S-3

As filed with the Securities and Exchange Commission on August 26, 2003.

Registration No. 333-________

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

CONNETICS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization) 94-3173928
(I.R.S. Employer
Identification Number)

3290 West Bayshore Road
Palo Alto, California 94303
(650) 843-2800
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

Thomas G. Wiggans
President and Chief Executive Officer
CONNETICS CORPORATION
3290 West Bayshore Road
Palo Alto, California 94303
(650) 843-2800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Brian V. Caid, Esq.
Russell J. Wood, Esq.
Morrison & Foerster LLP
370 Seventeenth Street, Suite 5200
Denver, Colorado 80202
(303) 592-1500

      Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement.

     If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [  ]

     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, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X]

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

     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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [  ]

CALCULATION OF REGISTRATION FEE

				Proposed maximum		Proposed maximum
Title of shares	Amount to be			offering price		aggregate		Amount of
to be registered	Registered			per share		offering price		registration fee
2.25% Convertible Senior Notes due May 30, 2008	$	90,000,000			100%	$	90,000,000	$	7,281.00
Common Stock, par value $0.001 par value(1)		4,203,450	(2)		Not applicable		Not applicable		—	(3)

⁽¹⁾ Each share of common stock being registered pursuant to this Registration Statement includes a right to purchase one one-thousandth of a share of Series B Participating Preferred Stock pursuant to an Amended and Restated Rights Agreement between the Registrant and EquiServe Trust Company, N.A., as Rights Agent.

⁽²⁾ Represents the number of shares of common stock that are initially issuable upon conversion of the 2.25% Convertible Senior Notes due May 30, 2008 registered hereby. In the event of a stock split, stock dividend or similar transaction involving the Registrant’s common stock, in order to prevent dilution, the number of shares registered shall automatically be increased to cover additional shares in accordance with Rule 416 under the Securities Act of 1933, plus such additional indeterminate number of shares as may become issuable upon conversion of the Convertible Senior Notes being registered hereunder by means of adjustment in the conversion price.

⁽³⁾ Pursuant to Rule 457(i), there is no filing fee with respect to the shares of Common Stock issuable upon conversion of the Convertible Senior Notes because no additional consideration will be received in connection with the exercise of the conversion right.

The information in this prospectus is not complete and may be changed. The selling securityholders 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 it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated August 26, 2003

     PROSPECTUS

CONNETICS CORPORATION

$90,000,000 Principal Amount of 2.25% Convertible Senior Notes
Due May 30, 2008

4,203,450 Shares of Common Stock, par value $0.001 per share

     This prospectus covers resales by selling securityholders of our 2.25% Convertible Senior Notes due May 30, 2008 and shares of our common stock into which the notes are convertible. The notes have the following provisions:

• the holders of the notes may convert the notes into shares of our common stock at any time at a conversion rate of 46.705 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances, which is equivalent to a conversion price of approximately $21.41 per share;

• we may redeem the notes on or after May 30, 2005 at the prices described in this prospectus or earlier if the price of our common stock reaches certain levels;

• holders may require us to purchase the notes upon a change in control;

• we will pay interest on the notes on May 30 and November 30 of each year, and the first interest payment will be made on November 30, 2003; and

• the notes are senior, unsecured obligations of Connetics and will rank equal in right of payment with any existing and future unsecured and unsubordinated indebtedness.

     Prior to this offering, the notes have been eligible for trading on the PORTAL Market of the Nasdaq Stock Market. Notes sold by means of this prospectus are not expected to remain eligible for trading on the PORTAL Market. We do not intend to list the notes for trading on any national securities exchange or on the Nasdaq National Market.

     Our common stock is traded on the Nasdaq Stock Market’s National Market System under the symbol “CNCT.” On August 22, 2003, the closing price of our common stock as reported by Nasdaq was $17.51 per share.

Investing in our securities involves risks. Before buying our securities, you should refer to the risk factors
included in this prospectus beginning on page 10.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is             , 2003

TABLE OF CONTENTS

EXHIBIT 1.1

EXHIBIT 5.1

EXHIBIT 12.1

EXHIBIT 23.1

EXHIBIT 25.1

Table of Contents

Summary	4
Risk Factors	9
Ratio of Earnings to Fixed Charges	22
Forward Looking Statements	23
Use of Proceeds	24
Where You Can Find More Information	24
Description of the Notes	26
Material United States Federal Income Tax Considerations	43
Selling Securityholders	53
Plan of Distribution	56
Legal Matters	58
Experts	58

     You should only rely on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We will not make an offer to sell these securities in any jurisdiction where the offer and sale is not permitted. You should assume that the information appearing in this prospectus, as well as information we previously filed with the SEC and incorporated by reference, is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

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SUMMARY

     This summary provides an overview of selected information and does not contain all the information you should consider. You should read the entire prospectus, including the section entitled “Risk Factors,” carefully before making an investment decision. When used in this prospectus, unless otherwise indicated, the terms “we,” “our,” and “us” refer to Connetics and its subsidiaries.

Connetics Corporation

The Company

     Connetics is a specialty pharmaceutical company focusing exclusively on the treatment of dermatological conditions. We currently market two pharmaceutical products, OLUX® Foam (clobetasol propionate), 0.05%, and Luxíq® Foam (betamethasone valerate), 0.12%. Our commercial business is focused on the dermatology marketplace, which is characterized by a large patient population that is served by a relatively small number of treating physicians. Our dermatology products have clinically proven therapeutic advantages for the treatment of dermatoses in a novel formulation, and we are providing quality customer service to dermatologists through our experienced sales and marketing professionals.

     Dermatological diseases often persist for an extended period of time and are treated with a variety of clinically proven drugs that are delivered in a variety of formulations, including solutions, creams, gels and ointments. These delivery systems often inadequately address a patient’s needs for efficacy, ease of use and cosmetic elegance, and the failure to address those needs may decrease patient compliance. We believe that the proprietary foam delivery system unique to OLUX and Luxíq has significant advantages over conventional therapies for dermatoses. The foam formulation liquefies when applied to the skin, and enables the active therapeutic agent to penetrate rapidly. When the foam is applied, it dries quickly, and does not leave any residue, stains or odor. We believe that the combination of the increased efficacy and the cosmetic elegance of the foam may actually improve patient compliance and satisfaction. In market research sponsored by Connetics, 80% of patients said that they preferred the foam to other topical delivery vehicles.

     Our products, OLUX and Luxíq, compete in the topical steroid market. According to NDC Health, in 2002, the value of the retail topical steroid market for mid-potency and high- and super high-potency steroids was $831 million. Luxíq competes in the mid-potency steroid market, and OLUX competes in the high- and super high-potency steroid market.

     During the first half of 2003, we had three product candidates in Phase III clinical trials: (1) Extina^TM, a foam formulation of a 2% concentration of the antifungal drug ketoconazole, for the treatment of seborrheic dermatitis; (2) Actiza^TM, a formulation of 1% clindamycin in our proprietary foam delivery system for the treatment of acne; and (iii) Velac® Gel, a first-in-class combination of 1% clindamycin and 0.025% tretinoin for the treatment of acne. Early in 2003, we initiated a promotional giveaway to dermatologists of Solux^TM, a sunscreen formulated in our proprietary VersaFoam delivery system. In addition, we recently launched OPIS^TM, a first-in-

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class internet-based and personal digital assistant-based software program designed specifically to help dermatology residents track surgical procedures. These innovative programs, designed to supplement our marketing activities, differentiate us from our competitors and demonstrate our commitment to the dermatology specialty.

Our Strategy

     Our principal business objective is to be a leading specialty pharmaceutical company focused on providing innovative treatments in the field of dermatologic disease. To achieve this objective, we intend to continue to pursue our commercial strategy of maximizing product sales by leveraging novel delivery technologies, accelerating the processes of getting products to market and targeting specific market opportunities with unmet needs.

     We have described our development paradigm as a “4:2:1 model.” We strive in any given year to have four product candidates in product formulation, two product candidates in late-stage clinical trials and one product or new indication launched commercially. We fuel our product pipeline with a combination of developing product candidates internally and in-licensing novel products that fit with our broader strategy.

     Key elements of our business and commercialization strategy include the following:

• Maximizing Near-Term Commercial Opportunities for OLUX and Luxíq. We have a focused sales force dedicated to establishing OLUX and Luxíq as the standard of care. Our commercial strategy permits us to effectively reach the majority of the treating dermatologists. In December 2002, we received approval from the FDA to market OLUX for the treatment of non-scalp psoriasis, specifically the short-term topical treatment of mild to moderate plaque-type psoriasis of non-scalp regions.

• Advancing the Development of Novel Dermatology Drugs. We plan to continue to leverage our investment in Connetics Australia Pty Ltd. and the Center for Skin Biology to enhance our ability to develop novel products and drug delivery technologies for the dermatology market.

• Broadening Our Product Portfolio Through Development, License or Acquisition. We believe that we can leverage our dermatology-dedicated sales force by marketing additional products to the dermatology market. In 2002, we acquired the rights to Velac. Also in 2002, we in-licensed the rights to access the clinical, regulatory and manufacturing records of a currently approved and marketed dermatological product. We intend to reformulate and market the product using our proprietary foam delivery vehicle. We are evaluating the licensing or acquisition of additional product candidates. We may also acquire additional technologies or businesses that we believe will enhance our research, development and commercial capabilities.

• Selective Collaborations. As we expand certain aspects of our development pipeline and delivery technologies, we may partner with pharmaceutical or biotech companies to gain access to additional marketing expertise, such as over-

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the-counter or non-U.S. markets. Our approach to partnership will be on a selective basis, seeking to maintain the highest possible value of our product candidates.

Recent Developments

     April 23, 2003. We announced the outcome of a Phase III clinical trial evaluating Extina, an investigational new drug formulation of 2% ketoconazole in our proprietary foam delivery system, as a potential new treatment for seborrheic dermatitis.

     The four-week, double-blinded, active- and placebo-controlled trial included 619 patients at 25 centers. The trial was designed to demonstrate that Extina is not inferior to (has similar or better clinical efficacy than) Nizoral® (ketoconazole) 2% Cream as measured by the primary endpoint of Investigator’s Static Global Assessment (“SGA”). ISGA for this trial was an overall assessment of the severity of seborrheic dermatitis with respect to the clinically relevant signs of the disease. The treatment success based on ISGA showed a 50% response for Extina, a 44% response for Nizoral, a 40% response for placebo foam and a 26% response for placebo cream. Therefore trial results demonstrated Extina was not inferior to Nizoral.

     Based on these Phase III results, on July 1, 2003, we submitted a New Drug Application to the U.S. Food and Drug Administration to seek approval to market Extina in the U.S.

     The trial was also designed to compare Extina to placebo foam as measured by the ISGA. The result, although in favor of Extina, did not achieve statistical significance. This was due to an unusually high placebo foam response at one out of 25 sites. An analysis excluding the outlying site demonstrates statistical significance.

     Based on the trial’s other efficacy endpoint of improvement in signs of seborrheic dermatitis (scaling, erythema and plaque thickness), the data showed Extina was statistically superior to placebo foam. The change in total score for this endpoint showed a median improvement of 80% for Extina, 67% for Nizoral, 57% for placebo foam and 54% for placebo cream.

     Adverse events with Extina were mild to moderate in nature and were related primarily to burning and stinging at the application site.

     March 24, 2003. We announced that the FDA has granted us marketing exclusivity for foam-based products incorporating clobetasol propionate for three years for the short-term topical treatment of mild to moderate plaque-type psoriasis of non-scalp regions. In addition to exclusivity granted by the FDA, OLUX is covered by a U.S. patent. Luxíq is covered by the same patent, which expires in 2016. This information can be viewed online in the FDA Electronic Orange Book.

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The Notes

Securities Offered	$90,000,000 aggregate principal amount of 2.25% convertible senior notes due 2008.
Offering Price	100% of the principal amount. The original principal amount per note is $1,000.
Maturity Date	May 30, 2008.
Interest	2.25% per year on the principal amount, payable semiannually in arrears in cash on May 30 and November 30 of each year, commencing November 30, 2003. The first interest payment will include interest from May 28, 2003.
Conversion	You may convert the notes into shares of common stock at a conversion rate of 46.705 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $21.41 per share of common stock. The conversion rate is subject to adjustment in certain events.
	You may convert the notes at any time before the close of business on the maturity date, unless we have previously redeemed or repurchased the notes. Holders of notes called for redemption or repurchase will be entitled to convert the notes up to and including the business day prior to the date fixed for redemption or repurchase, as the case may be.
Ranking	The notes are senior unsecured obligations and will rank equal in right of payment with any existing and future unsecured and unsubordinated indebtedness. The indenture under which the notes will be issued will not restrict us from incurring additional senior or other indebtedness and other liabilities by us or any of our subsidiaries.
No Redemption Period	Before May 30, 2005, the notes are not subject to redemption.
Provisional Redemption Period	We may redeem the notes in whole or in part at any time on or after May 30, 2005 but prior to May 30, 2007 at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to the redemption date if: (1) the closing price of our common stock on the Nasdaq National Market has exceeded 140% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the mailing of the notice of redemption; and (2) the registration statement covering resales of the notes and the common stock is effective and expected to remain effective and available for use for the

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	30 days following the redemption date, unless registration is no longer required.
Optional Redemption by Us	At any time or from time to time on or after May 30, 2007 and before maturity, we may redeem some or all of the notes at a redemption price equal to 100.45% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
Repurchase at Holder’s Option upon a Change in Control	You may require us to repurchase your notes upon a change in control in cash, or, at our option, in common stock or a combination of cash and common stock, at 100% of the principal amount of the notes plus accrued and unpaid interest. If we pay the repurchase price in common stock, the common stock will be valued at 95% of the average closing sales price of the common stock on the Nasdaq National Market for the five consecutive trading days ending on the third trading day prior to the repurchase date.
Use of Proceeds	We will not receive any proceeds from the sale of the notes or the shares of common stock offered by this prospectus.

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RISK FACTORS

     In addition to the other information contained in this prospectus or the documents incorporated by reference in this prospectus, you should carefully consider the following risks in evaluating an investment in the notes and the common stock issuable upon conversion of the notes.

Risks Related to Connetics

Our operating results may fluctuate, and this fluctuation could cause financial results to be below expectations.

     Our operating results may fluctuate from period to period for a number of reasons, and even a relatively small revenue shortfall may cause a period’s results to be below our expectations or projections. A revenue shortfall could arise from any number of factors, some of which we cannot control. For example, we may face:

• lower than expected demand for our products,

• changes in the amounts we spend to develop and promote our products,

• changes in treatment practices of physicians that currently prescribe our products,

• changes in the reimbursement policies of health plans and other similar health insurers, including changes that affect newly developed or newly acquired products,

• forward-buying patterns by wholesalers that may result in significant quarterly swings in revenue reporting,

• increases in the cost of raw materials used to manufacture our products,

• increases in returns of our product, or rebates paid for our products,

• increased competition from new or existing products, or

• changes in our product pricing strategies.

If we do not obtain the capital necessary to fund our operations, we will be unable to develop or market our products.

     Product revenues from sales of our marketed products do not currently cover the full cost of developing products in our pipeline. We currently believe that our available cash resources will be sufficient to fund our operating and working capital requirements for at least the next 18 months. If in the future our product revenues do not continue to grow or we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development of our other products. Accordingly, we may need to raise additional funds through public or private financings, strategic relationships or other arrangements.

If we do not achieve and sustain profitability, stockholders may lose their investment.

     Except for fiscal year 2000, we have lost money every year since our inception. We had net losses of $27.3 million in 1999, $16.0 million in 2000 (after excluding a one-time gain of $43.0 million on sales of stock we held in InterMune, Inc. and the associated income tax), $16.7 million in 2001, $16.6 million in 2002 and $7.2 million for the six months ended June

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30, 2003 as compared to $8.5 million for the six months ended June 30, 2002. Our accumulated deficit was $133.3 million at June 30, 2003. We may incur additional losses in the future. If we do not eventually achieve and maintain profitability, our stock price may decline.

Our total revenues depends on receiving royalties and contract payments from third parties, and we cannot control the amount or timing of those revenues.

     We generate contract and royalty revenues by licensing our products to third parties for specific territories and indications. Our reliance on licensing arrangements with third parties carries several risks, including the possibilities that:

• we may be contractually bound to terms that, in the future, are not commercially favorable to us, and

• royalties generated from licensing arrangements may be insignificant or may fluctuate from period to period, and

• a product development contract may expire or a relationship may be terminated, and we will not be able to attract a satisfactory alternative corporate partner within a reasonable time.

