future realization of these assets.

On January 1, 2009, the Company adopted the provisions of ASC 740-10, “Accounting for Uncertainty in Income Taxes.” ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The cumulative effect of adopting ASC 740-10 resulted in no adjustment to retained earnings as of January 1, 2009.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2009 and 2010 was as follows (in thousands):

It is unlikely that the amount of liability for unrecognized tax benefits will significantly change within the next 12 months. There was no interest or penalties accrued at January 1, 2009, December 31, 2009 and December 31, 2010.

The Company files income tax returns in the U.S. federal jurisdiction, various states and various foreign jurisdictions. As of December 31, 2010, all returns for the years ended 2005 through the current period remain open to examination. The Company is not currently subject to income tax examinations by any tax authorities.

In December 2006 and March 2009, the Company entered into transfer, license and supply agreements with Merck Serono and Merck GesmbH, an affiliate of Merck Serono, for the commercialization of LODOTRA in Germany and Austria, respectively. The agreement covering Germany was amended in December 2008 to allow co-promotion of LODOTRA in Germany. Under the agreements, the Company granted Merck Serono exclusive distribution and marketing rights pertaining to LODOTRA for Germany and Austria and an exclusive license to use the trademark for LODOTRA in Germany and Austria. Merck Serono agreed to purchase LODOTRA commercial product exclusively from the Company. The Company supplies LODOTRA to Merck Serono at the price which is the higher of (1) a percentage of the list price of LODOTRA to final purchasers of LODOTRA from Merck Serono (excluding any discounts) and (2) the costs incurred for the production and delivery of LODOTRA to a Merck Serono supply depot, plus a profit mark-up. Subject to early termination, the terms of the agreements are 10 years from the launch of LODOTRA in Germany and Austria, as applicable. Thereafter, the agreements automatically renew until terminated by either party by giving specified prior written notice to the other party. Either party may also terminate either agreement in the event of a bankruptcy of the other party, certain events beyond the parties’ control that impair performance under the agreements, or upon material uncured breach by the other party.

In April 2011, the transfer, license and supply agreements related to Germany were assigned to Mundipharma from Merck Serono with the Company’s consent (Note 17).

In March 2009, the Company entered into a distribution agreement with Mundipharma for the commercialization of LODOTRA in Europe, excluding Germany and Austria, and a manufacturing and supply agreement with Mundipharma Medical Company (“Mundipharma Medical”). The distribution agreement provides for an upfront payment less than ten million Euros, all of which has been paid by Mundipharma, and aggregate potential milestone payments in the tens of millions of Euros, of which approximately 32% has been

earned by the Company and paid by Mundipharma. Under the distribution agreement, the Company granted Mundipharma the exclusive distribution and marketing rights pertaining to LODOTRA for: Albania, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Serbia, former Soviet Union countries, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United Kingdom.

Under the manufacturing and supply agreement, Mundipharma Medical agreed to purchase LODOTRA exclusively from the Company. The Company supplies LODOTRA to Mundipharma Medical at the price which is a specified percentage of the average net selling price for sales in a given country. Subject to early termination, the terms of both agreements extend to March 2024. Thereafter, the agreements automatically renew until terminated by either party giving specified prior written notice to other party. Either party may also terminate either of the agreements in the event of a bankruptcy of the other party or upon an uncured material breach by the other party. In addition, Mundipharma has the right to terminate the distribution agreement in the event of material risk of personal injury to third parties or immediately by written notice with respect to any country if the market authorization for LODOTRA is cancelled in such country.

In November 2010, the Company entered into a second distribution agreement with Mundipharma for the commercialization of LODOTRA in several Asian and other countries, and a second manufacturing and supply agreement with Mundipharma Medical. Under the distribution agreement, the Company was entitled to an upfront payment of less than five million dollars, all of which has been paid by Mundipharma, and is eligible to receive aggregate potential milestone payments of less than five million dollars, of which none had been received as of December 31, 2010. The Company has deferred recognition of the entire upfront payment and will begin recognizing revenue associated with its payment upon the first commercial sale of LODOTRA in the applicable territory.

Under the distribution agreement, the Company granted Mundipharma the exclusive distribution and marketing rights pertaining to LODOTRA for: Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam. In addition, Mundipharma will be responsible for obtaining regulatory approvals in these countries. The Company also granted to Mundipharma an exclusive license to use its trademark for LODOTRA in these countries, and Mundipharma is allowed to commercialize LODOTRA under the LODOTRA trademark. Mundipharma is obligated to use commercially reasonable efforts to obtain regulatory approval for and market LODOTRA and is prohibited from launching other oral corticosteroids in these countries during the term of the distribution agreement. If Mundipharma does not meet specified minimum volume targets, which range from thousands of Euros to millions of Euros on a country by country basis, over specified periods of time, the marketing rights granted under the distribution agreement will become nonexclusive with respect to the applicable country unless Mundipharma pays the Company the shortfall.

Under the manufacturing and supply agreement, Mundipharma Medical agreed to purchase LODOTRA exclusively from the Company with respect to the territory. The Company supplies bulk product of LODOTRA to Mundipharma Medical at an adjustable price per tablet and Mundipharma is responsible for final packaging and distribution in the territory.

Subject to early termination, the terms of both of the November 2010 agreements are fifteen years from the first product launch on a country by country basis. Thereafter, the agreements automatically renew until terminated by either party by giving specified prior written notice to the other party. Either party may terminate either of the agreements early in the event of a change in control of the other party, bankruptcy of the other

party, or upon an uncured material breach by the other party. Either party has the right to terminate the distribution agreement with respect to any country upon prior written notice if the volume target is not met in such country for reasons beyond its control. In addition, Mundipharma has the right to terminate the distribution agreement in the event of material risk of personal injury to third parties or immediately by written notice with respect to any country if the market authorization for LODOTRA is cancelled, withdrawn or suspended in such country. The Company also has the right, subject to certain conditions, to terminate the distribution agreement with respect to any country in the territory if within a specified period of time, Mundipharma fails to submit appropriate filings to obtain marketing authorization in the country or fails to initiate a clinical trial required for marketing authorization in the country.

On January 7, 2011, the Company issued $5,030 of subordinated convertible notes (the “January 2011 Notes”) in a private placement to certain of its existing investors, in accordance with the Series B Preferred Stock and Convertible Note Purchase Agreement dated April 1, 2010, as amended by the First Amendment and Second Amendment to Series B Preferred Stock and Convertible Note Purchase Agreement. The January 2011 Notes, including accrued interest, are expected to convert into shares of the Company’s Series B preferred stock upon the completion of the Company’s initial public offering at the lower of the price of the Company’s common stock sold to the public in the Company’s initial public offering or $18.92 per share. The January 2011 Notes bear interest at a fixed rate of 10% per annum and mature on January 7, 2012, if not converted earlier. The subordinated convertible notes are considered hybrid instruments, which consist of a debt host instrument together with a conversion feature, thus giving the holder of a subordinated convertible note an option to convert into an equity instrument providing the holder a residual interest in the Company. Each holder of a subordinated convertible note also has the option to present its subordinated convertible note to the Company and demand payment under the terms of the convertible note after a certain date (defined as the maturity date) or upon the occurrence of certain events such as the failure of the Company to make a payment on the subordinated convertible note when due, bankruptcy or certain other liquidation events. The terms of the subordinated convertible notes require that the conversion price be adjusted (reduced) upon occurrence of certain events (for example, upon issuance of convertible preferred stock at a price less than the conversion price of the outstanding preferred stock series, or upon an IPO). The Company has concluded that the subordinated convertible notes will be accounted for as a typical debt instrument with related interest expense recorded in the Company’s consolidated statement of operations. If the contingency is met and the conversion feature is considered “beneficial” in a future accounting period, an additional cost of financing charge will be recorded for the beneficial conversion feature in the Company’s consolidated statement of operations at that time.

On July 7, 2011, the Company effected a 1-for-2.374 reverse stock split of its common stock and a proportional adjustment to the existing conversion ratios for each series of preferred stock. Accordingly, all share and per share amounts for all periods presented in these consolidated financial statements and notes thereto, have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On April 25, 2011, the Company issued $1,735 of subordinated convertible notes (the “April 2011 Notes”) in a private placement to certain of its existing investors, in accordance with the Series B Preferred Stock and

Convertible Note Purchase Agreement dated April 1, 2010, as amended by the First Amendment, Second Amendment and Third Amendment to Series B Preferred Stock and Convertible Note Purchase Agreement. The April 2011 Notes, including accrued interest, are expected to convert into shares of the Company’s Series B preferred upon the completion of the Company’s initial public offering at the lower of the price of the Company’s common stock sold to the public in the Company’s initial public offering or $18.92 per share. The April 2011 Notes bear interest at a fixed rate of 10% per annum and mature on April 25, 2012, if not converted earlier.

In April 2011, the transfer, license and supply agreements with Merck Serono and Merck GesmbH, an affiliate of Merck Serono, for the commercialization of LODOTRA in Germany was assigned to Mundipharma from Merck Serono with the Company’s consent.

In June 2011, the Company entered into a new debt facility with Oxford and SVB, and borrowed the full $17,000 available under this facility (the “Oxford Facility”). The debt under the Oxford Facility accrues interest at a fixed rate of 11.5% per annum, with interest only payments through June 1, 2012 followed by 36 equal monthly installments of principal and interest. The Oxford Facility is secured by a lien on substantially all of the Company’s assets and those of Horizon Pharma USA, including intellectual property, but excluding the shares of Horizon Pharma AG. If the Company generates an annualized revenue run rate of at least $45,000 over three consecutive months from DUEXIS product sales, the lien on the assets may be released with the consent of the lenders, provided the Company is not in default under the Oxford Facility. With the loan proceeds, the Company repaid all $8,455 due under the Kreos-SVB Facility (including principal and interest). The Company also paid Kreos $1,450 (1,000 Euros) and Horizon Pharma, Inc. assumed from Kreos a like amount of debt under the Kreos Facility (becoming a co-lender with Kreos to Horizon Pharma AG), as partial consideration for Kreos’ consent to enter into the Oxford Facility. The remaining loan proceeds of $6,880, net of $215 of loan fees, are being used to fund the Company’s operations. In connection with the Oxford Facility, the Company issued warrants to Oxford and SVB to initially purchase an aggregate of 80,007 shares of its Series B convertible preferred stock which will become warrants to purchase an aggregate number of shares of our common stock equal to (1) $638 divided by (2) the lower of the price per share to the public of our common stock sold in this offering or $18.92. The warrants will have a per share exercise price that is the lower of (1) the price per share to the public of the Company’s common stock sold in this offering or (2) $18.92. The warrants will expire on June 2, 2021 unless terminated earlier as a result of certain reorganizations or changes in control as set forth in the warrants. The Company also issued a warrant to Kreos to purchase an aggregate of 100,000 shares of its Series B convertible preferred stock with an exercise price of $0.01 per share, which will expire on June 2, 2021, unless earlier terminated as a result of certain acquisitions or changes in control, in exchange for Kreos’ consent to enter into the Oxford Facility. The Company is currently reviewing the accounting treatment of the warrant issued to Kreos in connection with the Oxford Facility.

In May 2011, the Company entered into a manufacturing and supply agreement with sanofi-aventis U.S. LLC to exclusively perform services for the Company in connection with the manufacturing, labeling, packaging, laboratory testing, and supply of DUEXIS.

We have audited the accompanying consolidated financial statements of Nitec Pharma AG (subsequently renamed Horizon Pharma AG, effective 23 April 2010), which comprise the consolidated balance sheets as of 30 June 2009 and 2008, and the related consolidated income statements, consolidated statements of cash flow, consolidated statement of changes in shareholders’ equity, and notes thereto, for the years then ended. These financial statements are the responsibility of the Company’s management and Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the consolidated balance sheet of Nitec Pharma AG as of 30 June 2009 and 2008, and of the consolidated results of their operations and their cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The prior year figures were adjusted leading to a more relevant information; see section “Change in accounting policies”.

Nitec Pharma AG (registered in Reinach BL) (“Nitec Pharma” or “the Company”) is a Switzerland-based specialty pharma ceutical company focused on the development and commercialisation of innovative medicines to treat chronic inflammation and pain-related diseases. The Company’s most advanced product is Lodotra™, a Circadian Cytokine Modulator (“CCM”) for the treatment of Rheumatoid Arthritis (“RA”). Nitec Pharma AG was originally incorporated in 2004 as a spin-out of Merck KGaA and is headquartered in Reinach (near Basel) in Switzerland. The Company is financed by Atlas Venture, Global Life Science Ventures and NGN Capital, TVM Capital and Deutsche Bank AG, London.

Together with its fully-owned subsidiary – Nitec Pharma GmbH – the Company forms a specialty pharma ceutical group (together referred to as “Nitec Pharma Group” or “the Group”).

The consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS). All accounting policies have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated. The consolidated financial statements have been prepared on a historical cost basis except where indicated.

The financial statements are presented in thousand Swiss Francs (kCHF) unless otherwise stated. All figures in this report are rounded to the nearest reported unit. When current year’s figures are compared to prior year the corresponding figures are presented in brackets.