     If any of these events occurs, we may not be able to successfully develop our products.

If we fail to protect our proprietary rights, competitors may be able to use our technologies, which would weaken our competitive position, reduce our revenues and increase our costs.

     We believe that the protection of our intellectual property, including patents and trademarks, is an important factor in product recognition, maintaining goodwill, and maintaining or increasing market share. If we do not adequately protect our rights in our trademarks from infringement, any goodwill which has been developed in those marks could be lost or impaired. If the marks we use are found to infringe upon the trademark of another company, we could be forced to stop using those marks, and as a result we could lose all the goodwill which has been developed in those marks and could be liable for damage caused by an infringement.

Our commercial success depends in part on our ability and the ability of our licensors to obtain and maintain patent protection on technologies, to preserve trade secrets, and to operate without infringing the proprietary rights of others.

     We are pursuing several U.S. and international patent applications, although we cannot be sure that any of these patents will ever be issued. We also have acquired rights to patents and patent applications from certain of our consultants and officers. These patents and patent applications may be subject to claims of rights by third parties. If there are conflicting claims to the same patent or patent application, we may not prevail and, even if we do have some rights in a patent or application, those rights may not be sufficient for the marketing and distribution of products covered by the patent or application.

     The patents and applications in which we have an interest may be challenged as to their validity or enforceability. Challenges may result in potentially significant harm to our business. The cost of responding to these challenges and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, could be substantial whether or not we are successful. Such litigation also could require a substantial

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commitment of management’s time. A judgment adverse to us in any patent interference, litigation or other proceeding arising in connection with these patent applications could materially harm our business.

     The ownership of a patent or an interest in a patent does not always provide significant protection. Others may independently develop similar technologies or design around the patented aspects of our technology. We only conduct patent searches to determine whether our products infringe upon any existing patents when we think such searches are appropriate. As a result, the products and technologies we currently market, and those we may market in the future, may infringe on patents and other rights owned by others. If we are unsuccessful in any challenge to the marketing and sale of our products or technologies, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease marketing the challenged products, or to modify our products to avoid infringing upon those rights. Under these circumstances, we may not be able to obtain a license to such intellectual property on favorable terms, if at all. We may not succeed in any attempt to redesign our products or processes to avoid infringement.

We rely on our employees and consultants to keep our trade secrets confidential.

     We rely on trade secrets and unpatented proprietary know-how and continuing technological innovation in developing and manufacturing our products. We require each of our employees, consultants and advisors to enter into confidentiality agreements prohibiting them from taking our proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances. The agreements also provide that all inventions conceived by an employee, consultant or advisor, to the extent appropriate for the services provided during the course of the relationship, shall be our exclusive property, other than inventions unrelated to us and developed entirely on the individual’s own time. Nevertheless, these agreements may not provide meaningful protection of our trade secrets and proprietary know-how if they are used or disclosed. Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. In addition, others may independently develop similar or equivalent trade secrets or know-how.

Our use of hazardous materials exposes us to the risk of environmental liabilities, and we may incur substantial additional costs to comply with environmental laws.

     Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. We are subject to laws and regulations governing the use, storage, handling and disposal of these materials and certain waste products. In the event of accidental contamination or injury from these materials, we could be liable for any damages that result and any liability could exceed our resources. We may also be required to incur significant costs to comply with environmental laws and regulations as our research activities increase.

Risks Related To Our Products

Future manufacturing difficulties could delay future revenues from product sales of OLUX and Luxíq.

     Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before

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they can be used in commercial manufacturing of our products. If DPT Laboratories, Ltd., AccraPac Group, Inc., or INyX Pharma Limited cannot provide us with our product requirements in a timely and cost-effective manner, or if the product they are able to supply cannot meet commercial requirements for shelf life, our sales of marketed products could be reduced and we could suffer delays in the progress of clinical trials for products under development. In addition, any commercial dispute with any of our suppliers could result in delays in the manufacture of product, and affect our ability to commercialize our products. We cannot be certain that manufacturing sources will continue to be available or that we can continue to out-source the manufacturing of our products on reasonable or acceptable terms. Any loss of a manufacturer or any difficulties that could arise in the manufacturing process could significantly affect our inventories and supply of products available for sale. If we are unable to supply sufficient amounts of our products on a timely basis, our market share could decrease and, correspondingly, our profitability could decrease.

If our contract manufacturers fail to comply with cGMP regulations, we may be unable to meet demand for our products and may lose potential revenue.

     All of our contractors must comply with the applicable FDA cGMP regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. If our contract manufacturers do not comply with the applicable cGMP regulations and other FDA regulatory requirements, our sales of marketed products could be reduced and we could suffer delays in the progress of clinical trials for products under development. We do not have control over our third-party manufacturers’ compliance with these regulations and standards. Our business interruption insurance may not completely mitigate the harm to our business from the interruption of the manufacturing of products caused by certain events, as the loss of a manufacturer could still have a negative effect on our sales, margins and market share, as well as our overall business and financial results.

If our supply of finished products is interrupted, our ability to maintain our inventory levels could suffer.

     We try to maintain inventory levels that are no greater than necessary to meet our current projections. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products. If we are unable to obtain adequate product supplies to satisfy our customers’ orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This in turn could cause a loss of our market share and negatively affect our revenues.

     Supply interruptions may occur and our inventory may not always be adequate. Numerous factors could cause interruptions in the supply of our finished products including shortages in raw material required by our manufacturers, changes in our sources for manufacturing, our failure to timely locate and obtain replacement manufacturers as needed and conditions affecting the cost and availability of raw materials.

We cannot sell our current products and product candidates if we do not obtain and maintain governmental approvals.

     Pharmaceutical companies are subject to heavy regulation by a number of national, state and local agencies. Of particular importance is the FDA in the United States. It has jurisdiction over all of our business and administers requirements covering testing, manufacture, safety,

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effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. Failure to comply with applicable regulatory requirements could, among other things, result in fines, suspensions of regulatory approvals of products, product recalls, delays in product distribution, marketing and sale, and civil or criminal sanctions.

     The process of obtaining and maintaining regulatory approvals for pharmaceutical products, and obtaining and maintaining regulatory approvals to market these products for new indications, is lengthy, expensive and uncertain. The manufacturing and marketing of drugs, including our products, are subject to continuing FDA and foreign regulatory review, and later discovery of previously unknown problems with a product, manufacturing process or facility may result in restrictions, including withdrawal of the product from the market. The FDA is permitted to revisit and change its prior determinations and it may change its position with regard to the safety or effectiveness of our products. Even if the FDA approves our products, the FDA is authorized to impose post-marketing requirements such as:

• testing and surveillance to monitor the product and its continued compliance with regulatory requirements,

• submitting products for inspection and, if any inspection reveals that the product is not in compliance, the prohibition of the sale of all products from the same lot,

• suspending manufacturing,

• recalling products, and

• withdrawing marketing approval.

     To market our products in countries outside of the United States, we and our partners must obtain approvals from foreign regulatory bodies. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval, and approval by the FDA does not ensure approval by the regulatory authorities of any other country.

Even before any formal regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our products if concerns about safety or effectiveness develop.

     In its regulation of advertising, the FDA from time to time issues correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices, and if we were to receive correspondence from the FDA alleging these practices we might be required to:

• incur substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements,

• change our methods of marketing and selling products,

• take FDA-mandated corrective action, which could include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion, and

• disrupt the distribution of products and stop sales until we are in compliance with the FDA’s position.

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     In recent years, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system. These proposals have included price or patient reimbursement constraints on medicines and restrictions on access to certain products. We cannot predict the outcome of such initiatives, and it is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us.

We may spend a significant amount of money to obtain FDA and other regulatory approvals, which may never be granted.

     Successful product development in our industry is highly uncertain, and the process of obtaining FDA and other regulatory approvals is lengthy and expensive. Very few research and development projects produce a commercial product. Product candidates that appear promising in the early phases of development may fail to reach the market for a number of reasons, including that the product candidate did not demonstrate acceptable clinical trial results even though it demonstrated positive preclinical trial results, or that the product candidate was not effective in treating a specified condition or illness.

     To obtain approval, we must show in preclinical and clinical trials that our products are safe and effective. The FDA approval processes require substantial time and effort, the FDA continues to modify product development guidelines, and we may not be able to obtain FDA approval to conduct clinical trials or to manufacture and market any of the products we develop, acquire or license. Clinical trial data can be the subject of differing interpretation, and the FDA has substantial discretion in the approval process. The FDA may not interpret our clinical data the way we do. The FDA may also require additional clinical data to support approval. The FDA can take between one and two years to review new drug applications, or longer if significant questions arise during the review process. Moreover, the costs to obtain approvals could be considerable and the failure to obtain or delays in obtaining an approval could have a significant negative effect on our business.

If OLUX and Luxíq do not sustain market acceptance, our revenues will not be predictable and may not cover our operating expenses.

     Our future revenues will depend upon dermatologist and patient acceptance of OLUX and Luxíq. Factors that could affect acceptance of OLUX and Luxíq include:

• availability of and satisfaction with existing alternative therapies,

• the effectiveness of our sales and marketing efforts,

• the cost of the product as compared with alternative therapies, and

• undesirable and unforeseeable side effects.

We cannot predict the potential long-term patient acceptance of, or the effects of competition and managed health care on, sales of either product.

We rely on third parties to conduct clinical trials for our products, and those third parties may not perform satisfactorily.

     We do not have the ability to independently conduct clinical studies, and we rely on third parties to perform this function. If these third parties do not perform satisfactorily, we may not be able to locate acceptable replacements or enter into favorable agreements with them, if at

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all. If we are unable to rely on clinical data collected by others, we could be required to repeat, extend the duration of, or increase the size of, clinical trials, which could significantly delay commercialization and require significantly greater expenditures.

If we are unable to develop new products, our expenses may continue to exceed our revenues indefinitely, without any return on the investment.

     We currently have a variety of new products in various stages of research and development and are working on possible improvements, extensions and reformulations of some existing products. These research and development activities, as well as the clinical testing and regulatory approval process, will require significant commitments of personnel and financial resources. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue generation from those products.

     We re-evaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures. On the basis of these re-evaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology. Products we are researching or developing may never be successfully released to the market, regardless of whether they are ever released to the market, the expense of such processes will have already been incurred.

If we do not successfully integrate new products into our business, we may not be able to sustain revenue growth and we may not be able to compete effectively.

     When we acquire or develop new products and product lines, we must be able to integrate those products and product lines into our systems for marketing, sales and distribution. If these products or product lines are not integrated successfully, the potential for growth is limited. The new products we acquire or develop could have channels of distribution, competition, price limitations or marketing acceptance different from our current products. As a result, we do not know whether we will be able to compete effectively and obtain market acceptance in any new product categories. A new product may require us to significantly increase our sales force and incur additional marketing, distribution and other operational expenses. These additional expenses could negatively affect our gross margins and operating results. In addition, many of these expenses could be incurred prior to the actual distribution of new products. Because of this timing, if the new products are not accepted by the market, or if they are not competitive with similar products distributed by others, the ultimate success of the acquisition or development could be substantially diminished.

We rely on the services of a single company to distribute our products to our customers.

     All of our product distribution activities are handled by Cardinal Health Specialty Pharmaceutical Services, or SPS. SPS stores and distributes our products from a warehouse in Tennessee. Any delay or interruption in the process or in payment could result in a delay delivering product to our customers, which could have a material effect on our business.

Our revenues depend on payment and reimbursement from third party payors, and if they reduce or refuse payment or reimbursement, the use and sales of our products will suffer, we may not increase our market share, and our revenues and profitability will suffer.

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     Our products’ commercial success is dependent, in part, on whether third-party reimbursement is available for the use of our products by hospitals, clinics, doctors and patients. Third-party payors include state and federal governments, under programs such as Medicare and Medicaid, managed care organizations, private insurance plans and health maintenance organizations. Over 70% of the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by managed care organizations, it is important to our business that we market our products to them and to the pharmacy benefit managers that serve many of these organizations. If only a portion of the cost of our prescription products is paid for or reimbursed our products could be less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generics are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. If a product is excluded from a formulary, its usage may be sharply reduced in the managed care organization patient population. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be negatively affected, as could our overall business and financial condition.

     To the extent that our products are purchased by patients through a managed care group with which we have a contract, our average selling price is lower than it would be for a non-contracted managed care group. We take reserves for the estimated amounts of rebates we will pay to managed care organizations each quarter. Any increase in returns and any increased usage of our products through Medicaid or managed care programs will affect the amount of rebates that we owe.

Risks Related To Our Industry

We face intense competition, which may limit our commercial opportunities and our ability to become profitable.

     The specialty pharmaceutical industry is highly competitive. Competition in our industry occurs on a variety of fronts, including developing and bringing new products to market before others, developing new technologies to improve existing products, developing new products to provide the same benefits as existing products at less cost and developing new products to provide benefits superior to those of existing products.

     Most of our competitors are large, well-established companies in the fields of pharmaceuticals and health care. Many of these companies have substantially greater financial, technical and human resources than we have to devote to marketing, sales, research and development and acquisitions. Some of these competitors have more collective experience than we do in undertaking preclinical testing and human clinical trials of new pharmaceutical products and obtaining regulatory approvals for therapeutic products. As a result, they have a greater ability to undertake more extensive research and development, marketing and pricing policy programs. Our competitors may develop new or improved products to treat the same

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conditions as our products treat or make technological advances reducing their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment. Our commercial opportunities will be reduced or eliminated if our competitors develop and market products that are more effective, have fewer or less severe adverse side effects or are less expensive than our products. These competitors also may develop products that make our current or future products obsolete. Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins.

     Luxíq and OLUX compete with generic pharmaceuticals, which claim to offer equivalent benefit at a lower cost. In some cases, insurers and other health care payment organizations encourage the use of these less expensive generic brands through their prescription benefits coverage and reimbursement policies. These organizations may make the generic alternative more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic product to the patient is less than the net cost of our prescription brand product. Aggressive pricing policies by our generic product competitors and the prescription benefits policies of insurers could cause us to lose market share or force us to reduce our margins in response.

The growth of managed care organizations and other third-party reimbursement policies may have an adverse effect on our pricing policies and our margins.

     Managed care initiatives to control costs have influenced primary-care physicians to refer fewer patients to specialists such as dermatologists. Further reductions in these referrals could have a material adverse effect on the size of our potential market as well as our business, financial condition and results of operation.

     Furthermore, federal and state regulations govern or influence the reimbursement to health care providers of fees in connection with medical treatment of certain patients. In the U.S., there have been, and we expect there will continue to be, a number of state and federal proposals that could limit the amount that state or federal governments will pay to reimburse the cost of drugs. Continued significant changes in the health care system could have a material adverse effect on our business. In addition, we believe the increasing emphasis on managed care in the U.S. will continue to put pressure on the price and usage of our products, which may in turn adversely impact product sales. Further, when a new therapeutic product is approved, the availability of governmental and/or private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict the availability or amount of reimbursement for our products or product candidates, and current reimbursement policies for existing products may change at any time. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues to decline.

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

     Our industry faces an inherent risk of product liability claims from allegations that our products resulted in adverse effects to the patient or others. These risks exist even with respect to those products that are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Our insurance may not provide adequate coverage against potential product liability claims or losses. We also cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all. Even if we

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are ultimately successful in product liability litigation, the litigation would consume substantial amounts of our financial and managerial resources, and might create adverse publicity, all of which would impair our ability to generate sales. If we were found liable for any product liability claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could severely damage our business, financial condition and profitability.

Risks Related to Our Stock

Our stock price is volatile and the value of your investment could decline in value.

     The market prices for securities of specialty pharmaceutical companies like Connetics have been and are likely to continue to be highly volatile. As a result, investors in these companies often buy at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the holdings of these investors. From the beginning of fiscal year 2002 to August 22, 2003, the price of our common stock has ranged from a low of $8.75 per share to a high of $18.30 per share. Such volatility could result in securities class action litigation. Any litigation would likely result in substantial costs, and divert our management’s attention and resources.

Our charter documents and Delaware law contain provisions that could delay or prevent a change in control, even if the change in control would be beneficial to our stockholders.

     Our certificate of incorporation authorizes our board of directors to issue undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of the preferred stock without further vote or action by our stockholders. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock. We also have a stockholder rights plan, which entitles existing stockholders to rights, including the right to purchase shares of preferred stock, in the event of an acquisition of 15% or more of our outstanding common stock, or an unsolicited tender offer for such shares. We have also entered into change in control agreements with our directors, officers, and key employees. These change in control agreements provide for severance payments to be made in the event of a change in control of Connetics. Provisions of Delaware law, our rights plan, our charter documents, and other arrangements, including a provision eliminating the ability of stockholders to take actions by written consent, could delay or make difficult the removal of our current management or a merger, tender offer or proxy contest involving us. Further, our stock option and purchase plans generally provide that such plans will be assumed, or equivalent option of a successor corporation will be substituted or, alternatively, at the discretion of the board of directors, some or all of the option stock may be exercised, including non-vested shares, or vesting of shares issued pursuant to stock grants may be accelerated, upon a change of control or similar event.

Risks Related to the Offering

Our indebtedness and debt service obligations may adversely affect our cash flow.

     Our ability to make payments on and to refinance our debt, including the notes offered by this prospectus, will depend on our ability to generate sufficient cash. During each of the last five years and the six months ended June 30, 2003, our operating cash flows were insufficient to cover our fixed charges. Our ability to generate sufficient cash flow will depend on increasing sales of our products, collection of receivables and the results of our research and development

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efforts and other factors, including general economic, financial, competitive, legislative and regulatory conditions, some of which are beyond our control.

     If we incur new indebtedness, the related risks that we now face could intensify. Our ability to make required payments on the notes and to satisfy any other debt obligations will depend upon our future operating performance and our ability to obtain additional debt or equity financing.

The notes are unsecured, and future indebtedness could effectively rank senior to the notes.

     The notes are unsecured and rank equal in right of payment with our existing and future unsecured and unsubordinated indebtedness. The notes are effectively subordinated to any secured debt to the extent of the value of the assets that secure the indebtedness. The notes are also “structurally subordinated” to all indebtedness and other liabilities, including trade payables and lease obligations, of our existing and future subsidiaries. In the event of our bankruptcy, liquidation or reorganization or if the notes are accelerated, payment on the notes could be less, ratably, than on any secured indebtedness. We may not have sufficient assets remaining to pay amounts due on any or all of the notes then outstanding.

     The indenture governing the notes does not prohibit or limit us from incurring additional indebtedness and other liabilities or from pledging assets to secure such indebtedness and liabilities. If we incur additional indebtedness and in particular if we grant a security interest to secure the indebtedness, it could adversely affect our ability to pay our obligations on the notes. We anticipate that from time to time we will incur additional indebtedness in the future.

The notes are not protected by restrictive covenants.

     The indenture governing the notes does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. The indenture contains no covenants or other provisions to afford protection to holders of the notes in the event of a fundamental change involving Connetics except to the extent described under “Description of the Notes - Repurchase at Option of Holders Upon a Change in Control.”

We may be required to repurchase the notes upon a repurchase event.

     You may require us to repurchase all or any portion of your notes upon a repurchase event. We may not have sufficient cash funds to repurchase the notes upon a repurchase event. We may elect, subject to certain conditions, to pay the repurchase price in common stock or a combination of cash and common stock. Although there are currently no restrictions on our ability to pay the repurchase price, future debt agreements may prohibit us from repaying the repurchase price in either cash or common stock. If we are prohibited from repurchasing the notes, we could seek consent from our lenders to repurchase the notes. If we are unable to obtain their consent, we could attempt to refinance the notes. If we were unable to obtain a consent or refinance, we would be prohibited from repurchasing the notes. If we were unable to repurchase the notes upon a repurchase event, it would result in an event of default under the indenture. An event of default under the indenture could result in a further event of default under our other then-existing debt.

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The trading price of our securities could be subject to significant fluctuations, which may adversely affect the price at which you can sell our common stock should you convert your notes into shares of common stock.

     The trading price of our common stock has been volatile, and the trading price for the notes and the common stock may be volatile in the future. Factors such as announcements of fluctuations in our or our competitors’ operating results, changes in our prospects and general market conditions for specialty pharmaceutical or biotechnology stocks could have a significant impact on the future trading prices of our common stock and the notes. In particular, the trading price of the common stock of many specialty pharmaceutical companies, including us, has experienced extreme price and volume fluctuations, and those fluctuations have at times been unrelated to the operating performance of the companies whose stocks were affected. Some of the factors that may cause volatility in the price of our securities include:

• clinical trial results and regulatory developments,

• quarterly variations in results,

• business and product market cycles,

• fluctuations in customer requirements,

• the availability and utilization of manufacturing capacity,

• the timing of new product introductions,

• the ability to develop and implement new technologies, and

• the timing and amounts of royalties paid to us by third parties.

     The price of our securities may also be affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets. While we cannot predict the individual effect that these factors may have on the price of our securities, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time. If any of these factors occur, it could negatively impact the trading prices of our common stock and the notes.

Because it is unlikely that an active trading market for the notes will develop, you many not be able to sell your notes. You should therefore be prepared to hold the notes until maturity unless you convert them into shares of our common stock.

     The notes constitute a new issue of securities for which there is no established trading market. Because the notes will not be listed on the Nasdaq or a national securities exchange, it is unlikely that an active trading market for the notes will develop. If an active trading market for the notes does not develop, or if one develops but is not maintained, holders of the notes may experience difficulty in reselling, or an inability to sell, the notes and the trading price of the notes could fall. If an active trading market were to develop, the notes could trade at prices that may be lower than the initial offering price of the notes. Whether or not the notes will trade at lower prices depends on many factors, including:

• prevailing interest rates and the markets for similar securities,

• general economic conditions, and

• our financial condition, historic financial performance and future prospects.

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If a trading market does not develop, you may be required to hold the notes to maturity unless you convert them into shares of common stock.

     Goldman Sachs advised us at the time of the initial offering that it intended to make a market in the notes. However, Goldman Sachs is not obligated to make a market in the notes and, to the extent it does make a market in the notes, it may discontinue market-making activity at any time without notice.

The market price of our common stock could be affected by the substantial number of shares that are eligible for future sale.

     As of August 8, 2003, we had 31,692,935 shares of common stock outstanding, excluding 5,995,292 shares issuable upon the exercise of options granted under our existing stock option plans and 77,927 shares issuable upon exercise of warrants. We cannot predict the effect, if any, that future sales of the notes or shares of common stock, including common stock issuable upon conversion of the notes, or the availability of the notes or shares of common stock for future sale, will have on the market price of common stock prevailing from time to time.

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RATIO OF EARNINGS TO FIXED CHARGES

     The following table sets forth the ratio of earnings to fixed charges for each of the last five fiscal years and the three and six month periods ended June 30, 2003, respectively.

	Three Months Ended		Six Months Ended
	June 30,		June 30,		Year Ended December 31,
	2003		2003		2002		2001		2000		1999		1998
Ratio of earnings to fixed charges(1)		—		—		—		—		56.64		—		—

(1) The ratio of earnings to fixed charges is computed by dividing the sum of income (loss) from continuing operations before provision for income taxes and cumulative effect of change in accounting principle plus fixed charges by fixed charges. Fixed charges consist of interest expense and that portion of rental payments under operating leases we believe to be representative of interest. Earnings were insufficient to cover fixed charges by $654,000 and $6.0 million for the three and six month periods ended June 30, 2003, respectively, and $16.4 million, $16.4 million, $27.3 million and $26.6 million for the fiscal years ended December 31, 2002, 2001, 1999 and 1998, respectively.

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FORWARD LOOKING STATEMENTS

     This prospectus includes and incorporates forward-looking statements. We based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure investors that our assumptions and expectations will prove to have been correct. Actual results could differ materially from our forward-looking statements. Important factors that could cause our actual results to differ from our expectations are disclosed under “Risk Factors” and elsewhere in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     This prospectus contains and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. We based these forward-looking statements on our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current events. They use words such as “anticipate,” “estimate,” “expect,” “will,” “may,” “intend,” “plan,” “believe” and similar expressions in connection with discussion of future operating or financial performance. These include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

     Forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in this prospectus — for example, governmental regulation and competition in our industry — will be important in determining future results. No forward-looking statement can be guaranteed, and actual results may vary materially from those anticipated in any forward-looking statement.

     Although we believe that the plans, intentions and expectations reflected in these forward-looking statements are reasonable, We may not achieve these plans, intentions or expectations. Forward-looking statements contained and incorporated into this prospectus include, but are not limited to, those relating to the commercialization of our currently marketed products, the progress of our product development programs, developments with respect to clinical trials and the regulatory approval process, developments related to acquisitions and development of drug candidates and developments relating to our sales and marketing capabilities. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained and incorporated in this prospectus. In particular, this prospectus sets forth important factors, under the heading “Risk Factors” and elsewhere, that could cause actual results to differ materially from our forward-looking statements. These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies, and other factors not currently known to us, may be significant, now or in the future, and the factors set forth in this prospectus may affect us to a greater extent than indicated. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus.

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Except as required by law, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

USE OF PROCEEDS

     We will not receive any proceeds from the sale by the selling securityholders of the notes or the shares of common stock offered by this prospectus.

WHERE YOU CAN FIND MORE INFORMATION

     We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document we file at the SEC’s public reference rooms at 450 Fifth Street, N.W., in Washington, D.C. Please call the SEC at 1-888-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s web site at www.sec.gov. You may also inspect copies of these materials at the National Association of Securities Dealer, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

     We incorporate by reference the information we file with the SEC, which means that we can disclose important information to you by referring you to another document we filed with the SEC. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any documents we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus but before the end of any offering made under this prospectus:

• Connetics’ Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on March 6, 2003, as amended by Form 10-K/A filed on April 1, 2003;

• Connetics’ Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2003 and June 30, 2003;

• Connetics’ Current Reports on Form 8-K, dated April 23, 2003, May 1, 2003, May 6, 2003, May 20, 2003, May 21, 2003, June 5, 2003, June 30, 2003, July 2, 2003, July 15, 2003 and August 18, 2003; and

• The description of our common stock contained in our Registration Statement on Form 8-A dated December 8, 1995, including any amendments or reports filed with the SEC for the purpose of updating such description; and

• The description of our Preferred Share Purchase Rights contained in our Registration Statement on Form 8-A, dated May 20, 1997 and filed with the SEC on May 23, 1997, as amended by Amendment No. 1 thereto on Form 8-A/A, dated November 27, 2001 and filed with the SEC on November 23,

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2001, including any amendments or reports filed with the SEC for the purpose of updating such description.

     You should read the information relating to us in this prospectus together with the information in the documents incorporated by reference.

     You should rely only upon the information provided in this document or incorporated in this document by reference. We have not authorized anyone to provide you with different information. You should not assume that the information in this document, including any information incorporated by reference, is accurate as of any date other than the date indicated on the front cover.

     We are also incorporating by reference any future documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this prospectus and prior to the termination of this offering. In no event, however, will any of the information that we disclose under Item 9 of any Current Report on Form 8-K that we may from time to time file with the SEC be incorporated by reference into, or otherwise included in, this prospectus.

     You may obtain a copy of any of the documents referred to above, other than exhibits, unless such exhibits are specifically incorporated by reference in such documents or this document, without charge upon written or oral request. Requests for such documents should be addressed in writing or by telephone to:

Connetics Corporation
Attention: Corporate Secretary
3290 West Bayshore Road
Palo Alto, California 94303
(650) 843-2800

     This prospectus includes reference to certain trademarks owned by other parties, including Nizoral^®, a registered trademark of Johnson & Johnson; and Velac^®, a registered trademark of Yamanouchi Europe B.V.

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DESCRIPTION OF THE NOTES

     We issued the notes under an indenture between us and J.P. Morgan Trust Company, National Association, as trustee. The following description of the terms of the notes and the indenture is a summary. It summarizes only those portions of the indenture we believe are most important to your decision to invest in the notes. There may be other provisions in the indenture that are also important to you. You should read the indenture for a full description of the terms of the notes. We will provide a copy, at no charge, if you contact us. As used in this section, the words “we,” “us,” “our” or “Connetics” refer to Connetics Corporation and its successors under the indenture and do not include any current or future subsidiary of Connetics Corporation.

General

     The notes are senior, unsecured obligations of Connetics. The notes are limited to $90,000,000 aggregate principal amount. We are required to repay the principal amount of the notes in full on May 30, 2008.

     The notes bear interest at the rate of 2.25% from May 28, 2003. Interest is payable semi-annually on May 30 and November 30 of each year, commencing on November 30, 2003. The interest payable for the period from the issue date to November 30, 2003 will be approximately $11.44 per $1,000 principal amount of notes.

     You may convert the notes into shares of our common stock initially at the conversion rate stated on the front cover of this prospectus at any time before the close of business on the maturity date, unless the notes have been previously redeemed or repurchased. Holders of notes called for redemption or submitted for repurchase will be entitled to convert the notes up to and including the business day prior to the date fixed for redemption or repurchase, as the case may be. The conversion rate may be adjusted as described below.

     Before May 30, 2005, the notes are not subject to redemption. On or after May 30, 2005 and before May 30, 2007, we may redeem the notes at our option, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date, if the closing price of our common stock has exceeded 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the redemption notice. In addition, we may redeem the notes at our option at any time on or after May 30, 2007, in whole or in part, at a redemption price equal to 100.45% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

     If we experience a change in control, you will have the right to require us to repurchase your notes as described below under “– Repurchase at Option of Holders Upon a Change in Control.” The notes rank equal in right of payment with any existing and future unsecured and unsubordinated indebtedness. The notes are subordinated to any existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and “structurally subordinated” to the indebtedness and other liabilities of our subsidiaries or any future subsidiaries, including trade payables and lease obligations in existence on or after the issue date. As “structurally subordinated,” our right to receive any assets of our subsidiaries upon their liquidation and reorganization, and your right to participate in those assets, will be effectively subordinated to claims of that subsidiary’s creditors, including trade creditors, except to the

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extent that we are recognized as a creditor of such subsidiary. If we are recognized as a creditor of that subsidiary, our claims would still be subordinate to any security interest in the assets of the subsidiary and any indebtedness of the subsidiary senior to us. In addition, our secured creditors will be entitled to receive payment on their claims by realizing on the collateral securing their claims prior to your right and that of our other senior unsecured creditors in respect of that collateral.

     The indenture does not limit our ability to incur debt, including secured debt, or our ability or the ability of our subsidiaries to incur any indebtedness.

Form, Denomination, Transfer, Exchange and Book-Entry Procedures

     We initially issued the notes in reliance on Rule 144A:

• in fully registered form;

• without interest coupons; and

• in denominations of $1,000 and greater multiples.

     The notes are evidenced by a global note, which was deposited with the trustee, as custodian for the Depository Trust Company, or DTC, and registered in the name of Cede & Co., or Cede, as nominee of DTC. Except as set forth below, record ownership of the global note may be transferred, in whole or in part, only to another nominee of DTC or to a successor of DTC or its nominee.

     The global note will not be registered in the name of any person, or exchanged for notes that are registered in the name of any person, other than DTC or its nominee, unless either of the following occurs:

• DTC notifies us that it is unwilling, unable or no longer qualified to continue acting as the depositary for the global note or DTC ceases to be a registered clearing agency or ceases doing business or announces an intention to cease doing business; or

• an event of default with respect to the notes represented by the global note has occurred and is continuing.

     In those circumstances, DTC will determine in whose names any securities issued in exchange for the global note will be registered.

     DTC or its nominee will be considered the sole owner and holder of the global note for all purposes, and as a result:

• you cannot receive notes registered in your name if they are represented by the global note;

• you cannot receive physical certificated notes in exchange for your beneficial interest in the global notes;

• you will not be considered to be the owner or holder of the global note or any note it represents for any purpose; and

• all payments on the global note will be made to DTC or its nominee.

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     The laws of some jurisdictions require that certain kinds of purchasers, such as insurance companies, can only own securities in definitive certificated form. These laws may limit your ability to transfer your beneficial interests in the global note to these types of purchasers.

     Only institutions, such as a securities broker or dealer, that have accounts with DTC or its nominee (called participants) and persons that may hold beneficial interests through participants can own a beneficial interest in the global note. The only place where the ownership of beneficial interests in the global note will appear and the only way the transfer of those interests can be made will be on the records kept by DTC (for their participants’ interests) and the records kept by those participants (for interests of persons held by participants on their behalf).