Regarding the financial year 2008/2009 the Group has adopted the following new standards and interpretations to existing standards.

IFRIC 14 – IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

The adoption of these new standards and/or interpretations did not have a significant impact on the Group’s accounts.

Regarding the up-coming financial year 2009/2010 the Group will additionally have to adopt the following new standards and interpretations to existing standards.

IFRS 1 and IAS 27 (Amendments) – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

IAS 32 and IAS 1 (Amendments) – Puttable Financial Instruments and Obligations Arising on Liquidation

Effective for annual periods beginning on or after mostly 1 January 2009 (amendment to IFRS 5 is effective 1 July 2009)

The adoption of these new standards and/or interpretations is not expected to have a significant impact on the Group’s accounts, expect from certain presentation requirements.

The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying its accounting policies. Nitec Pharma Group makes estimates and assumptions concerning the future. Areas where assumptions and estimates are significant to the consolidated financial statements are primarily:

Details to the accounting policy are contained in section “Development expenses” within this note as well as in note (13).

Details are given in section “Income tax” within this note as well as in note (19).

Details to the pension plans are contained in section “Employee benefit expense” within this note as well as in note (14), where also the applied assumptions are disclosed.

Details of the warrants and options granted and the assumptions applied are disclosed in note (12). Assumptions are mainly made concerning the vesting probability in relation with service conditions within the existing plans.

In the process of applying the Group’s accounting policies, management has made the following judgment, apart from those involving estimates, which has the most significant effect on the amounts recognised in the financial statements:

Nitec Group decided to start capitalising the cost of inventories in stock (and in particular the full manufacturing cost of the Lodotra™ tablets) for the first time on 30 June 2008, in consideration of the high likelihood that Lodotra™ might be recommended for approval in the EU in the course of 2008. During the first half of financial year 2008/2009 the EU regulatory authorities did recommend Lodotra™ for approval, however, the same authorities ruled that the authorised “shelf life” of the Lodotra™ tablets should be of only two years, while the Group had anticipated a “shelf life” of three years. As a result, the Group decided to write-off completely the value of the Lodotra™ tablets in stock as of 31 December 2008, which represent the vast majority of the value of the inventories.

During the preparation of the consolidated financial statements for financial year 2008/2009, the Group decided to rename certain Balance Sheet, Income Statement, Cash Flow and Statement of Changes in Shareholder’s Equity captions, in order to provide a better representation of certain line items, relative to previously released financial statements.

To capture their origin the former “capital reserves” and “free reserves” were merged to new “capital reserves” as both result from capital paid-in.

Additionally to this the Income Statement was restructured to show the operating activities of the Group more precisely. This led primarily to a shift from development to marketing expenses.

The above-mentioned changes in presentation did not have any impact in figures itself, but in certain sub-totals. All prior year figures were adjusted to a comparable structure.

The consolidated financial statements include the annual financial statements of Nitec Pharma AG and all subsidiaries where Nitec Pharma AG holds more than 50% of the voting power or which it otherwise controls. These entities are fully consolidated in preparing the consolidated financial statements.

The entities forming the consolidated Group at 30 June 2009 and 2008 respectively were:

In fully consolidating the entities, assets, liabilities and items of income and expense are recognised in full. Assets, liabilities and items of income and expense and profits and losses between consolidated entities are eliminated.

Transactions in foreign currencies are translated at the foreign exchange rate as of the date of the transaction. Foreign exchange differences arising on these transactions are recognised in the income statement.

On the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated at the closing rate. Any foreign exchange differences deriving from these translations are recorded in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as of the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The assets and liabilities of foreign operations are translated into CHF at the closing rate, income and expense are translated at average rates for the period. The exchange differences arising on the translation are taken directly to a separate component of equity.

The following exchange rates (CHF/foreign currency) were used for the Group’s main foreign currencies:

Cash and cash equivalents comprise cash on hand and bank deposits with an initial maturity of no more than three months.

Trade receivables are stated at repayment amount (amortised costs) less specific allowances for doubtful accounts and, if denominated in foreign currency, translated at the closing rate.

The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and the aging of the accounts receivable.

Other non-financial assets comprise receivables from non-direct taxes, such as VAT and withholding taxes. These taxes are normally refunded within one quarter to one year, respectively. Additionally to this, prepayments are also included in this line item.

Inventories are generally capitalised at direct purchase cost for material and/or service processed in the current productions stage (finished and unfinished goods). For production stages including internal cost, direct internal costs are capitalised allocated on the product.

The value of the inventory is measured applying the “first-in first-out” (FIFO) method. If current market prices and/or limited usability of products indicate any impairment, the value of the inventory is written-down to the lower net realisable value.

Based on its business, Nitec Group has only raw materials, production supplies and unfinished goods on stock. All raw material and production supply are purchased from third parties. Toll manufacturing and other supply chain services are rendered by third parties within corresponding agreements. These costs are capitalised similarly to the purchase of material.

Generally Nitec Pharma Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired.

This category has two subcategories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. Valuation is at fair value through profit and loss.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when Nitec Pharma Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in trade receivables and other current financial assets, except for maturities longer than 12 months after the balance sheet date, which are shown as other non-current financial assets.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that Nitec Pharma Group’s management has the intention and ability to hold to maturity. They are reported at amortised cost using the effective interest method.

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance-sheet date. Valuation is at fair value through equity, except for impairment losses and foreign exchange gains and losses on available-for-sale monetary items.

Purchases and sales of financial assets are recognised on trade date. This is the date on which Nitec Pharma Group commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are no longer recorded on the financial statements when the rights to receive cash flows from the financial assets have expired or have been transferred and Nitec Pharma Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair-value adjustments are included in the income statement.

As of the balance sheet dates 30 June 2009 and 30 June 2008, respectively, the Group had no held-to-maturity investments or available-for-sale financial assets.

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit and loss, loans and borrowings or other financial liabilities at amortised cost.

Financial liabilities are recognised initially at fair value and in the case of loans and borrowings net of directly attributable transaction costs.

Interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

Derivatives like options of the Company’s shares which are embedded in a non-derivative loan contract and form a component of a hybrid (combined) financial instrument are separated from the host contract and accounted for as a derivative if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative according to IAS 39.

Embedded derivatives separated from the host contract are accounted for as equity instruments if they involve the exchange of a fixed number of the Company’s ordinary shares for a fixed cash amount and gross physical settlement is required by the option contract. Otherwise such derivatives are accounted for as financial liabilities at fair value through profit and loss. After initial recognition they are subsequently revalued to fair value at each reporting date. Both realised gains and losses and unrealised revaluations gains and losses are recorded in profit or loss as they arise.

Items of property, plant and equipment are measured at cost less accumulated depreciation and net of impairment losses. Items are depreciated on a straight-line basis over their estimated useful life as indicated below, with the depreciation charged to the income statement:

Replacements and improvements are capitalised while general repairs and maintenance are charged to expenses as incurred.

Leases of assets under which Nitec Pharma Group substantially assumes all the rewards and risks of ownership are classified as finance leases. All other leases are classified as operating leases and payments are charged to the income statement on a straight line basis. Finance leases are capitalised as assets and liabilities at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. The assets acquired under these contracts are depreciated over the shorter of the estimated useful life of the asset or the lease term. No such finance lease contracts occurred for the reporting period.

Intangible assets are measured at cost less accumulated amortisation and net of impairment losses. Items are amortised on a straight-line basis over their estimated useful life as indicated below, with the amortisation charged to the income statement:

The management evaluates the carrying amount of the Group’s assets for potential impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If any indication of impairment exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the recoverable amount is less than the carrying amount of the asset. Impairment losses are recognised in the income statement.

The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate independent cash in-flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Trade and other payables are stated at repayment amount (amortised costs) and, if denominated in foreign currency, translated at the closing rate.

Payables with repayment dates exceeding one year are discounted to their net present value.

Other current non-financial liabilities consist of liabilities mainly to authorities (VAT, social security) and accruals such as for bonus and vacation.

The net pension liability only include liabilities arising from the defined benefit plan effective for the employees of Nitec Pharma AG, as the employees of Nitec Pharma GmbH are covered by a defined contribution (state) plan.

The net pension liability is supported by a regularly up-dated actuarial calculation. Using the corridor-method under IAS 19 actuarial gains/losses within the defined corridor remain unrecognised. Actuarial gains/losses within the corridor remain unrecognised.

Possible or existing liabilities which are deemed unlikely to lead to a cash outflow are not recognised in the balance sheet. However, the exposure to such liabilities as of the balance sheet date is disclosed as a contingent liability in the notes to the consolidated financial statements.

As a result of successful clinical development and European marketing approval of its product candidates, the Group generated in the financial year 2008/2009 for the first time revenues from the launch of its LODOTRA product in the market (in the form of product sales) and from the out-licensing to third parties of its marketing rights (in the form of up-front fees, milestone payments and/or royalties).

Revenue is measured at the fair value of consideration received or receivable and represents amounts receivable, in the normal course of business, and is stated net of any trade discounts, VAT and other sales related taxes. All revenues from these sales of products are recognised at date of delivery, as defined in the underlying contractual agreements, lying beneath.

Nitec Pharma entered out-licensing agreements with third parties for the distribution, marketing and sales (to end-customers) of its pharmaceutical products. As a result, the Group already received up-front payments and will receive further payments for licensing fees, milestone receipts on achievement of predetermined events and royalties on the sale of the product. The corresponding revenue is shown as “contract revenue”, as it is based on out-licensing right on making use of the Group’s core products. The revenue arising from these out-licensing agreements is recognised as follows:

These revenues consist of payments of non-refundable, up-front license fees. In situations where no further performance obligation exists, revenues are recognised on the earlier of when payments are received or collection is assured. Where continuing involvement is required in the form of technology transfer or technical support, revenues are recognised over the involvement period.

Milestone payments are recognised based on achievement of such milestones, as defined in the relevant agreements.

Revenues related to royalties are recognised when earned on an accrual basis in accordance with the substance of the relevant agreements.

Cost of sales includes all cost directly related to the sales of products and out-licensing of distribution, marketing and sales right.

The cost in connection with product sales consists of cost for the material used and cost for processing (toll manufacturing and other supply chain cost). The use of material is charged applying the “first-in first-out” (FIFO) method on capitalised inventory stock.

In addition to the revenues from the sale of goods, the Group generates significant contract revenues from the out-licensing of distribution, marketing and sales rights. As the Group is licensee and/or user of certain patents for producing the product, it has to pay royalties to the ultimate patent owner.

The amount of royalties is measured based on the goods sold and the license income (“contract revenues”).

Other income included non-material income derived from the re-charge of development expenses, namely for building-up new intellectual property (patents), and travel expenses to partners.

Personnel expenses include salaries, benefits (such as contribution to pension plans), share-based payment and related social security costs.

Nitec Pharma Group had a total of 23.25 FTEs (as of balance sheet date) on its payroll (prior year: 19.00 FTEs).

IFRS 2 defines a share-based payment as a transaction in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts that are based on the price of the entity’s share or other equity instruments of the entity.

Share-based payments include options granted to employees as well as the issuance of shares or rights to shares in return for services or goods.

Under IFRS the Swiss pension plan qualifies as a defined benefit plan. Actuarial gains and losses are recognised as income or expense when the net cumulative unrecognised actuarial gains and losses at the end of the prior reporting period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognised over the expected average remaining working lives of the employees participating in the plan.

The German employees are covered by a state plan according to German law. Under IFRS this plan qualifies as a defined contribution plan.

Development costs primarily include professional fees for clinical and technical development such as intellectual property activities, quality controls and pharmacovigilance. These costs are only capitalised if all of the following criteria are fulfilled:

Since the above criteria were not met in either of the financial years, development expenses are charged to the income statement.

Administrative expenses primarily include professional fees for Nitec Pharma Group’s business development such as legal and intellectual property activities, including consultant fees, as well as sundry expenses related to registration and filing costs for intellectual property, maintenance of equipment, rental fees and vehicle costs.

Marketing expenses comprise expenses related to market research and communicating Nitec Pharma Group’s activities such as advertising materials, commercial publications and participation in industry conferences and conventions, including costs related to the expected future launch of Nitec Pharma’s most advanced product candidate, Lodotra™ and Nitec Pharma Group’s second product candidate TruNoc™ (tarenflurbil).

Financial income consists primarily of interest income from cash on deposit and gains on foreign currency exchange. Financial expenses include interest expenses for debt financing (venture-loan) and losses on foreign currency exchange.

Current tax is the amount of income tax payable or recoverable in respect of the taxable profit (loss) for a period. Due to the tax holiday enjoyed by Nitec Pharma AG and its loss situation, current tax assets and liabilities relate solely to Nitec Pharma GmbH.

Current tax liabilities will be off-set with corresponding current tax assets if, and only if an entity has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

A current tax asset of one entity in a group is off-set against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the intent to make or receive such a net payment or to recover to asset and settle the liability simultaneously.

The amount of deferred tax liabilities and deferred tax assets reflects the tax consequences on the balance sheet date of Nitec’s expectation of recovery or settlement of such carrying amount of its assets and liabilities.

Deferred taxes are calculated using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes (including the effect of offsetting current profit and accumulated losses).

Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the balance sheet date.

Deferred tax assets and liabilities are not discounted and are classified as non-current assets (liabilities) in the balance sheet. They are offset against each other if they relate to the same taxable entity and the same taxation authority.

Deferred tax assets are recognised if it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilised. At each balance sheet date, Nitec re-assesses unrecognised deferred tax assets and the carrying amount of deferred tax assets. Nitec recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Nitec conversely reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or the entire deferred tax asset to be utilised.

Following this, the Group has neither any deferred tax assets nor deferred tax liabilities as of balance sheet date.

Current period’s income tax is fully recognised in the income statement. Additionally the changes of deferred tax are also recognised in the income statement in the period occurred.

Nitec Pharma Group operates primarily in Switzerland and Europe and is therefore exposed to a variety of financial risks such as credit risk, liquidity risk and market risk (including interest rate risk, currency risk and other price risk). Based on management’s judgment there is no concentration of risk arising for counterparty, geographical area or currency or market that need to be disclosed separately, except as stated below under “Credit risk”.

Even though most of these risks are not material at the current stage of operations, Nitec Pharma Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on financial performance. The Board of Directors implemented guidelines and policies for overall risk management and internal controls for financial processes monitored by the Management Board and supervised by the Audit Committee. Certain financial risks, when deemed appropriate, can be reduced using financial instruments. Nitec Pharma Group only concludes contracts with selected high-quality financial institutions of good reputation.

As of 30 June 2009, the Group was only exposed to minor credit risk. The counterpart exposure consisted mainly of bank deposits in cash (current accounts and short term time deposits) and to more limited extent receivables from two customer’s licensees.

In autumn 2008, in the immediate aftermath of the global financial crisis, the Group decided to spread its cash resources over a larger number of banks than in the past, as well as to open new banking relationships with two institutions, which benefit from the guarantee of the respective Swiss cantons. As of 30 June 2009 most of the Group’s cash and cash equivalents (total kCHF 14,846, prior year: kCHF 12,114) were placed with Credit Suisse (kCHF 3,233), Basler Kantonalbank (kCHF 4,825) and Basellandschaftliche Kantonalbank (kCHF 6,258). The residual cash and cash equivalents were placed with German banks Deutsche Apotheker- und Ärztebank and Sparkasse Rhein Neckar Nord. Bank deposits with Basler Kantonalbank and Basellandschaftliche Kantonalbank benefit from a full guarantee offered by the two Swiss cantons of Basel-Stadt and Basel-Landschaft respectively.

Following the regulatory approval, partnering in Europe and launch in Germany of its first product Lodotra™, the Group entered into commercial relationship with Merck KGaA (exclusive distributor for Germany and Austria) and Mundipharma International Corporation Ltd. (exclusive distributor for Albania, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Italy, Israel, Latvia, Lithuania, Lichtenstein, Luxemburg, Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal, Ireland, Romania, Serbia, Former Soviet Union Countries, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United Kingdom). The first deliveries of Lodotra™ tablets for the launch in Germany generated trade receivables from Merck KGaA (kCHF 3,398), while the approval of Lodotra™ in certain European countries generated trade receivables from Mundipharma International Corporation Ltd. (kCHF 2,086).

Merck KGaA and Mundipharma International Corporation Ltd. are currently the only two commercial partners of the Nitec Pharma Group and are both in good financial conditions. Nitec’s management is in constant contact with both Merck KGaA and Mundipharma International Corporation Ltd. for operating reasons and is therefore in a position to also monitor the fulfilment of the financial obligations of its two commercial partners on a regular basis. Only a limited number of invoices had been issued to Merck KGaA and to Mundipharma International Corporation Ltd. in the course of financial year 2008/2009 and were still outstanding as of 30 June 2009. This situation is not expected to change significantly in the immediate future, and this enables Nitec Pharma to easily perform regular controls over credit aging and actual payments. The two above-mentioned trade receivables from Merck KGaA and Mundipharma International Corporation Ltd. were collected at the beginning of the new financial year 2009/2010.

Financial assets included deposits of kCHF 40 (prior year: kCHF 41), which serve as security for a business premises lease. There are no partners for which the credit history and the ethical behaviour may show a certain shortfall risk.

The maximum exposure to credit risks at reporting date is represented in every case: bank deposits, trade receivables and other current and non-current receivables by the full book value amount. There is no other exposure to a single counterparty comprising more than 20% of portfolio – defined as the sum of all financial assets – at the date of investment.

The Board of Directors believes the cash and cash equivalents to be sufficient to cover the liabilities foreseeable at the balance sheet date. The cash and cash equivalents may be withdrawn or transferred from the respective banks at short notice. The Board of Directors therefore considers the liquidity risks to be low.

The Group is currently primary financed through equity and – to a lower extent – through an interest-bearing non-convertible long-term loan given by Kreos Capital III (UK) Ltd.

The Nitec Pharma Group has financial resources, which are currently largely invested in cash deposits (a EUR 9.5 million total cash position as of 30 June 2009) and an interest bearing borrowing facility (a EUR 7.5 million venture loan divided into two tranches, whereof EUR 4.0 million already received in financial year 2008/2009). The Nitec Pharma Group does not have any other assets or liabilities, which might be positively or negatively impacted by an increase or a decrease in market interest rates. A possible increase or decrease in market interest rates would have no impact on the EUR 7.5 million venture loan facilities, since the interest payable on this loan is fixed. Viceversa, a possible change in market interest rates would have an impact on the interest income generated by the financial assets owned by the company. In the course of financial year 2008/2009, for instance, most central banks decreased significantly interest rates, in an attempt to limit the risk of a global recession. As a result, the company earned significantly less interest income on its financial resources relative to the prior year. It should be considered, however, that in consideration of the severity of the global financial crisis, many investors and companies (including the Nitec Pharma Group) have experienced an extremely limited counterparty risk (in the interest of the safety of their financial assets) to financial reward (in the form of higher interest rates).

The sensitivity against possible changes in interest rates–ceteris paribus–is demonstrated for reasonable scenarios:

The majority of the cash and cash equivalents at the balance sheet date as well as during the financial year were held in EUR, mainly in consideration of the fact that the Company is funding its subsidiary which is mainly exposed in EUR. Also the long term debt-financing (and the corresponding amortisation and interest payments) are in EUR. The Group uses short term financial instruments (fixed-term deposits) with a maturity of up to three months to limit the exchange rate risk. The fixed-term deposits are shown in the balance sheet under cash and cash equivalents.

The sensitivity against possible changes in foreign currency exchange rate–ceteris paribus–is demonstrated for reasonable scenarios:

As the Group did not have any financial instruments influenced by other market prices (such as for commodities), the Group was not exposed to any other price risks.

The primary objective of the Group’s capital management is to ensure that the Group maintains a strong equity base – supported by the new long-term debt financing – and assures future liquidity for the business. In course of the financial year 2008/2009 the average monthly cash burn rate was approximately CHF 2.2 million (equivalent to EUR 1.5 million). Liquidity and financial needs are monitored on a regular monthly basis.

There are no held-to-maturity investments and/or available-for-sale financial assets. The fair value of all financial instruments at amortised approximates their carrying amount.

For the purpose of the interim consolidated cash flow statement, cash and cash equivalents are comprised of the following:

Nitec Group started the sale of products and out-licensing in financial year 2008/2009. Trade receivables outstanding as of 30 June 2009 referred to the first deliveries of Lodotra™ tablets to Merck KGaA and to certain milestone payments due by Mundipharma International Corporation Ltd.

The Group pledged all its trade receivables in favour of Kreos Capital III (UK) Ltd. as security for the loan received.

Having reached the final stage of Lodotra™ product development, in the course of financial year 2007/2008 the Group built up a stock of raw material and production supplies. At the end of financial year 2007/2008 the related costs were capitalised as assets and classified as inventories in consideration of the relatively high likelihood of obtaining the regulatory approval for Lodotra™. During the first half of financial year 2008/2009 the EU regulatory authorities did recommend Lodotra™ for approval, however, the same authorities ruled that the authorized “shelf life” of the Lodotra™ tablets should be of only two years, while the Group had applied for a “shelf life” of three years. As a result, the Group decided to write-down the Lodotra™ tablets in stock in financial year 2008/2009, which represents the vast majority of the value of the inventories to the carrying-amount, which is–due to the lack of marketability–zero.

The Group did not make any significant investments in property, plant and equipment during the financial year 2008/2009, except for the acquisition of production machinery (a press coater from IMA Kilian GmbH & Co. KG) as a possible future second source of supply of Lodotra™ tablets.

The prior year figures are split into the same categories used for the financial year 2008/2009 for comparison reasons, without having an effect on the total amounts.

The disposals result from a clean-up from assets with minor values and do not result from any sale of assets.

Some assets, which had previously been booked as “IT-hardware”, were re-classified during the financial year ending 30 June 2009 as software (under “intangible assets”) without a net effect on total non-current assets.

In March 2009 Nitec Pharma bought a patent from Sosei R&D Ltd. on a delayed release technology, comparable to the technology used in Lodotra™, protected by law in U.S. and Japan.

As Nitec Pharma is still examining the most appropriate clinical development strategy for tarenflurbil, and the molecule is not yet generating any revenues, Nitec Pharma did not amortise its original intangible assets book value in the financial year 2008/2009.

The prior year figures are split into the same categories used for the financial year 2008/2009 for comparison reasons, having any effect on the total amounts.

All intellectual property owned by the Company is pledged in favour of Kreos Capital III (UK) Ltd. as security for the loan received.

A significant portion of trade payables was related to toll manufacturing services rendered by Jagotec AG.

Other current non-financial liabilities are mainly represented by payables in favour of authorities and employees.

At 15 August 2008 Kreos Capital III (UK) Ltd. provided Nitec Pharma a venture debt facility of kEUR 7,500 divided into two tranches. The first tranche of EUR 4.0 million was received on 12 September 2008. The second tranche of EUR 3.5 million will be drawn down on 1 July 2009. Each tranche is repayable within 36 months. The loan bears a nominal interest of 11.9% p.a.

In conjunction with this venture debt facility, Nitec Pharma assigned all its present and future trade receivables as a guarantee of its obligations to Kreos Capital III (UK) Ltd. under the loan agreement. In addition, Nitec Pharma pledged on a first ranking basis all present and future patents and trademarks as security for the loan.

In connection with the loan agreement Nitec Pharma granted Kreos Capital III (UK) Ltd. and/or Kreos Capital III Ltd. (Jersey) a warrant to purchase, at Kreos’ discretion, either

(i) The number of shares of Nitec’s current stock equal to CHF 1,520,530.00 divided by the price per share paid by venture capitalists for that stock in the most recent round of equity financing, or

(ii) The number of shares of any of Nitec’s new stock equal to CHF 1,520,530.00 divided by the price per share paid by venture capitalists for that stock in the next round of equity financing. The exercise price for the warrants shall be the nominal value of the underlying shares.

As the subscription price per share was CHF 40.848 for both the March 2007 and the October 2008 round of financing, Kreos Capital III (UK) and/or Kreos Capital III Ltd. (Jersey) have the right to exercise up to 37,224 warrants. These warrants shall be exercisable prior the tenth annual anniversary of the grant date or the fifth annual anniversary of an initial public offering (IPO).

Also in connection with the loan Nitec received a prepayment option, which gives Nitec Pharma a right to repay the loan fully or partially any time before the end of the loan term. The corresponding prepayment amount should be equal to the aggregate of all monthly payments that are still due and that should be discounted at 4.5% p.a.

The warrant and the prepayment option represent embedded derivatives which have been separated from the loan and carried at fair value through profit or loss.

After the initial recognition at fair value the loan is subsequently measured at amortised costs using the effective interest rate and is split-up in a current and non-current part, as the repayments are due monthly. The current portion reflects the total amount of repayments due within the next 12 months after balance sheet date.

The loan agreement consists of two separate tranches. During the financial year ending 30 June 2009 only the first tranche was drawn down.

The draw-down of the second and final tranche in the amount of EUR 3.5 million of the loan occurred on 1 July 2009 and therefore it was not recognised.

The current and non-current part of the interest-bearing loans and borrowings has been assigned to the corresponding class of financial liabilities and is shown under these line items.

Other non-current financial assets comprise deposits, which serve as security for a business premises lease and the prepayment option in connection with the loan provided by Kreos Capital III (UK) Ltd.

The carrying value of the embedded prepayment option is shown as a financial asset at fair value though profit or loss.

The security will be repaid at the end of the lease and after deduction of any amounts claimed by the lessor.

In consideration of the conditions defined for the prepayment option, there is limited incentive for Nitec Pharma to pre-pay the loan before maturity, and thus the prepayment option does not have a value, neither at grant date nor at balance sheet date. It is recognised at a pro memoria value. As other consequence it is classified as non-current financial asset.

As of the balance sheet date the Group had pledged its security deposits as a security-payment for the lease of the premises.

This position consists mainly of the current portion of the Kreos Capital III (UK) Ltd. loan and the carrying value of the embedded “warrant to purchase” (“WTP”).