     Secondary trading in bonds and notes of corporate issuers is generally settled in clearinghouse (that is, next-day) funds. In contrast, beneficial interests in a global note usually trade in DTC’s same-day funds settlement system, and settle in immediately available funds. We make no representations as to the effect that settlement in immediately available funds will have on trading activity in those beneficial interests.

     We will make payments of interest on and principal of and the redemption or repurchase price of the global note, as well as any payment of liquidated damages, to Cede, the nominee for DTC, as the registered owner of the global note. We will make these payments by wire transfer of immediately available funds on each payment date.

     We have been informed that DTC’s practice is to credit participants’ accounts on the payment date with payments in amounts proportionate to their respective beneficial interests in the notes represented by the global note as shown on DTC’s records, unless DTC has reason to believe that it will not receive payment on that payment date. Participants will be responsible for payments to owners of beneficial interests in notes represented by the global note held through participants, as is now the case with securities held for the accounts of customers registered in street name.

     We will send any redemption notices to Cede. We understand that if less than all the notes are being redeemed, DTC’s practice is to determine by lot the amount of the holdings of each participant to be redeemed.

     We also understand that neither DTC nor Cede will consent or vote with respect to the notes. We have been advised that under its usual procedures, DTC will mail an omnibus proxy to us as soon as possible after the record date. The omnibus proxy assigns Cede’s consenting or voting rights to those participants to whose account the notes are credited on the record date identified in a listing attached to the omnibus proxy.

     Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having a beneficial interest in the principal amount represented by the global note to pledge the interest to persons or entities that do not participate in the DTC book-entry system, or otherwise take actions in respect of that interest, may be affected by the lack of a physical certificate evidencing its interest.

     DTC has advised us that it will take any action permitted to be taken by a holder of notes (including the presentation of notes for exchange) only at the direction of one or more participants to whose account with DTC interests in the global note are credited and only in respect of such portion of the principal amount of the notes represented by the global note as to which such participant or participants has or have given such direction.

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     DTC has also advised us as follows:

• DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a clearing corporation within the meaning of the Uniform Commercial Code, as amended, and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act;

• DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants;

• participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations;

• certain participants, or their representatives, together with other entities, own DTC; and

• indirect access to the DTC system is available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

     The policies and procedures of DTC, which may change periodically, will apply to payments, transfers, exchanges and other matters relating to beneficial interests in the global note. We and the trustee have no responsibility or liability for any aspect of DTC’s or any participants’ records relating to beneficial interests in the global note, including for payments made on the global note. Further, we and the trustee are not responsible for maintaining, supervising or reviewing any of those records.

Conversion Rights

     You have the option to convert any portion of the principal amount of any note that is an integral multiple of $1,000 into shares of our common stock at any time on or prior to the close of business on the maturity date, unless the notes have been previously redeemed or repurchased. The conversion rate will be equal to 46.705 shares of common stock per $1,000 principal amount of notes. The conversion rate is equivalent to a conversion price of $21.41 per share of common stock. Your right to convert a note called for redemption or delivered for repurchase will terminate at the close of business on the business day prior to the redemption date or repurchase date for that note, unless we default in making the payment due upon redemption or repurchase.

     You may convert all or part of any note by delivering the note to the corporate trust office of the trustee, J.P. Morgan Trust Company, National Association, accompanied by a duly signed and completed conversion notice, a copy of which may be obtained from the trustee. The conversion date will be the date on which the note and the duly signed and completed conversion notice are delivered.

     As promptly as practicable on or after the conversion date, we will issue and deliver to the trustee a certificate or certificates for the number of full shares of our common stock issuable upon conversion, together with payment in lieu of any fraction of a share. The trustee will then send the certificate(s) to the conversion agent for delivery to the holder of the note being converted. The shares of our common stock issuable upon conversion of the notes will be fully paid and nonassessable and will rank equally with the other shares of our common stock.

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     If you surrender a note for conversion on a date that is not an interest payment date, you will not be entitled to receive any interest for the period from the preceding interest payment date to the date of conversion, except as described below. However, if you are a holder of a note on a regular record date, including a note surrendered for conversion after the regular record date, you will receive the interest payable on such note on the next succeeding interest payment date. Accordingly, any note surrendered for conversion during the period from the close of business on a regular record date to the opening of business on the next succeeding interest payment date must be accompanied by payment of an amount equal to the interest payable on such interest payment date on the principal amount of notes being surrendered for conversion. However, you will not be required to make that payment if you are converting a note, or a portion of a note, that we have called for redemption, or that you are entitled to require us to repurchase from you, if your conversion right would terminate because of the redemption or repurchase between the regular record date and the close of business on the second business day following the next succeeding interest payment date.

     No other payment or adjustment for interest, or for any dividends in respect of our common stock, will be made upon conversion. Holders of our common stock issued upon conversion will not be entitled to receive any dividends payable to holders of our common stock as of any record time or date before the close of business on the conversion date. We will not issue fractional shares of common stock upon conversion. Instead, we will pay cash in lieu of fractional shares of common stock based on the market price of our common stock at the close of business on the conversion date. For a summary of the U.S. federal income tax considerations relating to conversion of a note, see “Certain United States Federal Income Tax Considerations – Conversion of Notes.”

     You will not be required to pay any taxes or duties relating to the issue or delivery of our common stock on conversion but you will be required to pay any tax or duty relating to any transfer involved in the issue or delivery of our common stock in a name other than yours. Certificates representing shares of our common stock will not be issued or delivered unless all taxes and duties, if any, payable by you have been paid.

     The conversion rate will be adjusted on the occurrence of, among other things:

• dividends and other distributions payable in our common stock on shares of our capital stock;

• the issuance to all holders of our common stock of rights, options or warrants entitling them to subscribe for or purchase our common stock at less than the then current market price of such common stock as of the record date for stockholders entitled to receive such rights, options or warrants; provided that the conversion rate will be readjusted to the extent that such rights, options or warrants are not exercised prior to their expiration;

• subdivisions, combinations and reclassifications of our common stock;

• distributions to all holders of our common stock of evidences of our indebtedness, shares of capital stock, cash or assets, not including:

- those dividends, rights, options, warrants and distributions referred to above;

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- dividends and distributions paid exclusively in cash other than those referred to in the next two succeeding bullet points; and

- distributions upon mergers or consolidations discussed below;

• distributions consisting exclusively of cash, excluding cash distributed upon a merger or consolidation discussed below, to all holders of our common stock in an aggregate amount that, combined together with:

- other all-cash distributions made within the preceding 365-day period in respect of which no adjustment has been made; and

- any cash and the fair market value of other consideration payable in connection with any tender offer by us or any of our subsidiaries for our common stock concluded within the preceding 365-day period in respect of which no adjustment has been made,

	exceeds 10% of our market capitalization, being the product of the current market price per share of our common stock on the record date for such distribution and the number of shares of common stock then outstanding; and
•	the successful completion of a tender offer made by us or any of our subsidiaries for our common stock which involves an aggregate consideration that, together with:

- any cash and the fair market value of other consideration payable in a tender offer by us or any of our subsidiaries for our common stock expiring within the 365-day period preceding the expiration of that tender offer in respect of which no adjustments have been made; and

- the aggregate amount of any cash distributions to all holders of our common stock within the 365-day period preceding the expiration of that tender offer in respect of which no adjustments have been made,

exceeds 10% of our market capitalization on the expiration of such tender offer.

     We have issued rights to all of our holders of common stock pursuant to our stockholder rights plan described under “Description of Capital Stock – Anti-Takeover Provisions.” If any holder converts notes before the rights trade separately from the common stock, the holder will be entitled to receive rights in addition to the common stock. Following the occurrence of a separation event, holders will only receive common stock upon a conversion of any notes without the right. Instead, upon the occurrence of the separation event, the conversion ratio will be adjusted. If such an adjustment is made and the rights are later redeemed, invalidated or terminated, then a reversing adjustment will be made.

     We reserve the right to effect such increases in the conversion rate in addition to those required by the foregoing provisions as we consider to be advisable in order to avoid or diminish any income tax to holders of our common stock resulting from certain dividends, distributions or issuances of rights or warrants. We will not be required to make any adjustment to the conversion rate until the cumulative adjustments amount to 1.0% or more of the conversion rate. We will compute all adjustments to the conversion rate and will give notice by mail to holders of the registered notes of any adjustments.

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     If we consolidate or merge with or into another entity or another entity is merged into us, or in case of any sale or transfer of all or substantially all of our assets, each note then outstanding will become convertible only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of common stock into which the notes were convertible immediately prior to the consolidation or merger or sale or transfer. The preceding sentence will not apply to a merger or sale of all or substantially all of our assets that does not result in any reclassification, conversion, exchange or cancellation of the common stock.

     We may increase the conversion rate for any period of at least 20 days if our board of directors determines that the increase would be in our best interest. The board of directors’ determination in this regard will be conclusive. We will give holders of notes at least 15 days’ notice of such an increase in the conversion rate. Any increase, however, will not be taken into account for purposes of determining whether the closing price of our common stock equals or exceeds the conversion price by 105% in connection with an event that otherwise would be a change in control as defined below.

     If at any time we make a distribution of property to our stockholders that would be taxable to such stockholders as a dividend for United States federal income tax purposes, such as distributions of evidences of indebtedness or assets by us, but generally not stock dividends on common stock or rights to subscribe for common stock, and, pursuant to the anti-dilution provisions of the indenture, the number of shares of common stock into which notes are convertible is increased, that increase may be deemed for United States federal income tax purposes to be the payment of a taxable dividend to holders of the notes. See “Certain United States Federal Income Tax Considerations.”

Provisional Redemption by Connetics

     We may redeem any portion of the notes at any time after May 30, 2005 but before May 30, 2007 upon at least 30 and not more than 60 days’ notice by mail to the holders of the notes, if (1) the closing price of our common stock on the Nasdaq National Market (or other primary exchange where our common stock is traded) has exceeded 140% of the conversion price for at least 20 trading days in any consecutive 30-day trading period ending on the trading day prior to the mailing of the notice of redemption and (2) the shelf registration statement covering resales of the notes and the common stock is effective and available for use and is expected to remain effective and available for use for the 30 days following the redemption date, unless registration is no longer required. The redemption price shall be equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest.

Optional Redemption by Connetics

     On or after May 30, 2007, we may redeem the notes, in whole or in part, at a redemption price equal to 100.45% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. If we elect to redeem all or part of the notes, we will give at least 30, but no more than 60, days’ notice to holders of the notes.

     No sinking fund is provided for the notes, which means that the indenture does not require us to redeem or retire the notes periodically.

     We or a third party may, to the extent permitted by applicable law, at any time purchase notes in the open market, by tender at any price or by private agreement. Any note that we or a

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third party purchase may, to the extent permitted by applicable law and subject to restrictions contained in the purchase agreement with the underwriters, be re-issued or resold or may, at our or such third party’s option, be surrendered to the trustee for cancellation. Any notes surrendered for cancellation may not be re-issued or resold and will be canceled promptly.

Payment and Conversion

     We will make all payments of principal and interest on the notes by dollar check drawn on an account maintained at a bank in The City of New York. If you hold registered notes with a face value greater than $2,000,000, at your request we will make payments of principal or interest to you by wire transfer to an account maintained by you at a bank in The City of New York.

     Payment of any interest on the notes will be made to the person in whose name the note, or any predecessor note, is registered at the close of business on the “regular record data,” which is defined as May 15 or November 15, whether or not a business day, immediately preceding the relevant interest payment date. If you hold registered notes with a face value in excess of $2,000,000 and you would like to receive payments by wire transfer, you will be required to provide the trustee with wire transfer instructions at least 15 days prior to the relevant payment date.

     Payments on any global note registered in the name of DTC or its nominee will be payable by the trustee to DTC or its nominee in its capacity as the registered holder under the indenture. Under the terms of the indenture, we and the trustee will treat the persons in whose names the notes, including any global note, are registered as the owners for the purpose of receiving payments and for all other purposes. Consequently, neither we, the trustee nor any of our agents or the trustee’s agents has or will have any responsibility or liability for:

• any aspect of DTC’s records or any participant’s or indirect participant’s records relating to or payments made on account of beneficial ownership interests in the global note, or for maintaining, supervising or reviewing any of DTC’s records or any participant’s or indirect participant’s records relating to the beneficial ownership interests in the global notes; or

• any other matter relating to the actions and practices of DTC or any of its participants or indirect participants.

     We are not required to make any payment on the notes due on any day which is not a business day until the next succeeding business day. The payment made on the next succeeding business day will be treated as though it were paid on the original due date and no interest will accrue on the payment for the additional period of time.

     Notes may be surrendered for conversion at the corporate trust office of the trustee, J.P. Morgan Trust Company, National Association. Notes surrendered for conversion must be accompanied by appropriate notices and any payments in respect of interest or taxes, as applicable, as described above under “– Conversion Rights.”

     We have initially appointed the trustee as paying agent and conversion agent. We may terminate the appointment of any paying agent or conversion agent and appoint additional or other paying agents and conversion agents. However, until the notes have been delivered to the trustee for cancellation, or monies sufficient to pay the principal of, premium, if any, and interest on the notes have been made available for payment and either paid or returned to us as provided

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in the indenture, we will maintain an office or agency in the Borough of Manhattan, New York for surrender of notes for conversion. Notice of any termination or appointment, and, notice of any change in the office through which any paying agent or conversion agent will act, will be given in accordance with “– Notices” below.

     All monies deposited with the trustee or any paying agent, or that we then hold, in trust for the payment of principal of, premium, if any, or interest on any notes which remain unclaimed at the end of two years after the payment has become due and payable will be repaid to us, and you will then look only to us for payment.

Repurchase at Option of Holders Upon A Change in Control

     If a “change in control” as defined below occurs, you have the right, at your option, to require us to repurchase all of your notes not previously called for redemption, or any portion of the principal amount thereof, that is equal to $1,000 or an integral multiple of $1,000. The price we are required to pay is 100% of the principal amount of the notes to be repurchased, together with accrued and unpaid interest to, but excluding, the repurchase date.

     At our option, instead of paying the repurchase price in cash, we may pay the repurchase price in common stock or a combination of cash and common stock valued at 95% of the average of the closing sales prices of common stock on the Nasdaq National Market for the five consecutive trading days ending on the third trading day prior to the repurchase date. We may only pay the repurchase price in common stock if we satisfy conditions provided in the indenture.

     Within 30 days after a change in control occurs, we are obligated to give each registered holder of notes notice of the change in control and of the repurchase right arising as a result of the change in control. We must also deliver a copy of this notice to the trustee. To exercise the repurchase right, a registered holder must deliver to the trustee on or before the 30th day after the date of our notice irrevocable written notice of such holder’s exercise of its repurchase right, together with the notes with respect to which the right is being exercised. We are required to repurchase the notes on the date that is 45 days after the date of our notice.

     A change in control will be deemed to have occurred at the time after the notes are originally issued that any of the following occurs:

(1)

any person acquires beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of our capital stock entitling the person to exercise 50% or more of the total voting power of all shares of our capital stock that is entitled to vote generally in elections of directors, other than an acquisition by us, any of our subsidiaries or any of our employee benefit plans; or

(2)

we merge or consolidate with or into any other person, or another person merges into us, or we convey, sell, transfer or lease all or substantially all of our assets to another person, other than any such transaction:

(a) that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of our capital stock; and pursuant to which the holders of 50% or more of the total voting power of all shares of our capital stock entitled to vote generally in elections of

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	directors immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving corporation immediately after such transaction; or
(b)	which is effected solely to change our jurisdiction of incorporation and results in a reclassification, conversion or exchange of outstanding shares of our common stock solely into shares of common stock of the surviving entity.

     However, a change in control will not be deemed to have occurred if:

• the closing price per share of our common stock for any five trading days within (1) the period of 10 consecutive trading days ending immediately after (a) the later of the change in control or (b) the public announcement of the change in control, in the case of a change in control relating to an acquisition of capital stock, or (2) the period of 10 consecutive trading days ending immediately before the change in control, in the case of a change in control relating to a merger, consolidation or asset sale, equals or exceeds 105% of the conversion price of the notes in effect on each of those five trading days; or

• all of the consideration, excluding cash payments for fractional shares of our common stock and cash payments made pursuant to dissenters’ appraisal rights, in a merger or consolidation otherwise constituting a change in control under the first and second bullet points in the preceding paragraph above consists of shares of common stock, depository receipts or other certificates representing common equity interests traded on a national securities exchange or quoted on the Nasdaq National Market, or will be so traded or quoted immediately following such merger or consolidation, and as a result of such merger or consolidation the notes become convertible solely into such common stock, depository receipts or other certificates representing common equity interests.