The estimated fair value of the warrant to purchase (WTP) is calculated based on the Cox, Ross & Rubinstein Binomial Tree Model for an American Call using the assumption of a lognormal stock price distribution with the following model inputs: an underlying stock price equalling the strike price of CHF 40.848, a risk free interest rate of 2.9% p.a., expiry date: 15 August 2018, a subscription price: CHF 1,520,000.00, number of shares in a warrant: 37,224, volatility: 80.00% p.a.

This position only consists of the non-current portion of the Kreos Capital III (UK) Ltd. loan.

In the course of financial year 2008/2009 the Group entered into an exclusive distribution agreement with a third party (Mundipharma International Corporation Ltd.) in respect of the distribution of Lodotra™ in Europe outside of Germany and Austria. The agreement provided for the payment of an upfront fee and certain milestone payments. The upfront fee payments are deferred pro rata temporis over the remaining licensing period.

As of 30 June 2009, the share capital of Nitec Pharma AG is fully paid in and composed of 2,911,747 (prior year: 2,519,817) registered shares, 552,750 (prior year: 552,517) of which are ordinary shares, 1,183,900 (prior year: 1,183,900) are series A preferred shares and 1,175,097 (prior year: 783,400) are series B preferred shares. Each share has a par value of CHF 0.10. Nitec Pharma AG does not hold treasury shares.

In the event of the Company being wound up or liquidated, the holders of series A and B preferred shares have certain preferential rights regarding liquidation proceeds.

In a liquidation event (including trade sale), the net proceeds of such transaction shall be allocated as follows: Holders of series B preferred shares are entitled to receive from the net proceeds in advance for each preferred share B the amount of CHF 40.85 plus any accrued but unpaid dividends (preference amount B). The holders of series A preferred shares are entitled to receive from the net proceeds in advance for each preferred share A the amount of CHF 10.72 plus any accrued but unpaid dividend, after all preferential rights of holders of series B preferred shares have been fully satisfied (preference amount A). To the extent that the net proceeds are greater than the aggregate of the preference amounts B and A, a further amount equal to the preference amount A shall be shared in the ratio of 85:15 between the holders of series A preferred shares and the founders. Any residue thereafter shall be shared between all shareholders according to their respective percentage in the share capital of the Company.

The share capital was increased by CHF 39,169.70 through the issuance of 391,697 new series B preferred shares. The capital increase was approved by the Extraordinary General Meeting of Shareholders on 3 October 2008.

The Company received the share premium (kCHF 15,961) from the above-mentioned capital increase on 17 October 2008.

The share capital was further increased by CHF 23.30 during the month of December 2008, owing to the exercise of 233 stock options under plan A. This led to an increase of the capital reserves (kCHF 2).

There are two categories of conditional capital. The first category is reserved to the possible issuance of the ordinary shares underlying the various share-base payment plans (BSW, SOA and SOB). On 3 October 2008 an Extraordinary General Meeting of the Shareholders approved the increase of this category of conditional capital of up to CHF 60,000 (representing up to 600,000 ordinary shares). In December 2008, 233 stock options under plan A were exercised. As a result, as of 30 June 2009 this first category of conditional capital consisted of an amount of up to CHF 59,976.70 allowing for the issuance of up to 599,767 additional ordinary shares. As of 30 June 2008 the conditional capital amounted to up to CHF 50,225.30 or up to 502,253 additional ordinary shares.

The second category of conditional capital is reserved to the possible future issuance of series B preferred shares underlying the warrants issued to Kreos Capital III (UK) in September 2008. On 3 September 2008 an Extraordinary General Meeting of the Shareholders approved the creation of this specific category of conditional capital for an amount of up to CHF 5,000 (representing up to 50,000 series B preferred shares or higher category, if existing). As of 30 June 2009 the remaining conditional capital for this purpose amounted to CHF 5,000.00 (30 June 2008: n/a).

The above figures were adjusted to the situation after the share-split (1:10) effective 15 December 2007.

As of 30 June 2008, the Company had three share-based payment arrangements: the bonus share warrant plan, which is described below, and the two stock option plans described below.

The estimated fair value of each bonus share warrant granted is CHF 0.59 at grant date. This was calculated based on a Black-Scholes model. The model inputs were the share price at grant date of approximately CHF 0.64, exercise price of CHF 0.100, three equally weighted scenarios with annualised volatility alternatives of 40.00%, 60.00% and 80.00%, no expected dividends, contractual life of ten years, and a risk-free interest rate of 2.644% p.a.

Due to the short time-life of the Company at grant date, the historic ten-years annualised volatility of the NASDAQ Biotechnology Index was used as best approximation for the lower bound. It was as of 20 August 2004: 37.66%. The higher volatility of a single stock is covered by the use of the above-mentioned higher volatility alternatives.

The impact of the expense for the bonus share warrants B (BSW) on the profit and loss of the financial year ending 30 June 2009 is kCHF 14 (prior year: kCHF 10).

The above figures were adjusted to the situation after the share-split (1:10) effective 15 December 2007.

The bonus shares warrants outstanding on 30 June 2009 had an exercise price of CHF 0.10 (prior years: CHF 0.10) and a weighted average remaining contractual life of 5.14 years (prior year: 6.14 years).

By notice of grant the Board of Directors granted as of 1 December 2006 stock options as described below.

The estimated fair value of each stock option granted is CHF 0.13. This was calculated based on the Black-Scholes model. The model inputs were the share price at grant date of CHF 1.01, exercise price of CHF 10.713, three equally weighted scenarios with annualised volatility alternatives of 40.00%, 60.00% and 80.00%, no expected dividends, contractual life of six years, and a risk-free interest rate of 2.249% p.a.

Due to the short time-life of the Company at grant date, the historic 6-years annualised volatility of the NASDAQ Biotechnology Index was used as best approximation for the lower bound. It was as of 1 December 2006: 35.07%. The higher volatility of a single stock is covered by the use of the above-mentioned higher volatility alternatives.

The impact of the expense for the stock option plan A (SOA) on the profit and loss of the financial year ending 30 June 2009 is less than kCHF 1 (prior year: less than kCHF 1).

The above figures were adjusted to the situation after the share-split (1:10) effective 15 December 2007.

The options outstanding at 30 June 2009 had an exercise price of CHF 10.71 (prior year: CHF 10.71) and a weighted average remaining contractual life of 3.17 years (prior year: 4.17 years).

The weighted average share price for stock options exercised under program A (SOA) was CHF 10.71 (prior year: CHF 10.71).

The existing stock option plan B has been modified at 1 July 2008 to the following conditions:

The estimated fair value of each stock option granted in the first round is CHF 19.35. This was calculated based on the Black-Scholes model. The model inputs were the share price at grant date of CHF 40.848, exercise price of CHF 40.848, annualised volatility of 55.00%, no expected dividends, risk-free interest rates of 2.70% p.a. and an assumed life of option of between 5.33 and 6.33 years, which is lower than the contractual life of 10.0 years. The number of options expected to vest was modelled taking different scenarios of early exercise into consideration. The implied volatility was determined by recent trading activity of exchange traded options of comparable companies.

The occurring difference in the valuation of CHF 2.76 per option – calculated as difference of the value of an option under the modified plan less the value of an option under the original plan – is expensed over the vesting period of four years. The resulting period expense is added to the expense occurring from the original plan.

The estimated fair value of each stock option granted in the second round is CHF 23.60. This was calculated based on the Black-Scholes model. The model inputs were the share price at grant date of CHF 40.848, exercise price of CHF 40.848, annualised volatility of 65.00%, no expected dividends, risk-free interest rates of 1.70% to 1.90% p.a. and an assumed life of option of between 6.50 and 7.50 years, which is lower than the contractual life of 10.0 years. The number of options expected to vest was modelled taking different scenarios of early exercise into consideration. The implied volatility was determined by recent trading activity of exchange traded options of comparable companies.

The impact of the expense for the stock option plan B (SOB) on the profit and loss of the financial year ending 30 June 2009 is kCHF 1,533 (prior year: kCHF 697). The significant increase is the result of the modification and the second round of grant under the existing plan.

The above figures were adjusted to the situation after the share-split (1:10) effective 15 December 2007.

The options outstanding at 30 June 2009 had an exercise price of CHF 40.85 (prior year: CHF 40.85) and a weighted average remaining contractual life of 9.00 years (prior year: 3.42 years, for the original plan).

The vast majority of the development expenses incurred during the financial year 2008/2009 were related to the second phase III clinical trial of Lodotra™ in RA, which was initiated in order to apply for marketing authorisation in the U.S. (the CAPRA-2 trial).

On 27 February 2009 Nitec Group announced that it has completed the recruitment of the 300 target patients for the CAPRA-2 trial. Results are expected to be announced by the end of calendar year 2009.

The increase in employee benefit expense reflects the higher number of full time equivalents (FTE) employed by the Group relative to the prior period, and – as a result – the increase in total salaries, bonuses and expenses for stock options plan B (SOB). In addition stock option plan B was modified as of 1 July 2008 leading to higher costs for the Group (see Note 12 for more details).

Interest cost arising from the actuarial calculation of the defined benefit plan is recognised in the Employee benefit expense, not in the financial expenses.

Nitec Pharma GmbH – the German subsidiary of the Group – employs the majority of the staff. The post-employment benefits of these employees are covered by a state plan, which qualifies as a defined contribution plan under IAS 19. The contributions made to this state plan amount to kCHF 123 (prior year: kCHF 101).

Nitec Pharma AG operates a defined benefit pension plan with “UWP Sammelstiftung für berufliche Vorsorge” in Switzerland.

Net periodic pension costs during the financial year ending 30 June 2009 amount to kCHF 48 (prior year: kCHF 101).

As of 30 June 2009, an independent actuary has performed the necessary IAS 19-calculations. The calculations resulted in a net pension liability of kCHF 6 as of 30 June 2009 (prior year: kCHF 30).

The recognition of pension assets is limited to the sum of any cumulative unrecognised net actuarial losses and the present value of any future refunds from the plans or reductions in future contributions to the plan.

The investment possibilities for plan assets under the control of Swiss pension funds are limited to certain investment categories and exposures. Investments in the employer company or its subsidiaries are strongly limited by law.

As the Swiss pension funds are independent from the employer they are self-responsible for the investment management. In any case they have to respect their abilities for carrying and diversifying risk, as well as the legal limits.

For the reporting period the plan assets include neither own financial instruments of the Group nor any property occupied by, or other assets used by, the Group.

The expected contribution for the financial year 2009/2010 amounts to kCHF 161 (prior year: kCHF 98).

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.

Assumptions regarding the mortality turnover and disability experience are based – like in the prior year – on published statistics (EVK 2000 and BVG 2000).

Administrative expenses decreased owing to lower accounting and tax & legal consulting expenses more than off-setting the increased investor relations and other administrative expenses.

Tax & legal, investors relation and other administrative expenses refer to services rendered by external consultants in the context of negotiations for the closing of equity financing rounds, venture loan financing, the in-licensing of new product candidate TruNoc™, as well as the possible future out-licensing of Lodotra™ in some territories. Accounting expense and miscellaneous administrative expenses decreased relative to prior year, even though business activity and resulting number of transactions to be booked and the complexity of the accounting increased significantly.

All the expensed transactions cost were not directly attributable to equity or loan financing.

Nitec Pharma AG and Nitec Pharma GmbH entered lease contracts in respect of their premises at Reinach BL (Switzerland) and in Mannheim (Germany). These contracts were concluded for a fixed term, which expires on 30 November 2010 (extendable until 31 May 2012) for the Reinach office and on 31 December 2011 for the Mannheim office.

Additionally the Group is lessee in several operating lease contracts such as for company cars and office equipment. All these lease contracts expire not later than 31 October 2012.

Expenses incurred for these operating leases amounted to kCHF 329 in financial year 2008/2009 (prior year: kCHF 164).

The following table shows future minimum lease payments under non-cancellable operating leases:

The September 2008 Kreos Capital III (UK) Ltd. a denominated venture loan is in EUR. Owing to the weakening of the EUR relative to the Swiss Franc during the months of September 2008 – June 2009, the Group recorded a foreign exchange gain in respect of this liability in the reporting period.

A significant part of cash and cash equivalents is held in EUR. Owing to the weakening of the EUR relative to CHF during the months of July 2008 – June 2009, the Group recorded a foreign exchange loss in respect of these assets.

Interest expenses refer to interest payable to Kreos Capital UK (III) Ltd. in respect of the September 2008 venture loan facility (first tranche in the nominal amount of EUR 4 million).

As most of the operating costs are incurred in EUR, a proportional part of cash and cash equivalent is held in EUR, in order to minimise the currency exposure.

Nitec Pharma AG has concluded an agreement with the canton of Basel-Landschaft guaranteeing a 100% reduction on state and community taxes for the year in which it was established and for the following six years. If Nitec Pharma AG relocates away from the canton of Basel-Landschaft in 2017 or earlier; it will subsequently be charged taxes on income and capital at 40%. However, as a tax loss carry-forward of kCHF 53,245 can be applied (prior years: kCHF 32,647), the risk of back-tax effectively falling due is deemed to be remote.

As of 30 June 2009 and 2008 no taxable temporary differences existed, which would lead to deferred tax liabilities.

Deferred tax assets due to tax loss carry-forwards of kCHF 53,245 (prior year: kCHF 32,647) would amount to kCHF 4,526 (prior year: kCHF 2,775). Due to the uncertainty surrounding the future results of operations and the uncertainty as to whether Nitec Pharma Group can use the loss carry-forwards for tax purposes, no deferred tax assets have been recognised.

The temporary differences associated with net pension liabilities, for which deferred assets have not been recognised, amount to kCHF 6 (prior year: kCHF 30). The same is true for the temporary differences associated with the amortised cost-calculation of the venture loan liability and the embedded derivatives at fair value in a total amount of kCHF 109 (prior year: n/a).

No deferred taxes have been recognised on bonus share warrants and stock options because the differences resulting from them are qualified as permanent.

The following is a theoretical reconciliation of the income taxes calculated at the tax rate of the parent company to the effective income tax expense:

Basic loss per share is calculated by dividing the net loss for the period attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares issued and outstanding during the year.

The above figures were adjusted to the situation after the share-split (1:10) effective 15 December 2007.

For the financial years ending 30 June 2009 and 2008 loss per basic and diluted shares is based on the weighted average number of ordinary shares outstanding and excludes shares to be issued upon the future exercise of stock options or warrants, as they would be anti-dilutive. In case the Group shows a profit in the future, options may have a dilutive effect on the earnings per share.

Deutsche Bank, a significant shareholder, advised the Company on the exploration of strategic alternatives and re-charged travel and consulting expenses in a total amount of kCHF 521 (prior year: n/a).

The law firm Vischer LLC, in which Dr. Ludwig (vice chairman of the Board of Directors) is a partner, advises the Company on legal & tax matters and charged a fee totalling kCHF 298 (prior year: kCHF 412) for the reporting period.

Optima group LLC, in which James Audibert (optionee and key consultant) is a owner, advises the Group on business development and charged a fee totalling kCHF 245 (prior year: kCHF 169) for the reporting period.

TVM capital group, a significant shareholder, re-charged travel and consulting expenses in a total amount of kCHF 31 (prior year: n/a).

The Atlas Venture group, a significant shareholder, re-charged travel expenses in a total amount of kCHF 12 (prior year: kCHF 26).

The NGN Capital group, a significant shareholder, (re-)charged travel expenses in a total amount of kCHF 10 (prior year: none).

Global Life Science Venture group, a significant shareholder, re-charged travel expenses in a total amount of kCHF 2 (prior year: kCHF 1).

At the time of the latest Series B round of financing (CHF 24 million) the shareholders of Nitec Pharma AG have concluded a shareholders’ agreement dated 26 September 2008, which supersedes the shareholders’ agreements dated 12/20 August 2004 and 22 March 2007. Nitec Pharma AG is not a party to this agreement. The shareholders agreed on certain procedures and regulations mainly regarding the following matters: conversion of preferred shares into ordinary shares on a one for one basis, anti-dilution regulations and set-up of shareholder committee and redemption of preferred shares.

On 18 August 2008, the Group appointed Deutsche Bank AG, London to act as its exclusive financial adviser in connection with the exploration of strategic alternatives. The Group terminated the engagement on 18 December 2008. The engagement letter specified, inter alia, that Deutsche Bank AG, London would be entitled to a success fee, in the event that at any time prior to the expiration of 12 months after a possible termination of the engagement by the Group, a strategic transaction is agreed or completed. The contingent liability amounts to a potential cash success fee of kEUR 2,500 (equivalent to kCHF 3,750) in minimum. This contingent liability will expire on 17 December 2009.

Nitec Pharma Group currently operates a single business segment related to its only marketable product: Lodotra™. On its further path of commercialisation of its current product in new markets (such as the US) and for new treatments (such as severe asthma) and the commercialisation of new product candidates (such as TruNoc™) the Group will start operations in new markets.

The consolidated financial statements of the Group were prepared on the assumption that Nitec Pharma AG is a going concern and will continue its operations for the foreseeable future. The Group has neither the intention nor the need to liquidate or curtail materially the scale of its operations also in consideration of the approval of Lodotra™ in Europe, the start of its commercialisation in Germany by Merck KGaA, the closing of an exclusive distribution agreement with Mundipharma International Corporation Ltd. in respect of European countries outside of Germany and Austria, the positive results from a second pivotal Phase III trial of Lodotra™ relevant for the possible marketing authorisation in the US, the granting of a EUR 7.5 million venture loan in September 2008 (whereof EUR 4.0 million already received in the financial year 2008/2009) and of the CHF 24.0 million new round of equity financing in October 2008 (whereof CHF 16.0 million already received in the financial year 2008/2009) and the revenues generated by up-front frees, milestones payments, and product sales.

These consolidated financial statements for the financial year ending 30 June 2009 reflect events after the balance sheet date until the date of authorisation for issuance.

Following the recommendation from the German healthcare authorities BfArM to grant European regulatory approval to Lodotra™ for the treatment of Rheumatoid Arthritis, the national authorities of eight European Union countries approved the drug in their respective jurisdictions between March and June 2009. In July 2009 the authorities of Austria and the Netherlands and Finland also granted marketing approval to Lodotra™.

In September 2009 Nitec Pharma Group announced positive top line data from a second Phase III trial of Lodotra™, which was required by the U.S. regulatory authorities (the Food and Drug Administration or “FDA”) in order to obtain marketing authorization in the United States.

In August 2009, following the execution of a joinder agreement signed by all new and existing shareholders, the Company re-opened for the second time the Series B round of financing and raised approximately CHF 2.6 million from three new investors: CD-Venture GmbH, ANMA Venture GmbH and CBI GmbH. On 10 August 2009, upon payment of the nominal value the Extraordinary General Meeting of the shareholders approved the related capital increase and issued 64,691 new series B preferred shares. The Company received the share premium from the above-mentioned capital increase in August 2009.

On 1 July 2009 the Company drew down the EUR 3.5 million second tranche of the EUR 7.5 million loans, which had originally been granted by venture debt provider Kreos Capital III (UK) in September 2008. The first EUR 4.0 million tranche had been drawn in September 2008. The loan bears an annual nominal interest of 11.9% and each of the two tranches is repayable in 36 months.

In August 2009 Karl Nägler resigned from the Board of Directors of Nitec Pharma AG. An Extraordinary General Meeting held on 10 August 2009 by-elected Regina Hodits as new member of the Board of Directors.

These consolidated financial statements for the financial years ending 30 June 2009 were authorised for issuance in accordance with a resolution of the Board of Directors of Nitec Pharma AG on 23 September 2009 and will be submitted to the Annual General Meeting of Nitec Pharma AG for approval on or about 29 October 2009.

INTERIM UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

These condensed consolidated financial statements for the interim period ending 31 December 2009 were authorised for issuance in accordance with a resolution of the Board of Directors of Nitec Pharma AG on 19 March 2010. After the acquisition of Horizon Pharma Inc., the company has updated its financial statements due to the changes that have occurred after the balance sheet date. Such changes, which are reflected in these consolidated financial statements, were approved by the new board of directors on 12 July 2010.

Nitec Pharma AG (registered in Reinach BL) (“Nitec Pharma” or “the Company”) is a limited company incorporated and domiciled in Switzerland.

Together with its fully-owned subsidiary – Nitec Pharma GmbH – the Company forms a specialty Pharma group (together referred to as “Nitec Pharma Group” or “the Group”).

These financial statements are the unaudited interim condensed consolidated financial statements of the Group for the six months ending 31 December 2009. They have been prepared in accordance with International Accounting Standard (IAS) 34 “Interim Financial Reporting”.

The interim condensed consolidated financial statements do not include all the information and disclosures required in annual financial statements, and should be read in conjunction with the Group’s annual financial statements as of 30 June 2009.

The financial statements are presented in thousand Swiss Francs [kCHF] unless otherwise stated. On July 1, 2009, the company’s functional currency changed from the Swiss Franc to the Euro due to the majority of the company’s activities and underlying transactions being denominated in Euro. The effect of this change on the financial statements is accounted for prospectively from the date of change. All figures in this report are rounded to the nearest reported unit. When current year’s figures are compared to previous period the corresponding figures are presented in brackets.

Regarding the financial statements for the six month ending 31 December 2009 the Group has adopted the following new standards and interpretations to existing standards relevant to the Group.

The adoption of these new standards and/or interpretations did not have an impact on the Group’s accounts.

Effective for annual periods beginning on or after mostly 1 January 2009IFRS 7 (Amendment) – Improving Disclosures about Financial Instruments

IAS 32 and IAS 1 (Amendments) – Puttable Financial Instruments and Obligations Arising on Liquidation

IFRS 1 (Amendment) – First-time Adoption of International Financial Reporting Standards

The Group has not early adopted any other standards, interpretations or amendments that was issued but is not yet effective.

As of July 1, 2009, the Group start accruing mandatory rebates on its sales in Germany. In addition, the Group also elected to amortize its intangible assets over its estimated useful life of both its existing license and patent.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s Annual Financial Statements 2008/2009 for the year ended 30 June 2009, except from the adoption of new standards and interpretations as noted above.

There are no changes in the composition of the Group such as business combinations, acquisitions and/or disposals of subsidiaries and long-term investments, restructuring and/or discontinued operations.

Assumptions are mainly made concerning the vesting probability in relation with service conditions within the existing plans.

In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimates, which has the most significant effect on the amounts recognised in the financial statements.

Nitec Group decided to start capitalising the cost of inventories in stock (and in particular the full manufacturing cost of the Lodotra™ tablets) for the first time on 30 June 2008, in consideration of the high likelihood that Lodotra™ might be recommended for approval in the EU in the course of 2008. During the first half of financial year 2008/2009 the EU regulatory authorities did recommend Lodotra™ for approval, however, the same authorities ruled that the authorised “shelf life” of the Lodotra™ tablets should be of only two years, while the Group had anticipated a “shelf life” of three years. As a result, the Group decided to write-off completely the value of the Lodotra™ tablets in stock as of 31 December 2009, which represent the vast majority of the value of the inventories.

The consolidated financial statements include the interim financial statements of Nitec Pharma AG and all subsidiaries where Nitec Pharma AG holds more than 50% of the voting power or which it otherwise controls. These entities are fully consolidated in preparing the consolidated financial statements. In fully consolidating the entities, assets, liabilities and items of income and expense are recognised in full. Assets, liabilities and items of income and expense and profits and losses between consolidated entities are eliminated.

All raw material and production supply are purchased from third parties. Toll manufacturing and other supply chain services are rendered by third parties within corresponding agreements. These costs are capitalised similarly to the purchase of material.

Revenue is measured at the fair value of consideration received or receivable and represents amounts receivable, in the normal course of business, and is stated net of any trade discounts, rebates, VAT and other sales related taxes. All revenues from these sales of products are recognised at date of delivery, as defined in the underlying contractual agreements, lying beneath.

Nitec Pharma entered into out-licensing agreements with third parties for the distribution, marketing and sales (to end-customers) of its pharmaceutical products. As a result, the Group already received up-front payments and will receive further payments for licensing fees, milestone receipts on achievement of predetermined events and royalties on the sale of the product. The corresponding revenue is shown as “contract revenue”, as it is based on out-licensing right on making use of the Group’s core products. The revenue arising from these out-licensing agreements is recognised as follows:

Milestone payments are recognised based on achievement of such milestones, as defined in the relevant agreements.

Revenues related to royalties are recognised when earned on an accrual basis in accordance with the substance of the relevant agreements.

Cost of sales includes all cost directly related to the sales of products and out-licensing of distribution, marketing and sales right.

The amount of royalties is measured based on the goods sold and the license income (“contract revenues”).

Since the above criteria were not met in either of the financial years, development expenses are charged to profit and loss.

For the purpose of the interim consolidated cash flow statement, cash and cash equivalents are comprised of the following:

By the year end contracting was finalised and the client’s stock of product were built-up. These two effects lead to a significant decrease of trade receivables as at interim balance sheet date.

Other non-financial assets consist mainly of receivable from tax authorities in connection with indirect taxation, mainly VAT.

Due to problems which have occurred in the production process a certain batch of bulk tablets did not fulfil the quality criteria and was therefore destroyed. This led to a significant write-down of inventory.

In July 2007 Nitec Pharma in-licensed from the German company PAZ GmbH the exclusive worldwide rights in respect of a second molecule, tarenflurbil, for possible use in chronic inflammation and pain indicators, shown as license. In March 2009 Nitec Pharma bought a patent from Sosei R&D Ltd. on a delayed release technology, comparable to the technology used in Lodotra™, protected by law in U.S. and Japan.

The license from PAZ has an estimated useful life of 10 years. For the year ending June 30, 2009 the license was not used and thus, no amortization was recorded. After review of the license, the company is amortizing the license for the period ending December 31, 2009 as it is available for our expected use.

Other current non-financial liabilities are mainly represented by payables in favour of employees and the German tax authorities.