     For purposes of these provisions:

• the conversion price is equal to $1,000 divided by the conversion rate;

• whether a person is a “beneficial owner” will be determined in accordance with Rule 13d-3 under the Exchange Act; and

• a “person” includes any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Exchange Act.

     We may arrange for a third party to make an offer to repurchase the notes upon a change in control in the manner and otherwise in compliance with the requirements set forth in the indenture applicable to the offer to repurchase the notes validly tendered and not withdrawn under the terms of the offer to repurchase the notes.

     The rules and regulations promulgated under the Exchange Act require the dissemination of prescribed information to security holders in the event of an issuer tender offer and may apply in the event that the repurchase option becomes available to you. We will comply with these rules to the extent they apply at that time.

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     The definition of change in control includes a phrase relating to the conveyance, transfer, sale, lease or disposition of all or substantially all of our assets. There is no precise, established definition of the phrase “substantially all” under applicable law. Accordingly, whether you will be able to require us to repurchase your notes as a result of the conveyance, transfer, sale, lease or disposition of less than all of our assets is uncertain.

     The foregoing provisions would not necessarily provide you with protection if we are involved in a highly leveraged or other transaction that may adversely affect you.

     Although we have the right to repurchase the notes with our common stock, subject to certain conditions, we cannot assure you that we would have the financial resources, or would be able to arrange financing, to pay the repurchase price in cash for all the notes that might be delivered by holders of notes seeking to exercise the repurchase right. If we were to fail to repurchase the notes when required following a change in control, an event of default under the indenture would occur. Some of the events constituting a change in control could cause an event of default under the terms of other debt instruments that we may become subject to in the future.

Mergers and Sales of Assets by Connetics

     We may not consolidate with or merge into any other person or convey, transfer, sell or lease our properties and assets substantially as an entirety to any person, and we may not permit any entity to consolidate with or merge into us or convey, transfer, sell or lease such person’s properties and assets substantially as an entirety to us unless:

• the surviving entity formed by such consolidation or into or with which we are merged, or the surviving entity to which our properties and assets are so conveyed, transferred, sold or leased, is a corporation, limited liability company, partnership or trust organized and existing under the laws of the U.S., any state within the U.S. or the District of Columbia and, if we are not the surviving entity, the surviving entity executes and files with the trustee a supplemental indenture assuming the payment of the principal of, premium, if any, and interest on the notes and the performance of our other covenants under the indenture; or

• immediately after giving effect to the transaction, no event of default, and no event that, after notice or lapse of time or both, would become an event of default, will have occurred and be continuing.

Events of Default

     The following will be events of default under the indenture:

• we fail to pay the principal of or premium, if any, on any note when due;

• we fail to pay any interest, including any liquidated damages, on any note when due, which failure continues for 30 days;

• we fail to provide notice of a change in control;

• we fail to perform any other covenant in the indenture, which failure continues for 60 days after written notice to us by the trustee or the holders of at least 25% in aggregate principal amount of outstanding notes;

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• any indebtedness under any bonds, debentures, notes or other evidences of indebtedness for money borrowed, or any guarantee thereof, by us or any of our significant subsidiaries, in an aggregate principal amount in excess of $10 million is not paid when due either at its stated maturity or upon acceleration thereof, and such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a period of 30 days after notice as provided in the indenture; and

• certain events of bankruptcy, insolvency or reorganization involving us or any of our significant subsidiaries (as defined in the indenture).

     Subject to the provisions of the indenture relating to the duties of the trustee in case an event of default shall occur and be continuing, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request or direction of any holder, unless the holder has furnished reasonable indemnity to the trustee. Subject to providing indemnification to the trustee and other conditions provided for in the indenture, the holders of a majority in aggregate principal amount of the outstanding notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee.

     If an event of default arising from events of insolvency, bankruptcy or reorganization with respect to Connetics occurs, then the principal of, and accrued interest on, all the notes will automatically become immediately due and payable without any declaration or other act on the part of the holders of the notes or the trustee. If an event of default other than an event of default arising from events of insolvency, bankruptcy or reorganization with respect to Connetics occurs and is continuing, either the trustee or the holders of at least 25% in principal amount of the outstanding notes may accelerate the maturity of all notes. However, after such acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate principal amount of outstanding notes may, under certain circumstances, rescind and annul the acceleration if all events of default, other than the nonpayment of principal of the notes that have become due solely by such declaration of acceleration, have been cured or waived as provided in the indenture. For information as to waiver of defaults, see “– Meetings, Modification and Waiver” below.

     You will not have any right to institute any proceeding with respect to the indenture, or for any remedy under the indenture, unless:

• you give the trustee written notice of a continuing event of default;

• the holders of at least 25% in aggregate principal amount of the outstanding notes have made written request and offered reasonable indemnity to the trustee to institute proceedings;

• the trustee has not received from the holders of a majority in aggregate principal amount of the outstanding notes a direction inconsistent with the written request; and

• the trustee has failed to institute such proceeding within 60 days of the written request.

     However, these limitations do not apply to a suit instituted by you to enforce payment of the principal of, premium, if any, or interest, including liquidated damages, on your note on or

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after the respective due dates expressed in your note or your right to convert your note in accordance with the indenture.

     We will be required to furnish to the trustee annually a statement as to our performance of certain of our obligations under the indenture and as to any default in such performance.

Meetings, Modification and Waiver

     The indenture contains provisions for convening meetings of the holders of notes to consider matters affecting their interests.

     Certain limited modifications of the indenture may be made without the necessity of obtaining the consent of the holders of the notes.

     Other modifications and amendments of the indenture may be made, our compliance with certain restrictive provisions of the indenture may be waived, and any past defaults by us under the indenture (except a default in the payment of principal, premium, if any, or interest) may be waived, either:

• with the written consent of the holders of not less than a majority in aggregate principal amount of the notes at the time outstanding; or

• by the adoption of a resolution, at a meeting of holders of the notes at which a quorum is present, by the holders of at least a majority in aggregate principal amount of the notes at the time outstanding represented at such meeting.

     The quorum at any meeting called to adopt a resolution will be persons holding or representing a majority in aggregate principal amount of the notes at the time outstanding and, at any reconvened meeting adjourned for lack of a quorum, 25% of such aggregate principal amount.

     However, a modification or amendment requires the consent of the holder of each outstanding note affected if it would:

• change the stated maturity of the principal or interest of a note;

• reduce the principal amount of, or any premium or interest on, any note;

• reduce the amount payable upon a redemption or mandatory repurchase;

• modify the provisions with respect to the repurchase rights of holders of notes in a manner adverse to the holders;

• modify our right to redeem the notes in a manner adverse to the holders;

• change the place or currency of payment on a note;

• impair the right to institute suit for the enforcement of any payment on any note;

• adversely affect the right to convert the notes other than a modification or amendment required by the terms of the indenture;

• modify our obligation to deliver information required under Rule 144A to permit resales of the notes and common stock issued upon conversion of the notes if we cease to be subject to the reporting requirements under the Exchange Act;

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• reduce the above-stated percentage of the principal amount of the holders whose consent is needed to modify or amend the indenture;

• reduce the percentage of the principal amount of the holders whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults; or

• reduce the percentage required for the adoption of a resolution or the quorum required at any meeting of holders of notes at which a resolution is adopted.

Registration Rights

     On May 28, 2003, we entered into a registration rights agreement with the initial purchasers. In the registration rights agreement we agreed, for the benefit of the holders of the notes and the shares of common stock issuable upon conversion of the notes, commonly referred to as the registrable securities, that we will, at our expense:

• file with the SEC, within 90 days after the date the notes are originally issued, a shelf registration statement covering resales of the registrable securities;

• use our reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act within 180 days after the date the notes are originally issued; and

• use our commercially reasonable best efforts to keep effective the shelf registration statement until the earliest of (i) the sale of all outstanding registrable securities registered under the shelf registration statement; (ii) the expiration of the period referred to in Rule 144(k) of the Securities Act with respect to the notes held by non-affiliates of Connetics; and (iii) two years after the effective date of the shelf registration statement.

     We will be permitted to suspend the use of the prospectus that is part of the shelf registration statement in connection with the sale of registrable securities during prescribed periods of time for reasons relating to pending corporate developments, public filings with the SEC and other events. The periods during which we can suspend the use of the prospectus may not, however, exceed a total of 30 days in any 90-day period or a total of 90 days in any 12-month period. We will provide to each holder of registrable securities copies of the prospectus that is a part of the shelf registration statement, notify each holder when the shelf registration statement has been filed with the SEC and when such shelf registration statement has become effective and take certain other actions required to permit public resales of the registrable securities.

     We may, upon written notice to all holders of notes, postpone having the shelf registration statement declared effective for a reasonable period not to exceed 90 days if we possess material non-public information the disclosure of which would have a material adverse effect on us and our subsidiaries taken as a whole. Notwithstanding any such postponement, additional interest referred to as “liquidated damages,” will accrue on the notes if either of the following registration defaults occurs:

• on or prior to the 90th day following the date the notes were originally issued, a shelf registration statement has not been filed with the SEC; or

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• on or prior to the 180th day following the date the notes were originally issued, we failed to use our reasonable best efforts to cause the shelf registration statement is not declared effective.

     In that case, liquidated damages will accrue on any notes and shares issued on conversion of the notes, which are then restricted securities, from and including the day following the registration default to but excluding the day on which the registration default has been cured. Liquidated damages will be paid semi-annually in arrears, with the first semi-annual payment due on the first interest payment date following the date on which the liquidated damages began to accrue.

     The rates at which liquidated damages will accrue will be as follows:

• 0.25% of the principal amount per annum to and including the 90th day after the registration default; and

• 0.5% of the principal amount per annum from and after the 91st day after the registration default.

     In addition, liquidated damages will accrue on any notes and shares of common stock issued upon conversion of the notes if:

• the shelf registration statement ceases to be effective, or we otherwise prevent or restrict holders of registrable securities from making sales under the shelf registration statement, for more than 30 days, whether or not consecutive, during any 90-day period; or

• the shelf registration statement ceases to be effective, or we otherwise prevent or restrict holders of registrable securities from making sales under the shelf registration statement, for more than 90 days, whether or not consecutive, during any 12-month period.

     In either event, liquidated damages will accrue at a rate of 0.5% per annum from the 31st day of the 90-day period or the 91st day of the 12-month period until the earlier of the following:

• the time the shelf registration statement again becomes effective or the holders of registrable securities are again able to make sales under the shelf registration statement, depending on which event triggered the increase in interest rate; or

• the earliest of (i) the sale of all outstanding registrable securities registered under the shelf registration statement; (ii) the expiration of the period referred to in Rule 144(k) of the Securities Act with respect to the notes held by non-affiliates of Connetics; and (iii) two years after the effective date of the shelf registration statement.

     A holder who elects to sell any registrable securities pursuant to the shelf registration statement:

• will be required to be named as a selling security holder in the related prospectus;

• may be required to deliver a prospectus to purchasers;

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• may be subject to certain civil liability provisions under the Securities Act in connection with those sales; and

• will be bound by the provisions of the registration rights agreement that apply to a holder making such an election, including certain indemnification provisions.

     We will mail a notice and questionnaire to the holders of registrable securities not less than 30 calendar days prior to the effective time of the shelf registration statement.

     No holder of registrable securities will be entitled:

• to be named as a selling security holder in the shelf registration statement as of the date the shelf registration statement is declared effective; or

• to use the prospectus forming a part of the shelf registration statement for offers and resales of registrable securities at any time, unless such holder has returned a completed and signed notice and questionnaire to us by the deadline for response set forth in the notice and questionnaire.

     Holders of registrable securities will, however, have at least 28 calendar days from the date on which the notice and questionnaire is first mailed to return a completed and signed notice and questionnaire to us.

     Beneficial owners of registrable securities who have not returned a notice and questionnaire by the questionnaire deadline described above may receive another notice and questionnaire from us upon request. After we receive a completed and signed notice and questionnaire, we will include the registrable securities covered thereby in the shelf registration statement.

     We will agree in the registration rights agreement to use our reasonable best efforts to cause the shares of common stock issuable upon conversion of the notes to be quoted on the Nasdaq National Market. However, if the common stock is not then quoted on the Nasdaq National Market, we will use our reasonable best efforts to cause the shares of common stock issuable upon conversion of the notes to be quoted or listed on whichever market or exchange the common stock is then primarily traded, upon effectiveness of the shelf registration statement.

     This summary of certain provisions of the registration rights agreement is not complete and is subject to, and qualified in its entirety by reference to, all the provisions of the registration rights agreement, a copy of which will we will make available to beneficial owners of the notes upon request.

Notices

     Notice to holders of the registered notes will be given by mail to the addresses as they appear in the security register. Notices will be deemed to have been given on the date of such mailing.

     Notice of a redemption of notes will be given not less than 30 nor more than 60 days prior to the redemption date and will specify the redemption date. A notice of redemption of the notes will be irrevocable.

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Satisfaction and Discharge

     We may discharge our obligations under the indenture, except as to the right of conversion and certain other rights of holders specified in the indenture, while notes remain outstanding if (1) all outstanding notes have or will become due and payable at their scheduled maturity within one year or (2) all outstanding notes are scheduled for redemption within one year, and, in either case, we have deposited with the trustee an amount sufficient to pay and discharge all outstanding notes on the date of their scheduled maturity or the scheduled date of redemption.

Replacement of Notes

     We will replace any note that becomes mutilated, destroyed, stolen or lost at the expense of the holder upon delivery to the trustee of the mutilated notes or evidence of the loss, theft or destruction satisfactory to us and the trustee. In the case of a lost, stolen or destroyed note, we or the trustee may require the holder to deliver on indemnity satisfactory to the trustee and us at the expense of the holder of the note before a replacement note will be issued.

Payment of Stamp and Other Taxes

     We will pay all stamp and other duties, if any, that may be imposed by the U.S. or any political subdivision or taxing authority of or in the U.S. with respect to the issuance of the notes or of shares of common stock upon conversion of the notes. We will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority thereof or therein.

Governing Law

     The indenture, the notes, and the registration rights agreement will be governed by and construed in accordance with the laws of the State of New York, United States of America.

The Trustee

     If an event of default occurs and is continuing, the trustee will be required to use the degree of care of a prudent person in the conduct of his own affairs in the exercise of its powers. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any of the holders of notes, unless they have furnished to the trustee reasonable security or indemnity.

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

          This section describes the material U.S. federal income tax consequences relating to the purchase, ownership, and disposition of the notes and of common stock into which the notes may be converted. This description does not provide a complete analysis of all potential tax consequences. The information provided below is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, and Internal Revenue Service (“IRS”) published rulings and court decisions, all as currently in effect. These authorities may change, possibly on a retroactive basis, or the IRS might interpret the existing authorities differently. In either case, the tax consequences of purchasing, owning or disposing of notes or common stock could differ from those described below. We do not intend to obtain a ruling from the IRS with respect to the tax consequences of acquiring or holding the notes or common stock.

          This description is general in nature and does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor in light of the investor’s particular circumstances, or to certain types of investors subject to special treatment under U.S. federal income tax laws (such as banks or financial institutions, life insurance companies, tax-exempt organizations, dealers in securities or foreign currencies, traders in securities that elect to apply a mark-to-market method of accounting, persons holding notes or common stock as part of a position in a “straddle” or as part of a “hedging,” “conversion” or “integrated” transaction for U.S. federal income tax purposes, persons subject to the alternative minimum tax provisions of the Internal Revenue Code, and persons that have a “functional currency” other than the U.S. dollar). This description generally applies to purchasers of notes who hold the notes and common stock as capital assets. This description does not consider the effect of any foreign, state, local or other tax laws that may be applicable to particular investors.

          Investors considering the purchase of notes should consult their own tax advisors regarding the application of the U.S. federal income tax laws to their particular situations and the consequences of U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.