During the six month ending 31 December 2009 the second tranche of the loan from Kreos Capital III (UK) Ltd. was drawn down.

This position consists mainly of the current portion of the Kreos Capital III (UK) Ltd. loan and the carrying value of the embedded “warrant to purchase” (“WTP”).

The share capital was ordinary increased CHF 6,569.10 through the issuance of 64,691 new series B preferred shares. The ordinary capital increase was approved by the Extraordinary General Meeting of Shareholders on 10 August 2009.

The Company received the share premium (kCHF 2,636) from the above-mentioned capital between 18 and 24 October 2009.

The share capital was further increased by CHF 100.00 during the month of September 2009, owing to the exercise of 1,000 stock bonus share warrants (BSW), without leading to an increase of the capital reserves.

Revenues recognized during the first six month of financial year 2009/2010 consisted mostly of upfront fees and milestones received from Mundipharma International Corporation Ltd. following the closing of a Manufacturing and Supply Agreement and of an Exclusive Distribution Agreement in respect of the supply and distribution of Lodotra™ for the European market (excluding Germany and Austria). In addition, Nitec Pharma also recognized during the first six months of financial year 2009/2010 sales of its product, Lodotra™.

The increase in employee benefit expense reflects the higher number of full time equivalents (FTE) employed by the Group relative to the prior period and as a result, the increase in total salaries, bonuses and expenses for stock options.

The vast majority of the development expenses incurred during the first six month of financial year 2009/2010 were related to the second phase III clinical trial of Lodotra™ in RA, which was initiated in order to apply for marketing authorisation in the U.S. (the CAPRA-2 trial).

In addition to RA, Lodotra™ is anticipated for development for the treatment of severe asthma and polymyalgia rheumatica (“PMR”), which appear to follow similar nocturnal circadian cytokine rhythms. Lodotra™ is in a phase IIa open label trial for the treatment of severe asthma, and Nitec Pharma Group is conducting a small trial for the treatment of PMR.

The Company received advice and consulting services from various significant shareholders, vice chairman of the Board of Directors and optionee.

For the six month ending 31 December 2009 and 2008, the company received advisory and consulting services from Deutsche Bank, TVM capital group, Atlas venture group and NGN capital group, who are significant shareholders. The Group also used the law firm Vischer LLC, in which Dr. Ludwig (the vice chairman of the Board of Directors) provided the firm legal and tax matters advice and Optima group LLC, in which James Audibert (optionee and key consultant) is a owner, provided advice to the Group on business development.

Nitec Pharma Group currently operates a single segment related to its only marketable product: Lodotra™. On its further path of commercialisation of its current product in new markets (such as the US) and for new treatments (such as severe asthma) and the commercialisation of new product candidates (such as TruNoc™) the Group will start operations in new markets.

These condensed consolidated financial statements for the first six months ending 31 December 2009 reflect events after the balance sheet date until the date of authorisation for issuance.

On 1 April 2010, pursuant to a share exchange agreement, Horizon Pharma, Inc. completed the acquisition of Nitec Pharma AG. Under the terms of the share exchange agreement and recapitalization (together, “the Transactions”), all existing shares of common and preferred stock of Nitec and Horizon Therapeutics, Inc. were exchanged for shares of common stock and convertible Series A preferred stock of the parent holding company, Horizon Pharma, Inc. Following the completion of the Transactions, the former shareholders of Nitec and Horizon Therapeutics owned 49% and 51%, respectively, of Horizon Pharma, Inc. on a fully diluted basis. In connection with the Transactions, Nitec Pharma AG changed its name to Horizon Pharma AG.

In connection with the Transactions, on 1 April 2010, the Company amended its EUR 7.5M loan facility with Kreos Capital III (UK) Limited. The Company pays accrued interest only on the outstanding principal balance of the loan amounting to EUR 50,000 per calendar month, beginning 1 May 2010 through 31 December 2010. Thereafter, 35 equal monthly payments of EUR 184,000, consisting of principal and interest.

Also in connection with the Transactions, Horizon Pharma Inc., Horizon Pharma USA, and Horizon Pharma AG entered into a Loan and Security Agreement with two financial institutions allowing borrowings of up to $12 million at 12.9% interest rate, an initial loan commitment fee of $120,000, end of loan fee of 1% of the principal borrowed and loan prepayments of $466,622. The first loan of $7,000,000 was advanced on April 1, 2010 with thirty-four remaining equal monthly payments of $233,311 for principal and interest.

Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful.

The following table sets forth all costs and expenses, other than underwriting discounts and commissions, paid or payable by us in connection with the sale of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the listing fee for The NASDAQ Global Market.

We are incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such person as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director has actually and reasonably incurred. Our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective upon the completion of this offering, provide for the indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

Our amended and restated certificate of incorporation and amended and restated bylaws include such a provision. Expenses incurred by any officer or director in defending any such action, suit or proceeding in advance of its final disposition shall be paid by us upon delivery to us of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by us.

Section 174 of the Delaware General Corporation Law provides, among other things, that a director who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption may be held liable for such actions. A director who was either absent when the unlawful actions were approved, or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

As permitted by the Delaware General Corporation Law, we have entered into indemnity agreements with each of our directors and executive officers, that require us to indemnify such persons against any and all expenses (including attorneys’ fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of Horizon or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.

We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, or otherwise.

We have entered into an underwriting agreement which provides that the underwriters are obligated, under some circumstances, to indemnify our directors, officers and controlling persons against specified liabilities, including liabilities under the Securities Act.

Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification provisions described above and elsewhere herein:

The following list sets forth information regarding all securities sold by us in the three years preceding the filing of this Registration Statement:

The offers, sales and issuances of the securities described in paragraphs (1), (2), (3), (4), (5), (7), (9), (11), (12), (13) and (14) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor under Rule 501 of Regulation D.

The offers, sales and issuances of the securities described in paragraph (6) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering and Regulation S in that the issuance of securities to non-U.S. persons were made pursuant to an offshore transaction, and no directed selling efforts were made in the United States. Each of the recipients of securities in these transactions was an accredited investor under Rule 501 of Regulation D who acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, or a non-U.S. person under Rule 902 of Regulation S. Appropriate legends were affixed to the securities issued in the transaction.

The offers, sales and issuances of the securities described in paragraphs (8), (10) and (15) were deemed to be exempt from registration under the Securities Act in reliance on Regulation S in that the issuance of securities to non-U.S. persons were made pursuant to an offshore transaction, and no directed selling efforts were made in the United States. Each of the recipients of securities in each of these transactions was a non-U.S. person under Rule 902 of Regulation S. Appropriate legends were affixed to the securities issued in these transactions.

The offers, sales and issuances of the securities described in paragraph (16) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our 2005 Stock Plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.

No financial statement schedules are provided because the information called for is not required or is shown either in the consolidated financial statements or notes.

The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

Pursuant to the requirements of the Securities Act of 1933, as amended, or the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 11^th day of July, 2011.

Pursuant to the requirements of the Securities Act this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.


Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨
(Do not check if a smaller reporting company)



Title of each class of securities to be registered	Proposed maximum aggregate offering price(1)		Amount of registration fee
Common Stock, $0.0001 par value per share	$	75,900,000	$	8,811.99	(2)


	PER SHARE	TOTAL
Public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to us	$	$


Assumed initial public offering price per share				$	11.00
Historical net tangible book value (deficit) per share as of March 31, 2011	$	(40.39	)
Pro forma increase in net tangible book value per share attributable to the borrowing and repayments under, and the issuance of warrants in connection with, the Oxford facility, the issuance of the April 2011 notes, the assumed conversion of the 2010 notes, January 2011 notes, April 2011 notes and the conversion of convertible preferred stock	$	37.17

Pro forma net tangible book value (deficit) per share as of March 31, 2011	$	(3.22	)
Pro forma increase in net tangible book value per share attributable to investors participating in this offering	$	3.65
Pro forma as adjusted net tangible book value per share after this offering				$	0.43
Dilution per share to investors participating in this offering				$	10.57


	Shares purchased					Total consideration					Average price
	Number		Percent			Amount		Percent			per share
Existing stockholders before this offering		13,646,982		71.3	%	$	113,753,000		65.3	%	$	8.34
Investors participating in this offering		5,500,000		28.7			60,500,000		34.7	%		11.00

Total		19,146,982		100.0	%	$	174,253,000		100.0	%	$	9.10


	Page
Prospectus Summary		1
Risk Factors		11
Special Note Regarding Forward-Looking Statements		42
Use of Proceeds		43
Dividend Policy		43
Industry and Market Data		43
Capitalization		44
Dilution		46
Unaudited Pro Forma Condensed Consolidated Financial Information		49
Selected Consolidated Financial Data		56
Management’s Discussion and Analysis of Financial Condition and Results of Operations		58
Business		85
Management		113
Executive and Director Compensation		120
Transactions with Related Persons		140
Principal Stockholders		149
Description of Capital Stock		153
Shares Eligible for Future Sale		159
Underwriting		161
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders		164
Legal Matters		167
Experts		167
Where You Can Find Additional Information		167
Index to Consolidated Financial Statements		F-1


	Horizon Pharma, Inc. Fiscal Year Ended December 31, 2010			Nitec Pharma AG Three Months Ended March 31, 2010			Pro Forma Adjustments			Pro Forma Combined
Revenues
Sales of goods	$	2,376		$	278		$	—		$	2,654
Contract revenue		—			175			—			175

Total revenues		2,376			453			—			2,829
Cost of goods sold		4,263			355			906	(A)		5,524

Gross profit (loss)		(1,887	)		98			(906	)		(2,695	)
Operating expenses
Research and development		17,697			2,044			—			19,741
Selling and marketing		5,558			2,236			—			7,794
General and administrative		18,612			5,620			—			24,232

Total operating expenses		41,867			9,900			—			51,767

Loss from operations		(43,754	)		(9,802	)		(906	)		(54,462	)
Interest income		28			290			—			318
Interest expense		(3,052	)		(857	)		—			(3,909	)
Bargain purchase gain		19,326			—			—			19,326
Foreign exchange loss, net		(273	)		—			—			(273	)

Loss before income tax		(27,725	)		(10,369	)		(906	)		(39,000	)
Income tax benefit (loss)		660			(17	)		—			643

Net loss	$	(27,065	)	$	(10,386	)	$	(906	)	$	(38,357	)

Net loss per share-basic and diluted	$	(21.16	)							$	(25.73	)

Weighted average common shares outstanding, basic and diluted		1,279,133									1,490,548


Horizon Common Stock	$	11.1
Horizon Convertible Preferred Stock (including sale at discount from fair value)		90.9
Estimated Fair Value of Warrants		0.9
Estimated Fair Value of Options		2.1
Current Liabilities		8.3
Long-Term Debt		6.0

Total Purchase Price	$	119.3


Category	Preliminary Allocation			Revisions			Allocation as Revised
Net Tangible Assets (including cash acquired)	$	9.6		$	—		$	9.6
Developed Technology		43.5			—			43.5
In-Process Research and Development (IPR&D)		110.9			—			110.9
Property, Plant and Equipment		0.6			—			0.6
Deferred Tax Liabilities		(30.6	)		4.6			(26.0	)
Bargain Purchase Gain		(14.7	)		(4.6	)		(19.3	)

Total Purchase Price	$	119.3		$	—		$	119.3


	For the Three Month Period Ended March 31, 2010 (Unaudited)
	Nitec Pharma AG IFRS			IFRS to U.S. GAAP Presentation Adjustments ⁽¹⁾			U.S. GAAP Presentation			IFRS to U.S. GAAP Adjustments			Nitec Pharma AG U.S. GAAP			Nitec Pharma AG U.S. GAAP ⁽²⁾
Sales of goods		CHF 294			CHF —			CHF 294			CHF —			CHF 294		$	278
Contract revenue		125			—			125			60	(3)		185			175

Revenue		419			—			419			60			479			453
Raw material and consumables used		—			—			—			—			—			—
Toll manufacturing and other supply chain cost		6			(6	)		—			—			—			—
Change in inventories of finished goods and work in progress		—			—			—			—			—			—
Cost of goods sold		678			(303	)		375			—			375			355
Write down of inventories		(350	)		350			—			—			—			—
Royalties for goods sold		73			(73	)		—			—			—			—
Royalties related to contract revenue		(32	)		32			—			—			—			—

Cost of sales		375			—			375			—			375			355

Gross profit		44			—			44			60			104			98

Other income		—			—			—			—			—			—
Employee benefit expense		5,971			(5,971	)		—			—			—			—
Other operating expense
Development expense		1,785			1,230			3,015			(856	) (4)		2,159			2,044
Administrative expense		3,471			2,722			6,193			(255	) (4)		5,938			5,620
Marketing expense		362			2,071			2,433			(71	) (4)		2,362			2,236

Operating result before depreciation and amortization		(11,545	)		(52	)		(11,597	)		1,242			(10,355	)		(9,802	)

Depreciation and amortization		(52	)		52			—			—			—			—

Operating result		(11,597	)		—			(11,597	)		1,242			(10,355	)		(9,802	)