U.S. Holders

          As used in this section, the term “U.S. Holder” means a beneficial owner of a note or common stock that is (1) a citizen or resident of the U.S. or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes; (2) a corporation organized in or under the laws of the U.S. or any political subdivision thereof; (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust, (a) if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes, or (b) if (i) a court within the U.S. can exercise primary supervision over its administration and (ii) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. If you are not a U.S. Holder, this subsection does not apply to you and you should refer to “Non-U.S. Holders” below.

          If a partnership (including for this purpose any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of the notes or common stock into which the notes may be converted, the U.S. tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of the notes or common stock into which the notes may be converted that is a partnership and partners in such

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partnership should consult their individual tax advisors about the U.S. federal income tax consequences of holding and disposing of the notes and the common stock into which the notes may be converted.

Taxation of Interest

          U.S. Holders will be required to recognize as ordinary income any interest paid or accrued on the notes, in accordance with their regular method of accounting.

          Under the terms of the notes, if a holder converts a note into our common stock after the record date but prior to the interest payment date (and thus receives the interest payment payable on the interest payment date, notwithstanding that as a result of the conversion the holder is not entitled to retain such payment), the holder is obligated to pay us an amount equal to the interest payable on the converted principal amount. The tax consequences to the holder of the receipt and repayment of this amount is uncertain. We believe that neither the receipt nor the repayment should be taken into account in computing the holder’s taxable income. A taxing authority, however, may require the holder to recognize ordinary income in an amount equal to the interest payment received. In that case, we believe the holder should be allowed an offsetting deduction for the repayment. However, the holder may be required to capitalize (rather than deduct) the repaid interest payment as an addition to the adjusted tax basis in the common stock received in the conversion, or may otherwise be subject to certain limitations on the deductibility of the repaid interest payment.

Additional Payments

          If the amount or timing of any payments on a note is contingent, the note could be subject to special rules that apply to contingent debt instruments. These rules generally require a U.S. Holder to accrue interest income at a rate higher than the stated interest rate on the note and to treat as ordinary income (rather than capital gain) any gain recognized on a sale, exchange or retirement of the note before the resolution of the contingencies. If, upon a change in control, an investor requires us to repurchase some or all of the investor’s notes and we elect to pay the repurchase price in shares of our common stock, the value of the stock could be greater or less than the sum of the principal amount of the notes and accrued and unpaid interest. Additionally, U.S. Holders would be entitled to liquidated damages if the notes are not registered with the SEC within prescribed time periods. We do not believe that, because of these potential additional payments, the notes should be treated as contingent debt instruments. Therefore, for purposes of filing tax or information returns with the IRS, we will not treat the notes as contingent debt instruments. Unless otherwise noted, this discussion assumes that the notes are not subject to the contingent debt instrument rules.

Sale, Exchange or Redemption of the Notes

          A U.S. Holder generally will recognize capital gain or loss if the U.S. Holder disposes of a note in a sale, redemption or exchange other than a conversion of the note into common stock. The U.S. Holder’s gain or loss will equal the difference between the amount realized by the U.S. Holder and the U.S. Holder’s adjusted tax basis in the note. The U.S. Holder’s adjusted tax basis in the note will generally equal the amount the U.S. Holder paid for the note. The amount realized by the U.S. Holder will include the amount of any cash and the fair market value of any other property received for the note, except that the portion of any proceeds attributable to accrued interest will not be taken into account in computing the U.S.

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Holder’s capital gain or loss. Instead, that portion will be recognized as ordinary interest income to the extent that the U.S. Holder has not previously included the accrued interest in income. The gain or loss recognized by a U.S. Holder on a disposition of the note will be long-term capital gain or loss if the U.S. Holder held the note for more than one year. Long-term capital gains of non-corporate taxpayers are taxed at lower rates than those applicable to ordinary income. The deductibility of capital losses is subject to certain limitations.

          If, upon a change in control, a holder requires us to repurchase some or all of the holder’s notes and we elect to pay the repurchase price in shares of our common stock, the redemption would likely qualify as a recapitalization for U.S. federal income tax purposes if the notes qualify as “securities” for those purposes. It is unclear whether the notes qualify as “securities.” Please consult your own tax advisor regarding such determination. If the redemption qualifies as a recapitalization, a U.S. Holder would not recognize any income, gain or loss on the holder’s receipt of our common stock in exchange for notes (except to the extent the stock received is attributable to accrued interest). If the holder receives cash in lieu of fractional shares of stock, however, the holder would be treated as if he received the fractional share and then had the fractional share redeemed for cash. The holder would recognize gain or loss equal to the difference between the cash received and that portion of his basis in the stock attributable to the fractional share. The holder’s aggregate basis in the stock (including any fractional share for which cash is paid) would equal his adjusted basis in the note. The holder’s holding period for the stock would include the period during which he held the note. If the redemption does not qualify as a recapitalization, a U.S. Holder may recognize income, gain or loss when the holder receives our common stock in exchange for notes (except to the extent the stock received is attributable to accrued interest).

Conversion of Notes

          A U.S. Holder who converts his note into common stock generally will not recognize any income, gain or loss. The U.S. Holder will recognize gain, however, to the extent that the U.S. Holder receives cash in lieu of a fractional share. The U.S. Holder’s aggregate basis in the common stock (including any fractional share for which cash is paid) will equal his adjusted basis in the note, and the U.S. Holder’s holding period for the stock will include the period during which he held the note.

Market Discount

          A purchaser who purchases notes for less than their original issue price will be subject to the market discount rules. Subject to a de minimis exception, the market discount on a note generally will equal the amount, if any, by which the stated redemption price at maturity of the note immediately after its acquisition (other than at original issue) exceeds the U.S. Holder’s adjusted tax basis in the note. If applicable, these provisions generally require a U.S. Holder who acquires a note at a market discount to treat as ordinary income any gain recognized on the disposition of that note to the extent of the accrued market discount on that note at the time of disposition, unless the U.S. Holder elects to include market discount in income currently as it accrues with a corresponding increase in adjusted tax basis in the note. If you dispose of a note with market discount in certain otherwise non-taxable transactions, you must include accrued market discount as ordinary income as if you had sold the note at its then fair market value.

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          An election to include market discount in income currently, once made, applies to all market discount obligations acquired on or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS. In general, market discount will be treated as accruing on a straight-line basis over the remaining term of the note at the time of acquisition, or, at the election of the U.S. Holder, under a constant yield method. A U.S. Holder who acquires a note at a market discount and who does not elect to include accrued market discount in income currently may be required to defer the deduction of a portion of the interest on any indebtedness incurred or maintained to purchase or carry the note until the note is disposed of in a taxable transaction. If a note with accrued market discount is converted into common stock pursuant to the conversion feature, the amount of such accrued market discount not previously included in income generally will be taxable as ordinary income when the common stock is disposed of.

Amortizable Premium

          A U.S. Holder who purchases a note at a premium over its stated principal amount, plus accrued interest, generally may elect to amortize that premium (referred to as a Section 171 premium) with a corresponding decrease in adjusted tax basis from the purchase date to the note’s maturity date under a constant-yield method that reflects semiannual compounding based on the note’s payment period, but subject to special limitations if the note is subject to optional redemption at a premium. Section 171 premium will not include any premium attributable to a note’s conversion feature. The premium attributable to the conversion feature generally is the amount, if any, by which the note’s purchase price would exceed the note’s fair market value if there were no conversion feature. Amortized Section 171 premium is treated as an offset to interest income on a note and not as a separate deduction. Under Treasury Regulations, the amount of amortizable bond premium that a U.S. Holder may deduct in any accrual period is limited to the amount by which the holder’s total interest inclusions on the note in prior accrual periods exceeds the total amount treated by the holder as a bond premium deduction in prior accrual periods. If any of the excess bond premium is not deductible, that amount is carried forward to the next accrual period. The election to amortize premium on a constant-yield method, once made, applies to all debt obligations held or subsequently acquired by the electing U.S. Holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. If a U.S. holder does not elect to amortize Section 171 premium, the holder must include all amounts of taxable interest without reduction for such premium, and may receive a tax benefit from the premium only in computing such U.S. Holder’s gain or loss on disposition of the note.

Dividends

          If, after a U.S. Holder converts a note into common stock, we make a distribution in respect of that stock, the distribution will be treated as a dividend, taxable to the U.S. Holder as ordinary income, to the extent it is paid from our current or accumulated earnings and profits. If the distribution exceeds our current and accumulated profits, the excess will be treated first as a nontaxable return of capital reducing the U.S. Holder’s tax basis in the U.S. Holder’s stock. Any remaining excess will be treated as capital gain. We are required to provide stockholders who receive dividends with an information return on Form 1099-DIV that states the extent to which the dividend is paid from our current or accumulated earnings and profits and is thus taxable. If the U.S. Holder is a U.S. corporation, it generally would be able to claim a deduction equal to a portion of any dividends received.

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          The terms of the notes allow for changes in the conversion price of the notes in certain circumstances. A change in conversion price that allows U.S. Holders of notes to receive more shares of common stock on conversion may increase those noteholders’ proportionate interests in our earnings and profits or assets. In that case, those noteholders would be treated as though they received a dividend in the form of our stock. Such a constructive stock dividend could be taxable to those noteholders, although they would not actually receive any cash or other property. A taxable constructive stock dividend would result to U.S. Holders of notes, for example, if the conversion price were adjusted to compensate noteholders for distributions of cash or property to our stockholders. Not all changes in conversion price that allow noteholders to receive more stock on conversion, however, increase the noteholders’ proportionate interests in the company. For instance, a change in conversion price could simply prevent the dilution of the noteholders’ interests upon a stock split or other change in capital structure. Changes of this type, if made under a bona fide, reasonable adjustment formula, are not treated as constructive stock dividends. On the other hand, if an event occurs that dilutes the noteholders’ interests and the conversion price is not adjusted, the resulting increase in the proportionate interests of our stockholders could be treated as a taxable stock dividend to the stockholders. Any taxable constructive stock dividends resulting from a change to, or failure to change, the conversion price would be treated in the same manner as dividends paid in cash or other property. Such dividends would result in ordinary income to the recipient, to the extent of our current or accumulated earnings and profits, with any excess treated as a nontaxable return of capital or as capital gain.

Sale of Common Stock

          A U.S. Holder will generally recognize capital gain or loss on a sale or exchange of common stock. The U.S. Holder’s gain or loss will equal the difference between the amount realized by the U.S. Holder and the U.S. Holder’s adjusted tax basis in the stock. The amount realized by the U.S. Holder will include the amount of any cash and the fair market value of any other property received for the stock. Gain or loss recognized by a U.S. Holder on a sale or exchange of stock will be long-term capital gain or loss if the holder held the stock for more than one year. Long-term capital gains of non-corporate taxpayers are taxed at lower rates than those applicable to ordinary income. The deductibility of capital losses is subject to certain limitations.

Deductibility of Interest

          Under Section 163(l) of the Internal Revenue Code, no deduction is permitted for interest paid or accrued on any indebtedness of the corporation that is “payable in equity” of the issuer or a related party. Debt is treated as debt payable in equity of the issuer if the debt is part of an arrangement designed to result in payment of the instrument with or by reference to the equity. Such arrangements could include debt instruments that are convertible at the holder’s option if it is substantially certain that the option will be exercised. The legislative history indicates that it is not expected that this provision will affect debt with a conversion feature where the conversion price is significantly higher than the market price of the stock on the date of the debt issuance. Accordingly, we do not believe that our interest deduction with respect to interest payments on the notes will be adversely affected by these rules.

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Backup Withholding and Information Reporting

          The Internal Revenue Code and the Treasury Regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are interest, dividends, and proceeds paid by brokers to their customers. This reporting regime is reinforced by “backup withholding” rules. These rules require the payors to withhold tax from payments subject to information reporting if the payee fails to cooperate with the reporting regime by failing to provide the payee’s taxpayer identification number to the payor or by furnishing an incorrect identification number, or if the payee has been notified by the IRS that the payee has failed to report interest or dividends on the payee’s returns. The information reporting and backup withholding rules do not apply to payments to corporations, tax-exempt organizations and certain foreign persons, provided their exemptions from backup withholding are properly established.

          Payments of interest or dividends to individual U.S. Holders of notes or common stock generally will be subject to information reporting, and generally will be subject to backup withholding unless the U.S. Holder provides us or our paying agent with a correct taxpayer identification number.

          Payments made to U.S. Holders by a broker upon a sale of notes or common stock generally will be subject to information reporting and backup withholding. If, however, the sale is made through a foreign office of a U.S. broker, the sale will be subject to information reporting but not backup withholding. If the sale is made through a foreign office of a foreign broker, the sale generally will not be subject to either information reporting or backup withholding. This exception may not apply, however, if the foreign broker is owned or controlled by U.S. persons, or is engaged in a U.S. trade or business.

          Any amounts withheld from a payment to a U.S. Holder of notes or common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the U.S. Holder.

Non-U.S. Holders

          This subsection describes the tax consequences to a Non-U.S. Holder of notes or common stock. You are a Non-U.S. Holder if you are, for United States federal income tax purposes (1) a nonresident alien individual, (2) a foreign corporation, (3) a foreign partnership, or (4) an estate or trust that in either case is not subject to United States federal income tax on a net income basis on income or gain from a note. If you are a U.S. Holder, this subsection does not apply to you.

In general, subject to the discussion below concerning backup withholding:

     (a)   Payments of principal or interest on the notes by us or our paying agent to a beneficial owner of a note that is a Non-U.S. Holder will not be subject to U.S. federal income tax or U.S. withholding tax, provided that, in the case of interest, (i) such Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code, (ii) such Non-U.S. Holder is not a “controlled foreign corporation” within the meaning of Section 957(a) of the Code with respect to which we are a “related person” within the meaning of Section 864(d)(4) of the Code, and (iii) certain certification requirements (discussed below) are satisfied;

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     (b)   A Non-U.S. Holder of a note or common stock will not be subject to U.S. federal income tax on gains realized on the sale, exchange or other disposition of such note or common stock unless (i) such Non-U.S. Holder is an individual who holds the common stock as a capital asset and is present in the U.S. for 183 days or more in the taxable year of sale, exchange or other disposition, and certain conditions are met, (ii) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if certain U.S. income tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder, (iii) the Non-U.S. Holder is subject to Internal Revenue Code provisions applicable to certain U.S. expatriates, or (iv) in the case of common stock held by a person who holds more than 5% of such stock, we are or have been, at any time within the shorter of the five-year period preceding such sale or other disposition or the period such Non-U.S. Holder held the common stock, a U.S. real property holding corporation for U.S. federal income tax purposes. We do not believe that we are currently a U.S. real property holding corporation or that we will become one in the future; and

     (c)   Interest on the notes that is not excluded from U.S. federal income tax or U.S. withholding tax as described in (a) above and dividends on common stock after conversion generally will be subject to U.S. withholding tax at a 30% rate, except where an applicable U.S. income tax treaty provides for the reduction or elimination of such withholding tax.

          Even if a Non-U.S. Holder is eligible for a lower treaty rate, we and other payors will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividend payments to the Non-U.S. Holder, unless the Non-U.S. Holder has furnished to us or another payor:

• a valid IRS Form W-8BEN or an acceptable substitute form upon which the Non-U.S. Holder certifies, under penalties of perjury, its status as a non-U.S. person and its entitlement to the lower treaty rate with respect to such payments, or

• in the case of payments made outside the U.S. to an offshore account (generally, an account maintained by such Non-U.S. Holder at an office or branch of a bank or other financial institution at any location outside the United States), other documentary evidence establishing the Non-U.S. Holder’s entitlement to the lower treaty rate in accordance with U.S. Treasury regulations.

If a Non-U.S. Holder is eligible for a reduced rate of U.S. withholding tax under a tax treaty, such Non-U.S. Holder may obtain a refund of any amounts withheld in excess of that rate by filing a refund claim with the U.S. Internal Revenue Service.

          The above discussion may be applicable to liquidated damages, if any, received by Non-U.S. Holders. Please consult your own tax advisor regarding such determination.

          To satisfy the certification requirements referred to in (a) (iii) above, either (1) the beneficial owner of a note must certify, under penalties of perjury, to us or our paying agent, as the case may be, that such owner is a Non-U.S. Holder, or (2) a securities clearing organization, bank or other financial institution that holds customer securities in the ordinary

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course of its trade or business (each a “Financial Institution”) and holds the note on behalf of the beneficial owner must certify, under penalties of perjury, to us or our paying agent, as the case may be, that it has received such certificate from the beneficial owner and must furnish the payor with a copy of the certificate. This requirement will be fulfilled if the beneficial owner of a note certifies on IRS Form W-8BEN, under penalties of perjury, that it is a Non-U.S. Holder or any Financial Institution holding the note on behalf of the beneficial owner files a statement with the withholding agent to the effect that it has received such a statement from the beneficial owner (and furnishes the withholding agent with a copy of the beneficial owner’s statement).