Financial income		306			—			306			—			306			290
Financial expenses		(905	)		—			(905	)		—			(905	)		(857	)

Result before taxes		(12,196	)		—			(12,196	)		1,242			(10,954	)		(10,369	)

Income tax expense		(18	)		—			(18	)		—			(18	)		(17	)

Net loss for the period		CHF (12,214	)		CHF —			CHF (12,214	)		CHF 1,242			CHF (10,972	)	$	(10,386	)


	As of Year Ended December 31,															As of March 31, 2011
	2006			2007			2008			2009			2010			As of March 31, 2011
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	16,317		$	20,824		$	14,067		$	7,160		$	5,384		$	2,556
Working capital (deficit)		16,112			21,044			(628	)		(905	)		(17,944	)		(25,172	)
Total assets		16,403			23,404			14,955			8,213			161,685			169,580
Long-term debt, net of current portion		—			1,604			7,749			3,133			10,395			9,266
Convertible preferred stock warrant liabilities		—			181			657			—			—			—
Accumulated deficit		(5,741	)		(31,588	)		(59,487	)		(79,987	)		(107,052	)		(114,723	)
Total stockholders’ equity (deficit)		15,229			19,275			(8,454	)		(3,177	)		97,056			96,847


	Year Ended December 31,							Three Months Ended March 31,
	2008		2009		2010			2010		2011
External Research and Development Expenses
LODOTRA-Rheumatoid Arthritis	$	—	$	—	$	5,814		$	—	$	933
LODOTRA-Severe Asthma		—		—		36			—		6
TRUNOC		—		—		(91	)		—		13
DUEXIS		21,736		9,581		8,850			2,255		530
HZN-602		278		116		—			—		—

Total External Research and Development Expenses		22,014		9,697		14,609			2,255		1,482
Total Internal Research and Development Expenses		281		1,197		3,088			571		1,247

Total Research and Development Expenses	$	22,295	$	10,894	$	17,697		$	2,826	$	2,729


	December 31,									March 31, 2011
	2008			2009			2010			March 31, 2011
Expected volatility		70	%		98	%		79	%		64	%
Risk-free interest rate		3.5	%		2.7	%		2.3	%		2.8	%
Expected term (in years)		6.25			6.25			5.06			6.25
Expected dividends		0	%		0	%		0	%		0	%


Grant Date	Number of Options Granted		Exercise Price			Reassessed Fair Value Per Share of Common Stock		Intrinsic Value (in thousands)
March 11, 2009		47,176	$	13.47		$	11.78	$	—
May 28, 2009		6,318		13.47			9.88		—
June 23, 2009		48,441		13.47			9.23		—
September 29, 2009		6,318		13.47			6.86		—
February 3, 2010		285,688		5.20			8.12		834
April 1, 2010		328,074		7.55-28.83			12.94		179
June 16, 2010		413,609		12.94			16.36		1,415
September 23, 2010		20,796		16.98			20.49		73
December 2, 2010		29,485		20.78			17.21		—
December 21, 2010		5,265		20.78			17.21		—
March 24, 2011		3,580		17.22			18.52		5

Total Options
Options outstanding vested at March 31, 2011		617,758	$	17.39	(A)	$	18.52	$	3,262
Options outstanding unvested at March 31, 2011		699,776		11.12	(A)		18.52		5,328


	Three Months Ended March 31,						Increase/ (Decrease)			% Increase/ (Decrease)
	2010			2011			Increase/ (Decrease)			% Increase/ (Decrease)
	(in thousands, except percentages)
Revenues	$	—		$	1,793		$	1,793			*
Cost of goods sold		—			1,839			1,839			*
Gross profit (loss)		—			(46	)		(46	)		*
Research and development expenses		2,826			2,729			(97	)		(3	%)
Sales and marketing expenses		259			1,117			858			331	%
General and administrative expenses		4,533			3,098			(1,435	)		(32	%)
Interest expense		(285	)		(1,285	)		1,000			351	%
Foreign exchange gain (loss), net		(2	)		422			420			*



Stifel Nicolaus Weisel	Cowen and Company	JMP Securities


	Year Ended December 31,						Increase/ (Decrease)			% Increase/ (Decrease)
	2009			2010			Increase/ (Decrease)			% Increase/ (Decrease)
	(in thousands, except percentages)
Sales of goods	$	—		$	2,376		$	2,376			*
Cost of goods sold		—			4,263			4,263			*
Gross profit (loss)		—			(1,887	)		(1,887	)		*
Research and development expenses		10,894			17,697			6,803			62	%
Sales and marketing expenses		2,072			5,558			3,486			168	%
General and administrative expenses		5,823			18,612			12,789			220	%
Interest income		25			28			3			12	%
Interest expense		(2,214	)		(3,052	)		(838	)		(38	%)
Bargain purchase gain		—			19,326			19,326			*
Other income (expense), net		478			—			(478	)		*
Foreign exchange loss		—			(273	)		(273	)		*


	Year Ended December 31,						Increase/ (Decrease)			% Increase/ (Decrease)
	2008			2009			Increase/ (Decrease)			% Increase/ (Decrease)
	(in thousands, except percentages)
Research and development expenses	$	22,295		$	10,894		$	(11,401	)		(51	%)
Sales and marketing expenses		1,337			2,072			735			55	%
General and administrative expenses		3,235			5,823			2,588			80	%
Interest income		340			25			(315	)		(93	%)
Interest expense		(869	)		(2,214	)		(1,345	)		*
Other income (expense), net		(503	)		478			981			*


	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
Cash and cash equivalents	$	14,067		$	7,160		$	5,384		$	2,039		$	2,556
Cash provided by (used in):
Operating activities		(23,971	)		(18,392	)		(37,532	)		(4,770	)		(6,498	)
Investing activities		(786	)		(357	)		5,575			(6	)		(41	)
Financing activities		18,000			11,842			29,760			(345	)		3,679


	Payments Due as of December 31, 2010
	Total		Less than 1 Year		1-3 Years		4-5 Years		More Than 5 Years
Debt⁽¹⁾	$	30,569	$	17,794	$	12,775	$	—	$	—
Purchase commitments^(2)(3)(4)		3,909		581		3,317		11		—
Operating lease obligations⁽⁵⁾		888		510		342		36		—

Total	$	35,366	$	18,885	$	16,434	$	47	$	—


	Payments Due as of March 31, 2011
	Total		Less than 1 Year		1-3 Years		4-5 Years		More Than 5 Years
Debt⁽¹⁾	$	34,391	$	16,323	$	18,068	$	—	$	—
Purchase commitments^(2)(3)(4)		3,658		165		3,485		8		—
Operating lease obligations⁽⁵⁾		749		385		330		34		—

Total	$	38,798	$	16,873	$	21,883	$	42	$	—


Name	Age		Position
Directors
Timothy P. Walbert		44	President, Chief Executive Officer and Chairman of the Board of Directors
Jeffrey W. Bird, M.D., Ph.D.^(2, 3)		50	Director
Hubert Birner, Ph.D.^{(1, 3)}		44	Director
Louis C. Bock⁽¹⁾		46	Director
Jean-François Formela, M.D.⁽²⁾		54	Director
Jeff Himawan, Ph.D.^{(1, 2)}		46	Director
Peter Johann, Ph.D.^{(1, 2)}		53	Director

Executive Officers (other than Mr. Walbert)
Robert J. De Vaere		53	Executive Vice President and Chief Financial Officer
Jeffrey W. Sherman, M.D., FACP		56	Executive Vice President, Development, Regulatory Affairs and Chief Medical Officer
Michael Adatto		50	Senior Vice President, Sales and Managed Care
Todd N. Smith		41	Senior Vice President, Marketing and Alliance Management


Name and Principal Position	Year		Salary		Bonus		Option Awards⁽¹⁾		Non Equity Incentive Plan		All Other Compensation⁽⁷⁾		Total
Timothy P. Walbert		2010	$	450,625	$	—	$	2,182,343	$	175,100	$	1,077	$	2,809,145
President, Chief Executive Officer and Chairman of the Board⁽²⁾		2009	$	437,750	$	—	$	—	$	—	$	991	$	438,741
		2008	$	214,135	$	100,000	$	835,586	$	212,500	$	200	$	1,362,421

Robert J. De Vaere		2010	$	324,450	$	—	$	813,744	$	100,800	$	1,657	$	1,240,651
Executive Vice President and Chief Financial Officer⁽³⁾		2009	$	315,000	$	—	$	—	$	—	$	1,601	$	316,601
Executive Vice President and Chief Financial Officer⁽³⁾		2008	$	75,317	$	—	$	317,911	$	31,500	$	267	$	424,995

Jeffrey W. Sherman		2010	$	333,900	$	—	$	813,744	$	47,250	$	3,139	$	1,198,033
Executive Vice President,		2009	$	159,886	$	—	$	165,517	$	—	$	1,372	$	326,775
Development, Regulatory Affairs and Chief Medical Officer⁽⁴⁾		2008	$	—	$	—	$	—	$	—	$	—	$	—

Michael Adatto		2010	$	110,417		—	$	173,233		—		324	$	283,973
Senior Vice President, Sales and Managed Care⁽⁵⁾		2009		—		—		—		—		—		—
Senior Vice President, Sales and Managed Care⁽⁵⁾		2008		—		—		—		—		—		—

Todd N. Smith		2010	$	66,250		—	$	182,835		—		127	$	249,212
Senior Vice President, Marketing and Alliance Management⁽⁶⁾		2009		—		—		—		—		—		—
Senior Vice President, Marketing and Alliance Management⁽⁶⁾		2008		—		—		—		—		—		—


	Upon Termination without Cause or Resignation for Good Reason – No Change in Control										Upon Termination without Cause or Resignation for Good Reason – Change in Control⁽¹⁾
Name	Cash Severance		Continuation of Medical Benefits		Bonus		Value of Accelerated Vesting⁽²⁾		Total		Cash Severance		Continuation of Medical Benefits		Bonus		Value of Accelerated Vesting⁽²⁾		Total
Timothy P. Walbert	$	450,625	$	27,501	$	225,313	$	41,910	$	745,349	$	450,625	$	27,501	$	225,313	$	817,204	$	1,520,643
Robert J. De Vaere	$	324,450	$	29,547			$	14,306	$	368,303	$	324,450	$	29,547			$	302,804	$	656,801
Jeffrey W. Sherman, M.D., FACP	$	333,900	$	27,528					$	361,428	$	333,900	$	27,528			$	276,393	$	637,821
Michael Adatto⁽³⁾	$	132,500	$	13,751					$	146,251	$	132,500	$	13,751					$	146,251
Todd N. Smith⁽⁴⁾	$	132,500	$	13,842					$	146,342	$	132,500	$	13,842					$	146,342


Name	Grant Date		Estimated Future Payouts Under Non-Equity Incentive Plan Awards			All Option Awards: Number of Shares of Stock or Units (#)			Exercise or Base Price of Option Awards ($/Share)		Grant Date Fair Value of Option Awards ($)⁽⁶⁾
			Target
Timothy P. Walbert		2/3/10					128,937	⁽¹⁾	$	5.20	$	857,074
		6/6/10					112,787	⁽²⁾	$	12.94	$	1,325,268
		N/A	$	225,313	⁽⁷⁾
Robert J. De Vaere		2/3/10					47,654	⁽¹⁾	$	5.20	$	316,770
		6/6/10					42,295	⁽²⁾	$	12.94	$	496,974
		N/A	$	129,780	⁽⁸⁾
Jeffrey W. Sherman, M.D., FACP		2/3/10					47,654	⁽¹⁾	$	5.20	$	316,770
		6/6/10					42,295	⁽³⁾	$	12.94	$	496,974
		N/A	$	100,170	⁽⁹⁾
Michael Adatto		6/6/10					14,743	⁽⁴⁾	$	12.94	$	173,233
		N/A	$	36,440	⁽¹⁰⁾
Todd N. Smith		12/2/10					18,955	⁽⁵⁾	$	20.78	$	182,835
		N/A	$	21,863	⁽¹¹⁾


	Option Awards
Name	Number of Securities Underlying Unexercised Options Options - Exercisable			Number of Securities Underlying Unexercised Options Options - Unexercisable⁽²⁾			Option Exercise Price ($)		Option Expiration Date
Timothy P. Walbert		121,701	⁽¹⁾⁽²⁾		—		$	10.43		7/15/2018
		—			128,937	⁽³⁾	$	5.20		2/2/2020
		14,098	⁽⁴⁾		98,689	⁽⁴⁾	$	12.94		6/5/2020
Robert J. De Vaere		46,335	⁽¹⁾⁽²⁾		—		$	10.43		9/7/2018
		—			47,654	⁽³⁾	$	5.20		2/2/2020
		5,286	⁽⁴⁾		37,009	⁽⁴⁾	$	12.94		6/5/2020
Jeffrey W. Sherman, M.D., FACP		46,335	⁽¹⁾⁽²⁾		—		$	13.47		6/22/2019
		—			47,654	⁽³⁾	$	5.20		2/2/2020
		5,286	⁽⁵⁾		37,009	⁽⁵⁾	$	12.94		6/5/2020
Michael Adatto		—			14,743	⁽⁶⁾	$	12.94		6/5/2020
Todd N. Smith		—			18,955	⁽⁷⁾	$	20.78		12/1/2020


Director		Principal Stockholder
Jeffrey Bird, M.D., Ph.D.		Sutter Hill Ventures, a California Limited Partnership
Hubert Birner, Ph.D.		TVM Life Science Ventures VI, L.P.
Louis C. Bock		Scale Venture Partners II, L.P.
Jean-François Formela, M.D.		Atlas Venture Fund VI, L.P.
Jeff Himawan, Ph.D.		Essex Woodlands Health Ventures Fund VII, L.P.
Peter Johann, Ph.D.		NGN Biomed Opportunity I, L.P.


Participants⁽¹⁾	Options to Purchase Common Stock		Common Stock		Series A Preferred Stock		Series A Warrants
5% or Greater Stockholders
Atlas Venture Fund VI, L.P.⁽²⁾				326,524		3,745,741
Essex Woodlands Health Ventures Fund VII, L.P.						3,398,303		144,439
Scale Venture Partners II, L.P.						3,252,547		147,586
NGN Biomed Opportunity I, L.P.⁽³⁾				123,287		2,274,014
Sutter Hill Ventures, a California Limited Partnership						1,423,377		63,407
The Global Life Science Ventures Fund II Limited Partnership⁽⁴⁾				143,861		1,738,013
FHVF, L.P.⁽⁵⁾				215,213		1,475,103		104,939
TVM Life Science Ventures VI, L.P.⁽⁶⁾				67,246		1,240,361
Executive Officers and Directors
Timothy P. Walbert		250,638
Robert J. De Vaere		93,989
Jeffrey W. Sherman, M.D., FACP		93,989
Jeffrey Bird, M.D., Ph. D.⁽⁷⁾						53,916		2,435


Participants⁽¹⁾	Series A Preferred Stock		Series B Preferred Stock		Series C Preferred Stock		Series D Preferred Stock		Special Preferred Stock		Series D Warrants
5% or Greater Stockholders
Essex Woodlands Health Ventures Fund VII, L.P.						1,406,470		1,527,746				144,439
Scale Venture Partners II, L.P.		492,611		592,885		351,618		1,560,233				147,586
Sutter Hill Ventures, a California Limited Partnership⁽²⁾		132,615		265,813		241,102		695,811				65,842
FHVF, L.P.⁽³⁾		246,306		247,036		17,582		900,389		510,920		104,939


Participants⁽¹⁾	Loan Amount
5% or Greater Stockholders
Atlas Venture Fund VI, L.P.⁽²⁾	$	1,900,001
Essex Woodlands Health Ventures Fund VII, LP	$	1,695,983
Scale Venture Partners II, LP	$	1,623,241
NGN Biomed Opportunity I, L.P.⁽³⁾	$	1,000,000
Sutter Hill Ventures, a California Limited Partnership⁽⁴⁾	$	736,592
The Global Life Science Ventures Fund II Limited Partnership⁽⁵⁾	$	699,997
FHVF, L.P.⁽⁶⁾	$	736,177
TVM Life Science Ventures VI, L.P.⁽⁷⁾	$	599,998


	January 2011 notes		April 2011 notes
Participants⁽¹⁾	Loan Amount		Loan Amount
5% or Greater Stockholders
Atlas Venture Fund VI, L.P.⁽²⁾	$	1,100,001	$	380,000
Essex Woodlands Health Ventures Fund VII, LP	$	981,885	$	339,197
Scale Venture Partners II, LP	$	939,771	$	324,648
NGN Biomed Opportunity I, L.P.⁽³⁾	$	578,947	$	200,000
Sutter Hill Ventures, a California Limited Partnership⁽⁴⁾	$	426,344	$	147,283
The Global Life Science Ventures Fund II Limited Partnership⁽⁵⁾	$	384,973	$	122,668
TVM Life Science Ventures VI, L.P.⁽⁶⁾	$	329,999	$	26,036


Name and address of beneficial owner	Number of shares beneficially owned		Percentage of shares beneficially owned
Name and address of beneficial owner	Number of shares beneficially owned		Before offering			After offering
5% or greater stockholders:

Atlas Venture Fund VI, L.P. and its affiliates⁽¹⁾		2,413,364		17.7	%		12.6	%
25 First Street, Suite 303 Cambridge, MA 02141

Essex Woodlands Health Ventures Fund VII, L.P.⁽²⁾		1,965,551		14.3	%		10.2	%
335 Bryant St., 3rd Floor Palo Alto, CA 94301

Scale Venture Partners II, L.P.⁽³⁾		1,885,182		13.8	%		9.8	%
950 Tower Lane, Suite 700 Foster City, CA 94404

NGN Biomed Opportunity I, L.P. and its affiliates⁽⁴⁾		1,360,206		10.0	%		7.1	%
369 Lexington Avenue, 17^th Floor New York, NY 10017

Sutter Hill Ventures, a California Limited Partnership⁽⁵⁾		824,136		6.0	%		4.3	%
755 Page Mill Road, Suite A-200 Palo Alto, CA 94304

The Global Life Science Ventures Fund II Limited Partnership and its affiliates⁽⁶⁾		1,062,465		7.8	%		5.5	%
1 Royal Plaza Royal Avenue St. Peter Port Guernsey, G41 2HL

FHVF, L.P. and its affiliates⁽⁷⁾		1,031,979		7.5	%		5.4	%
FirstMark Capital LLC 1221 Avenue of the Americas, 26th Fl. New York, NY 10020

TVM Life Science Ventures VI, L.P. and its affiliates⁽⁸⁾		787,208		5.8	%		4.1	%
101 Arch Street, Suite 1950 Boston, MA 02110

Directors and named executive officers:
Jean-François Formela, M.D.⁽⁹⁾		2,413,364		17.7	%		12.6	%

Jeff Himawan, Ph.D.⁽¹⁰⁾		1,965,551		14.3	%		10.2	%

Louis C. Bock⁽¹¹⁾		1,885,182		13.8	%		9.8	%

Peter Johann, Ph.D.⁽¹²⁾		1,360,206		10.0	%		7.1	%

Jeffrey W. Bird, M.D., Ph.D.⁽¹³⁾		855,399		6.3	%		4.5	%

Hubert Birner, Ph.D.⁽¹⁴⁾		787,208		5.8	%		4.1	%

Timothy P. Walbert⁽¹⁵⁾		192,875		1.4	%		1.0	%

Robert J. De Vaere⁽¹⁶⁾		72,792		*			*

Jeffrey W. Sherman, M.D., FACP⁽¹⁷⁾		72,792		*			*

Michael Adatto⁽¹⁸⁾		3,686		*			*

Todd N. Smith		—		*			*

All executive officers and directors as a group (11 persons)⁽¹⁹⁾		9,609,055		68.0	%		48.9	%


Description	# of Shares of Common Stock After this Offering		Weighted Average Exercise Price After this Offering
Series A preferred stock		282,609	$	11.38
Series B preferred stock		63,438	$	0.03


Name	Number of Shares
Stifel, Nicolaus & Company, Incorporated
Cowen and Company, LLC
JMP Securities LLC

Total		5,500,000


	Page
Horizon Pharma, Inc. (formerly Horizon Therapeutics, Inc.)

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets		F-3

Consolidated Statements of Operations		F-4

Consolidated Statements of Cash Flows		F-5

Consolidated Statements of Stockholders’ Equity (Deficit)		F-6

Notes to Consolidated Financial Statements		F-8

Nitec Pharma AG

Report of Independent Registered Public Accounting Firm		F-57

Consolidated Balance Sheets		F-58

Consolidated Income Statement		F-59

Consolidated Statement of Cash Flow		F-60

Consolidated Statement of Changes in Shareholders’ Equity		F-61

Notes to the Consolidated Financial Statements		F-62


	December 31,						March 31, 2011			Pro Forma Stockholders’ Equity at March 31, 2011
	2009			2010			March 31, 2011
							(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	7,160		$	5,384		$	2,556
Restricted cash		—			200			200
Accounts receivable		—			575			2,594
Inventory		—			306			155
Prepaid expenses and other current assets		192			903			1,071

Total current assets		7,352			7,368			6,576
Property and equipment, net		747			2,107			2,086
Developed technology		—			39,990			41,596
In-process research and development		—			108,746			115,688
Other assets		114			3,474			3,634

Total assets	$	8,213		$	161,685		$	169,580

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	1,761		$	2,514		$	3,865
Accrued expenses		1,649			6,733			5,962
Deferred revenues—current portion		—			1,845			2,270
Notes payable—current portion		4,847			4,220			4,621
Bridge notes payable to related parties		—			10,000			15,030

Total current liabilities		8,257			25,312			31,748
Long-term liabilities
Notes payable, net of current		3,133			10,395			9,266
Deferred revenues, net of current		—			4,123			5,528
Deferred tax liabilities		—			24,798			26,190
Other long term liabilities		—			1			1

Total liabilities		11,390			64,629			72,733

Commitments and Contingencies (Note 7)

Stockholders’ equity (deficit)
Convertible preferred stock, $0.0001 par value; 10,573,393, 27,400,000, and 28,175,000 shares authorized at December 31, 2009, 2010 and March 31, 2011 (unaudited), respectively; 9,087,516, 24,961,340 and 24,961,340 shares issued and outstanding at December 31, 2009, 2010 and March 31, 2011 (unaudited) respectively, and no shares at March 31, 2011 pro forma (unaudited); (Liquidation preference: $72,090, $177,002 and $177,002 at December 31, 2009, 2010, and March 31, 2011 (unaudited), respectively)		1			2			2			—
Common stock, $0.0001 par value; 20,095,393, 35,400,000 and 36,175,000 shares authorized at December 31, 2009, 2010 and March 31, 2011 (unaudited), respectively; 1,010,950, 1,490,551 and 1,496,278 shares issued and outstanding at December 31, 2009, 2010 and March 31, 2011 (unaudited), respectively, and 12,010,709 shares at March 31, 2011 pro forma (unaudited); (Liquidation preference: $16,798, $0 and $0 at December 31, 2009, 2010 and March 31, 2011 (unaudited), respectively		—			—			—			2
Special preferred stock, $0.0001 par value; 4,784,037 authorized at December 31, 2009 and no shares authorized at December 31, 2010, March 31, 2011 (unaudited); 510,920 shares issued and outstanding at December 31, 2009 and no shares issued and outstanding at December 31, 2010, March 31, 2011 (unaudited) and March 31, 2011 pro forma (unaudited)		—			—			—			—
Treasury stock, at cost, 168,492 shares at December 31, 2009 and no shares at December 31, 2010, March 31, 2011 (unaudited) and March 31, 2011 pro forma (unaudited)		—			—			—			—
Additional paid-in capital		76,809			206,336			206,975			206,975
Accumulated other comprehensive income (loss)		—			(2,230	)		4,593			4,593
Accumulated deficit		(79,987	)		(107,052	)		(114,723	)		(114,723	)

Total stockholders’ equity (deficit)		(3,177	)		97,056			96,847		$	96,847

Total liabilities and stockholders’ equity (deficit)	$	8,213		$	161,685		$	169,580


	Years Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
										(Unaudited)
Revenues
Sales of goods	$	—		$	—		$	2,376		$	—		$	1,763
Contract revenue		—			—			—			—			30

Total revenues		—			—			2,376			—			1,793
Cost of goods sold		—			—			4,263			—			1,839

Gross profit (loss)		—			—			(1,887	)		—			(46	)
Operating Expenses
Research and development		22,295			10,894			17,697			2,826			2,729
Sales and marketing		1,337			2,072			5,558			259			1,117
General and administrative		3,235			5,823			18,612			4,533			3,098

Total operating expenses		26,867			18,789			41,867			7,618			6,944

Loss from operations		(26,867	)		(18,789	)		(43,754	)		(7,618	)		(6,990	)
Interest income		340			25			28			—			—
Interest expense		(869	)		(2,214	)		(3,052	)		(285	)		(1,285	)
Bargain purchase gain		—			—			19,326			—			—
Other income (expense), net		(503	)		478			—			—			—
Foreign exchange gain (loss), net		—			—			(273	)		(2	)		422

Loss before income tax expense		(27,899	)		(20,500	)		(27,725	)		(7,905	)		(7,853	)
Income tax benefit		—			—			660			—			182

Net loss		(27,899	)		(20,500	)		(27,065	)		(7,905	)		(7,671	)
Plus: capital contribution		—			3,489			—			—			—

Net loss attributable to common stockholders	$	(27,899	)	$	(17,011	)	$	(27,065	)	$	(7,905	)	$	(7,671	)

Net loss per share- basic and diluted	$	(68.01	)	$	(40.65	)	$	(21.16	)	$	(12.49	)	$	(5.13	)

Weighted average shares outstanding used in calculating net loss per share—basic and diluted		410,206			418,520			1,279,133			633,146			1,493,962

Pro forma net loss per share—basic and diluted							$	(2.61	)				$	(0.64	)

Pro forma weighted average shares outstanding used in calculating net loss per share—basic and diluted								10,365,771						12,008,393