          If a Non-U.S. Holder of a note or common stock is engaged in a trade or business in the U.S. and if interest on the note, dividends on the common stock, or gain realized on the sale, exchange or other disposition of the note or common stock is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S. Holder, although exempt from U.S. withholding tax (provided that the certification requirements discussed in the next sentence are met), will generally be subject to U.S. federal income tax on such interest, dividends or gain on a net income basis in the same manner as if it were a U.S. Holder. In lieu of the certificate described above, such a Non-U.S. Holder will be required, under currently effective Treasury Regulations, to provide us with a properly executed IRS Form W-8ECI in order to claim an exemption from U.S. withholding tax. In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable U.S. income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year.

United States Federal Estate Tax

          A note held by an individual who at the time of death is not a citizen or resident of the U.S. (as specially defined for U.S. federal estate tax purposes) will not be subject to U.S. federal estate tax if the individual did not actually or constructively own 10% or more of the total combined voting power of all classes of our stock and, at the time of the individual’s death, payments with respect to such note would not have been effectively connected with the conduct by such individual of a trade or business in the U.S. Common stock held by an individual who at the time of death is not a citizen or resident of the U.S. (as specially defined for U.S. federal estate tax purposes) will be included in such individual’s estate for U.S. federal estate tax purposes, unless an applicable U.S. estate tax treaty otherwise applies.

          Non-U.S. Holders should consult with their tax advisors regarding U.S. and foreign tax consequences with respect to the notes and common stock.

Backup Withholding and Information Reporting

          In the case of payments of interest on a note to a Non-U.S. Holder, backup withholding and information reporting will not apply to payments with respect to which either requisite certification has been received or an exemption has otherwise been established (provided that neither we nor a paying agent has actual knowledge or reason to know that the holder is a U.S. Holder or that the conditions of any other exemption are not in fact satisfied). However, we and other payors are required to report payments of interest on such Non-U.S. Holders’ notes on Internal Revenue Service Form 1042-S even if the payments are not otherwise subject to information reporting requirements.

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     Dividends on the common stock paid to Non-U.S. Holders that are subject to U.S. withholding tax, as described above, generally will be exempt from U.S. backup withholding tax but will be subject to certain information reporting requirements.

     Payments of the proceeds of the sale of a note or common stock to or through a foreign office of a broker that is,

(a)	a U.S. person or
(b)	a U.S. related person (either a “controlled foreign corporation” or a foreign person, 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment was effectively connected with the conduct of a trade or business within the U.S.), or
(c)	a foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership, or such foreign partnership is engaged in a U.S. trade or business,

     are subject to certain information reporting requirements, unless the payee establishes that it is an exempt recipient or such broker has evidence in its records that the payee is a Non-U.S. Holder and has no actual knowledge or reason to know that such evidence is false and certain other conditions are met. Such payments are not currently subject to backup withholding.

     Payments of the proceeds of a sale of a note or common stock to or through the U.S. office of a broker will be subject to information reporting and backup withholding unless the payee certifies under penalties of perjury as to his or her status as a Non-U.S. Holder and satisfies certain other qualifications (and no agent of the broker who is responsible for receiving or reviewing such statement has actual knowledge or reason to know that it is incorrect) and provides his or her name and address or the payee otherwise establishes an exemption.

     If a Non-U.S. Holder fails to establish an exemption and the broker does not possess adequate documentation of the holder’s status as a non-U.S. person, the payments may be subject to information reporting and backup withholding. However, backup withholding will not apply with respect to payments made to an offshore account maintained by a Non-U.S. Holder unless the broker has actual knowledge that the holder is a U.S. person.

     Payments of the proceeds of the sale of a note or common stock to or through a foreign office of a broker will not be subject to information reporting or backup withholding. However, a sale effected at a foreign office of a broker will be subject to information reporting and backup withholding if the proceeds are transferred to an account maintained by the Non-U.S. Holder in the United States, the payment of proceeds or the confirmation of the sale is mailed to the Non-U.S. Holder at a U.S. address, or the sale has some other specified connection with the U.S. as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to know that the holder is a U.S. person and the documentation requirements described above (relating to a sale of notes effected at a U.S. office of a broker) are met or the holder otherwise establishes an exemption.

     Any amounts withheld under the backup withholding rules from a payment to a holder of a note or common stock will be allowed as a refund or credit against such holder’s U.S.

51

federal income tax provided that the required information is furnished to the IRS in a timely manner.

     A holder of a note or common stock should consult with its tax advisor regarding the application of the backup withholding rules to its particular situation, the availability of an exemption therefrom and the procedure for obtaining such an exemption, if available.

     The preceding discussion of certain U.S. federal income tax consequences is for general information only. It is not tax advice. Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state, local, and foreign tax consequences of purchasing, holding, and disposing of our notes or common stock, including the consequences of any proposed change in applicable laws.

52

SELLING SECURITYHOLDERS

     We originally issued and sold the notes to the initial purchasers in transactions exempt from the registration requirements of the Securities Act, and the initial purchasers immediately resold the notes to persons they reasonably believed to be qualified institutional buyers. Selling securityholders, including their transferees, pledges or donees or their successors, may from time to time offer and sell pursuant to this prospectus any or all of the notes and common stock into which the notes are convertible.

     The following table sets forth information with respect to the selling securityholders and the securities beneficially owned by each selling securityholder that may be offered under this prospectus. This information is based on information provided by or on behalf of the selling securityholders. The selling securityholders may offer all, some or none of the notes or common stock into which the notes are convertible. Because the selling securityholders may offer all or some portion of the notes or the common stock, we cannot give you an estimate as to the amount of the notes or the common stock that will be held by the selling securityholders upon termination of any sales. The table below assumes that all selling securityholders will sell all of their notes or common stock, unless otherwise indicated. The selling securityholders identified below may have sold, transferred or otherwise disposed of all or a portion of their notes or common stock since the date on which they provided the information regarding their notes and common stock in transactions exempt from the registration requirements of the Securities Act. No selling securityholder may make any offer or sale under this prospectus unless that selling securityholder is listed in the table below.

Common

Principal

Stock

Percentage

Principal

Amount of

Beneficially

Ownership

Amount of

Notes

Owned

of Common

Notes

Percentage

Common

Beneficially

After

Stock

Beneficially

Ownership

Stock

Common

Owned After

Completion

Outstanding

Owned and

of Notes

Beneficially

Stock

Completion of

of the

after the

Name(1)

Offered

Outstanding

Owned(2)

Offered(2)

the Offering

Offering

Offering

AIG DKR Soundshore Opportunity Holding Fund Ltd.

$

2,000,000

2.2

%

93,410

93,410

$

0

0

*

%

AIG/National Union Fire Insurance

280,000

*

13,077

13,077

0

0

*

Akela Capital Master Fund, Ltd.

6,000,000

6.7

280,230

280,230

0

0

*

Attorney’s Title Insurance Fund

60,000

*

2,802

2,802

0

0

*

BNP Paribas Equity Strategies, SNC

932,000

*

57,078

(3)

43,529

0

13,549

*

Boilermakers Blacksmith Pension Trust

800,000

*

37,364

37,364

0

0

*

53

											Common
									Principal		Stock		Percentage
	Principal								Amount of		Beneficially		Ownership
	Amount of								Notes		Owned		of Common
	Notes		Percentage		Common				Beneficially		After		Stock
	Beneficially		Ownership		Stock		Common		Owned After		Completion		Outstanding
	Owned and		of Notes		Beneficially		Stock		Completion of		of the		after the
Name(1)	Offered		Outstanding		Owned(2)		Offered(2)		the Offering		Offering		Offering
CooperNeff Convertible Strategies (Cayman) Master Fund L.P.		780,000		*		36,429		36,429		0		0		*
DBAG - London		1,750,000		1.9		81,733		81,733		0		0		*
Delaware PERS		895,000		*		41,800		41,800		0		0		*
Froley Revy Investment Convertible Security Fund		95,000		*		4,436		4,436		0		0		*
ICI American Holdings Trust		195,000		*		9,107		9,107		0		0		*
John Deere Pension Trust		1,000,000		1.1		46,705		46,705		0		0		*
Morgan Stanley Convertible Securities Trust		2,500,000		2.8		116,762		116,762		0		0		*
Nuveen Preferred & Convertible Income Fund		3,950,000		4.4		184,484		184,484		0		0		*
Prudential Insurance Co. of America		55,000		*		2,568		2,568		0		0		*
RAM Trading, LTD		1,500,000		1.6		70,057		70,057		0		0		*
SG Cowen Securities – Convertible Arbitrage		3,000,000		3.3		140,115		140,115		0		0		*
Silverback Master LTD		6,000,000		6.7		280,230		280,230		0		0		*
Singlehedge US Convertible Arbitrage Fund		156,000		*		7,285		7,285		0		0		*
Southern Farm Bureau Life Insurance		475,000		*		22,184		22,184		0		0		*
St. Alban Partners LTD		1,000,000		1.1		46,705		46,705		0		0		*
State of Oregon/Equity		2,825,000		3.1		131,941		131,941		0		0		*
Sturgeon Limited		132,000		*		6,165		6,165		0		0		*
Syngenta AG		150,000		*		7,005		7,005		0		0		*
Wolverine Asset Management, LLC		4,433,000		4.9		207,043		207,043		0		0		*

54

Common

Principal

Stock

Percentage

Principal

Amount of

Beneficially

Ownership

Amount of

Notes

Owned

of Common

Notes

Percentage

Common

Beneficially

After

Stock

Beneficially

Ownership

Stock

Common

Owned After

Completion

Outstanding

Owned and

of Notes

Beneficially

Stock

Completion of

of the

after the

Name(1)

Offered

Outstanding

Owned(2)

Offered(2)

the Offering

Offering

Offering

Zazove Convertible Arbitrage Fund L.P.

500,000

*

23,352

23,352

0

0

*

Zazove Hedged Convertible Fund L.P.

1,000,000

1.1

46,705

46,705

0

0

*

Zazove Income Fund L.P.

1,000,000

1.1

46,705

46,705

0

0

*

Zeneca Holdings Trust

220,000

*

10,275

10,275

0

0

*

Zurich Institutional Benchmark Master Fund LTD

500,000

*

23,352

23,352

0

0

*

Unnamed holders of notes or any future transferees, pledges, donees or successors of or from any such unnamed holders(4)

51,817,000

57.6

2,420,112

2,420,112

0

0

*

* Less than one percent.

(1)	The selling securityholders and the securities held by them are set forth as of August 8, 2003. Beneficial ownership is determined accordingly to Rule 13d-3 of the Securities Exchange Act. Percentage ownership of common stock is calculated based on 31, 692,935 shares outstanding as of August 8, 2003.
(2)	Assumes conversion of the full amount of the notes held by such holder at the initial rate of 46.705 shares of common stock per each $1,000 principal amount of notes. The number of shares of common stock issuable upon conversion of the notes is subject to adjustment under certain circumstances. See “Description of the Notes – Conversion Rights.” Accordingly, the number of shares of common stock issuable upon conversion of the notes may increase or decrease from time to time. Under the terms of the indenture, fractional shares will not be issued upon conversion of the notes; cash will be paid in lieu of fractional shares, if any.
(3)	Includes 13,549 shares of common stock currently held by BNP Paribas Equity Strategies, SNC, or its affiliates, which are not being registered pursuant to the Registration Statement of which this prospectus is a part.
(4)	Assumes that the unnamed holders of notes or any future transferees, pledges, donees or successors of or from any such unnamed holder do not beneficially own any shares of common stock other than the shares of common stock issuable upon conversion of the notes at the initial conversion rate. No such unnamed holder may offer notes pursuant to this prospectus until such unnamed holder is included as a selling securityholder in a supplement to this prospectus in accordance with the registration rights agreement among Connetics and the initial purchasers.

     During the past three years, no selling securityholder has had a material relationship with us or our affiliates.

55

PLAN OF DISTRIBUTION

     The selling securityholders and their successors, including their transferees, pledgees or donees or their successors, may sell the notes and the common stock into which the notes are convertible directly to purchasers or through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, concessions or commissions from the selling securityholders or the purchasers. These discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may exceed those customary in the types of transactions involved.

     The notes and the common stock into which the notes are convertible may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market prices, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions which may involve crosses or block transactions:

• on any national securities exchange or U.S. inter-dealer system of a registered national securities association on which the notes or the common stock may be listed or quoted at the time of sale;

• in the over-the-counter market;

• in transactions other than on these exchanges or systems or in the over-the-counter market;

• through the writing of options, whether the options are listed on an options exchange or otherwise; or

• through the settlement of short sales.

     In connection with the sale of the notes and the common stock into which the notes are convertible or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the notes or the common stock into which the notes are convertible in the course of hedging the positions they assume. The selling securityholders may also sell short the notes or the common stock into which the notes are convertible and deliver these securities to close out their short positions, or loan or pledge the notes or the common stock into which the notes are convertible to broker-dealers that in turn may sell these securities.

     We will not receive any of the proceeds from this offering. The aggregate proceeds to the selling securityholders from the sale of the notes or common stock into which the notes are convertible offered by them will be the purchase price of the notes or common stock less discounts and commissions, if any. Each of the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of notes or common stock to be made directly or through agents.

     Our outstanding common stock is listed for trading on the Nasdaq National Market. We do not intend to list the notes for trading on any national securities exchange or on the Nasdaq National Market and can give no assurance about the development of any trading market for the notes.

56

          In order to comply with the securities laws of some states, if applicable, the notes and common stock into which the notes are convertible may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the notes and common stock into which the notes are convertible may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

          The selling securityholders and any underwriters, broker-dealers or agents that participate in the sale of the notes and common stock into which the notes are convertible may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling securityholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. The selling securityholders have acknowledged that they understand their obligations to comply with the provisions of the Exchange Act and the rules thereunder relating to stock manipulation, including Regulation M.

          In addition, any securities covered by this prospectus that qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling securityholder may transfer, devise or gift these securities by other means not described in this prospectus.

          To the extent required, the specific notes or common stock to be sold, the names of the selling securityholders, the respective purchase prices and public offering prices, the names of any agent, dealer or underwriter, and any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement of which this prospectus is a part.

          We entered into a registration rights agreement for the benefit of holders of the notes to register their notes and common stock under applicable federal and state securities laws under specific circumstances and at specific times. The registration rights agreement provides for cross-indemnification of the selling securityholders and us and their and our respective directors, officers and controlling persons against specific liabilities in connection with the offer and sale of the notes and the common stock, including liabilities under the Securities Act. We will pay all costs and expenses associated with the registration of the notes and the common stock. These expenses include the SEC’s filing fees and fees under state securities or “blue sky” laws. The selling securityholders will pay all underwriting discounts, commissions, transfer taxes and certain other expenses associated with any sale of the notes and the common stock by them.

57

LEGAL MATTERS

          Morrison & Foerster LLP will pass upon legal matters for us regarding the validity of the notes and the shares of common stock issuable upon conversion of the notes.

EXPERTS

          The consolidated financial statements of Connetics Corporation appearing in Connetics Corporation’s Annual Report (Form 10-K/A) for the year ended December 31, 2002, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

58

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

          The following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the notes and the common stock being registered. All amounts are estimates except the SEC registration fee and the Nasdaq National Market Fee. The selling stockholder is responsible for paying selling commissions, brokerage fees and any applicable transfer taxes and fees and disbursements of their counsel.

SEC Registration Fee		$	7,281
Nasdaq National Market Fee			42,035
Printing Expenses			10,000	*
Legal Fees and Expenses			50,000	*
Accounting Fees and Expenses			15,000	*
Miscellaneous			684	*
	Total	$	125,000	*

*Estimated.

Item 15. Indemnification of Directors and Officers.

          Section 145(a) of the Delaware General Corporation Law, or DGCL, provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, other than an action by or in the right of the corporation, by reason of the fact that the person is or was a director or officer of the corporation, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and if, with respect to any criminal action or proceeding, the person had no reasonable cause to believe the person’s conduct was unlawful.

          Section 145(b) of the DGCL provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director or officer of the corporation, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the

II-1

circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper.

          We have implemented such indemnification provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, which provide that officers and directors shall be entitled to be indemnified by Connetics to the fullest extent permitted by law. In addition, we have entered into Indemnification Agreements with our officers and directors.

          Section 145(g) of the DGCL provides, in general, that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation against any liability asserted against the person or incurred by the person in any such capacity, or arising out of the person’s status as such, whether or not the corporation would have the power to indemnify the person against such liability under Section 145. Pursuant to Section 145(g) of the DGCL, we maintain insurance on behalf of the directors and officers serving at our request.

          The foregoing summaries are not intended to be complete and are necessarily subject to the complete text of the DGCL, Connetics’ Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, and the arrangements referred to above, and are qualified in their entirety by reference thereto.

Item 16. Exhibits.

          See the Exhibit Index of this Registration Statement.

Item 17. Undertakings.

          (a) The undersigned Registrant hereby undertakes:

          (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

               (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

               (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

               (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

II-2

provided, however, that paragraphs (a)(1)(i) and (1)(ii) shall not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in any periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.

          (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

          (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

          (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

          (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 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 of 1933 and will be governed by the final adjudication of such issue.

II-3

SIGNATURES

          Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California, on August 26, 2003.

Connetics Corporation
By:	/s/ John L. Higgins
	John L. Higgins Chief Financial Officer, Executive Vice President, Finance and Corporate Development

POWER OF ATTORNEY

          Each person whose signature appears below hereby constitutes and appoints, jointly and severally, Thomas G. Wiggans, John L. Higgins and Katrina J. Church, and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement.

          Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date
	Principal Executive Officer:
/s/ Thomas G. Wiggans Thomas G. Wiggans	President, Chief Executive Officer and Director	August 26, 2003
	Principal Financial and Accounting Officer:
/s/ John L. Higgins John L. Higgins	Chief Financial Officer, Executive Vice President, Finance and Corporate Development	August 26, 2003
/s/ G. Kirk Raab G. Kirk Raab	Chairman of the Board of Directors	August 26, 2003
/s/ Alexander E. Barkas Alexander E. Barkas	Director	August 26, 2003

II-4

Signature	Title	Date
Eugene A. Bauer	Director	August     , 2003
/s/ R. Andrew Eckert R. Andrew Eckert	Director	August 26, 2003
Denise M. Gilbert	Director	August     , 2003
/s/ John C. Kane John C. Kane	Director	August 26, 2003
Thomas D. Kiley	Director	August     , 2003
/s/ Leon E. Panetta Leon E. Panetta	Director	August 26, 2003

II-5

EXHIBIT INDEX

Exhibit No.	Description
1.1	Purchase Agreement dated as of May 21, 2003 among the Registrant and Goldman, Sachs & Co., C.E. Unterberg Towbin (a California Limited Partnership), CIBC World Markets Corp., Thomas Weisel Partners LLC and U.S. Bankcorp Piper Jaffray Inc., as representatives of the several purchasers named in Schedule I thereto.
4.1	Form of Common Stock Certificate (previously filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998).
4.2	Amended and Restated Preferred Shares Rights Agreement, dated as of November 21, 2001, between the Company and EquiServe Trust Company, N.A., including the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A and B, respectively (previously filed as Exhibit 4.1 to the Company’s Form 8-A/A filed November 28, 2001).
4.3	Indenture dated as of May 28, 2003 between the Registrant and J.P. Morgan Trust Company, National Association, including therein the form of the notes (previously filed as Exhibit 4.1 to the Company’s Form 10-Q for the quarter ended June 30, 2003).
4.4	Registration Rights Agreement dated as of May 28, 2003 among the Registrant and Goldman, Sachs & Co., C.E. Unterberg Towbin (a California Limited Partnership), CIBC World Markets Corp., Thomas Weisel Partners LLC and U.S. Bankcorp Piper Jaffray Inc., as representatives of the several purchasers (previously filed as Exhibit 4.2 to the Company’s Form 10-Q for the quarter ended June 30, 2003).
5.1	Opinion of Morrison & Foerster LLP.
12.1	Statement re computation of ratios.
23.1	Consent of Ernst & Young LLP, Independent Auditors.
23.2	Consent of Morrison & Foerster LLP (included in Exhibit 5.1 of this Registration Statement).
24.1	Power of Attorney (see page II-4).
25.1	Statement of Eligibility and Qualification of Trustee on Form T-1.

E - 1 EX-1.1 3 f92728orexv1w1.txt EXHIBIT 1.1 EXHIBIT 1.1 Execution Copy CONNETICS CORPORATION 2.25% CONVERTIBLE SENIOR NOTES DUE MAY 30, 2008 ---------- PURCHASE AGREEMENT May 21, 2003 Goldman, Sachs & Co., C.E. Unterberg, Towbin (a California Limited Partnership), CIBC World Markets Corp., Thomas Weisel Partners LLC, U.S. Bancorp Piper Jaffray Inc., As representatives of the several Purchasers named in Schedule I hereto, c/o Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004. Ladies and Gentlemen: Connetics Corporation, a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the Purchasers named in Schedule I hereto (the "Purchasers") an aggregate of $80,000,000 principal amount of its 2.25% Convertible Senior Notes due May 30, 2008, convertible into shares of common stock, par value $0.001 per share ("Stock") of the Company (the "Firm Securities"), and, at the election of Goldman, Sachs & Co., to issue and sell to Goldman, Sachs & Co. up to an aggregate of $10,000,000 additional principal amount of such notes (the "Optional Securities") (the Firm Securities and the Optional Securities which Goldman, Sachs & Co. elects to purchase pursuant to Section 2 hereof are herein collectively referred to as the "Securities"). The Purchasers and other holders (including subsequent transferees) of Securities will be entitled to the benefits of the registration rights agreement, to be dated as of the First Time of Delivery (as defined in Section 4) (the "Registration Rights Agreement"), between the Company and the Purchaser, in the form attached hereto as Exhibit A. Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "Commission") under the circumstances set forth therein a shelf registration statement pursuant to Rule 415 under the United States Securities Act of 1933, as amended (the "Act"), relating to the resale of (i) Securities initially resold in registered form and (ii) the shares of Stock initially issuable upon conversion of the Securities by holders thereof, and to take the actions specified therein to cause such shelf registration statement to be declared effective. 1. The Company represents and warrants to, and agrees with, each of the Purchasers that: (a) An offering circular, dated May 21, 2003 (the "Offering Circular") has been prepared in connection with the offering of the Securities and shares of Stock issuable upon conversion thereof. Any reference to the Offering Circular shall be deemed to refer to and include the Company's most recent Annual Report on Form 10-K, as amended, and all subsequent documents filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or prior to the date of the Offering Circular and any reference to the Offering Circular, as amended or supplemented, as of any specified date, shall be deemed to include (i) any documents filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act after the date of the Offering Circular, and prior to such specified date, and (ii) any Additional Issuer Information (as defined in Section 5(f)) furnished by the Company prior to the completion of the distribution of the Securities; and all documents filed under the Exchange Act and so deemed to be included in the Offering Circular or any amendment or supplement thereto are hereinafter called the "Exchange Act Reports". The Exchange Act Reports, when they were or are filed with the Commission, conformed or will conform in all material respects to the applicable requirements of the Exchange Act and the applicable rules and regulations of the Commission thereunder. The Offering Circular and any amendments or supplements thereto and the Exchange Act Reports did not and will not, as of their respective dates, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by a Purchaser through Goldman, Sachs & Co. expressly for use therein; (b) Neither the Company nor any of its subsidiaries has sustained since the date of the latest audited financial statements included in the Offering Circular any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree that would be material to the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Offering Circular; and, since the respective dates as of which information is given in the Offering Circular, there has not been any change in the capital stock (other than grants or exercises of options pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement) or material change in long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Offering Circular; (c) The Company and its subsidiaries have good title to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Offering Circular or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and 2 any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases, except as the enforcement thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject to the applicability of general principles of equity and with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries; (d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Circular, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (e) The Company has an authorized capitalization as set forth in the Offering Circular, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable; the shares of Stock initially issuable upon conversion of the Securities have been duly authorized and reserved for issuance and, when issued and delivered in accordance with the provisions of the Securities and the Indenture referred to below, will be validly issued, fully paid and non-assessable and will conform to the description of the Stock contained in the Offering Circular; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; (f) The Securities have been duly authorized and, when issued and delivered pursuant to this Agreement and authenticated by the Trustee (as defined below) in accordance with the provisions of the Indenture (as defined below), will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the indenture to be dated as of May 28, 2003 (the "Indenture") between the Company and J. P. Morgan Trust Company, National Association, as Trustee (the "Trustee"), under which they are to be issued; and the Securities and the Indenture will conform in all material respects to the descriptions thereof in the Offering Circular and will be in substantially the form previously delivered to you; (g) None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Securities) will violate or result in a violation of Section 7 of the Exchange Act, or any regulation promulgated thereunder, including, without limitation, Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System; (h) Prior to the date hereof, neither the Company nor any of its affiliates has taken any action which is designed to or which has constituted or which might have been expected to 3 cause or result in stabilization or manipulation of the price of any security of the Company in connection with the offering of the Securities; (i) The issue and sale of the Securities and the compliance by the Company with all of the provisions of the Securities, the Indenture, the Registration Rights Agreement and this Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the transactions contemplated by this Agreement, the Indenture or the Registration Rights Agreement, except (i) as required pursuant to the Registration Rights Agreement, (ii) for the approval of the Stock issuable upon conversion of the Securities for quotation on the Nasdaq National Market, (iii) such consents and waivers with respect to registration rights of certain stockholders that have already been obtained and (iv) such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Purchasers; (j) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or in default in the performance or observance of any obligation, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, subject to such exceptions as are either (i) disclosed in the Offering Circular or (ii) would not be material to the Company and its subsidiaries taken as a whole; (k) The statements set forth in the Offering Circular under the captions "Description of the Notes" and "Description of Capital Stock", insofar as they purport to constitute summaries of the terms of the Securities and the Stock, and under the caption "Material United States Federal Income Tax Considerations", insofar as they purport to describe the provisions of the laws and regulations referred to therein, represent fair and accurate summaries in all material respects; (l) Other than as set forth in the Offering Circular, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole; and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; 4 (m) When the Securities are issued and delivered pursuant to this Agreement, the Securities will not be of the same class (within the meaning of Rule 144A(d)(3) under the Act) as securities which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; (n) The Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; (o) The Company is not, and after giving effect to the offering and sale of the Securities will not be, an "investment company", as such term is defined in the United States Investment Company Act of 1940, as amended (the "Investment Company Act"); (p) Neither the Company, nor any person acting on its behalf, has offered or sold the Securities by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Act; (q) Within the preceding six months, neither the Company nor any other person acting on behalf of the Company has offered or sold to any person any Securities, or any securities of the same or a similar class as the Securities, other than Securities offered or sold to the Purchasers hereunder. The Company will take reasonable precautions designed to insure that any offer or sale, direct or indirect, in the United States or to any U.S. person (as defined in Rule 902 under the Act) of any Securities or any substantially similar security issued by the Company, within six months subsequent to the date on which the distribution of the Securities has been completed (as notified to the Company by Goldman, Sachs & Co.), is made under restrictions and other circumstances reasonably designed not to affect the status of the offer and sale of the Securities in the United States and to U.S. persons contemplated by this Agreement as transactions exempt from the registration provisions of the Act; (r) It is not necessary in connection with the offer, sale and delivery of the Securities to the Purchasers, or in connection with the offer, sale and initial resale of the Securities by the Purchasers in a manner contemplated by this Agreement, to register the Securities under the Act or to qualify an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") (in giving this representation and warranty the Company is relying on the representations, warranties and agreements of the Purchasers in this Agreement); (s) The Securities have been, or prior to the First Time of Delivery (as defined in Section 4) will be, designated PORTAL eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc.; (t) Ernst & Young LLP, which has certified certain financial statements of the Company and its subsidiaries, is an independent public accountant as required by the Act and the rules and regulations of the Commission thereunder; (u) The Company has all requisite corporate power to enter into this Agreement, the Indenture and the Registration Rights Agreement. This Agreement has been and, as of each Time of Delivery, the Indenture and the Registration Rights Agreement will have been, duly authorized, executed and delivered by the Company and upon such execution by the Company (assuming the due authorization, execution and delivery of such agreements by the other parties thereto) this Agreement, the Indenture and the Registration Rights Agreement 5 will constitute valid and binding obligations of the Company enforceable against the Company in accordance with the terms hereof and/or thereof, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles, and except as the enforcement of indemnification and contribution provisions hereof and thereof may be limited by applicable law and public policy; (v) Except as disclosed in the Offering Circular, there are no persons with registration rights or other similar rights to have any securities of the Company (other than the Securities and the shares of Stock issuable upon conversion thereof) registered under the Act under any registration statement, which rights have not been satisfied or waived; (w) None of the holders of outstanding shares of capital stock of the Company and no other person has or will have any preemptive or other rights to purchase, subscribe for or otherwise acquire (i) the shares of Stock to be issued upon conversion of the Securities or any rights to such shares (other than those granted by the holders of the Securities) or (ii) as a result of or in connection with the transactions contemplated by this Agreement, the Indenture or the Registration Rights Agreement, any other capital stock of the Company or rights thereto; (x) The Company and its subsidiaries, taken as a whole, are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which they are engaged; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the general affairs, management, the current or future consolidated financial position, business prospects, stockholders' equity or results of operations of the Company and its subsidiaries; (y) The Company and each of its subsidiaries holds, and are operating in compliance in all material respects with, all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of their businesses (including those that may be required by the U.S. Food and Drug Administration and any federal, state or foreign agencies or bodies engaged in the regulation of pharmaceuticals or biohazardous substances) (collectively, "Government Licenses") and all such Government Licenses are valid and in full force and effect; the Company and each of its subsidiaries are in compliance in all material respects with all applicable federal, state, local and foreign laws, regulations, orders and decrees; neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any material Government Licenses; (z) The Company and each of its subsidiaries own or possess, or have no reason to believe they cannot acquire on reasonable terms, adequate licenses or other rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and know-how (collectively, the "Intellectual Property") necessary to conduct the businesses now operated by them as described in the Offering Circular, and except as stated in the Offering Circular, to the 6 Company's knowledge, no name which the Company or any of its subsidiaries uses and no other aspect of the business of the Company or any of its subsidiaries as conducted on the date hereof involves or gives rise to any infringement of, or license or similar fees for, any licenses, patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets, know-how or other similar rights of others, and neither the Company nor any of its subsidiaries has received any notice alleging any such infringement or fee. The Company has duly and properly filed or caused to be filed with the U.S. Patent and Trademark Office (the "PTO") and applicable foreign and international patent authorities all patent applications described in the Offering Circular (the "Patent Applications"); in connection with the filing of the Patent Applications, the Company conducted reasonable investigations of the published literature and patent references relating to the inventions claimed in such applications; to the best of the Company's knowledge, it has complied with the PTO's duty of candor and disclosure for the Patent Applications and has made no misrepresentation in the Patent Applications; the Company is not aware of any facts material to a determination of patentability regarding the Patent Applications not called to the attention of the PTO which would preclude the grant of a patent for the Patent Applications; and the Company has no knowledge of any facts which would preclude it from having clear title to the Patent Applications; (aa) Since the respective dates as of which information is given in the Offering Circular, the studies, tests and preclinical and clinical trials conducted by or on behalf of the Company that are described in the Offering Circular were and, if still pending, are being conducted in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional scientific standards; the descriptions of the results of such studies, tests and trials contained in the Offering Circular are accurate and complete in all material respects; the Company is not aware of any studies, tests or trials the results of which the Company believes reasonably call into question the clinical trial results described or referred to in the Offering Circular when viewed in the context in which such results are described and the clinical state of development; and the Company has not received any notices or correspondence from the U.S. Food and Drug Administration or any foreign, state or local governmental body exercising comparable authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of the Company; and (bb) The Company is eligible for use of Form S-3 promulgated under the Act. 2. Subject to the terms and conditions herein set forth, and upon the basis of the representations, warranties and agreements of the Purchasers contained herein, (a) the Company agrees to issue and sell to each of the Purchasers, and each of the Purchasers agrees, severally and not jointly, to purchase from the Company, at a purchase price of 96.5% of the principal amount thereof, the principal amount of Firm Securities set forth opposite the name of such Purchaser in Schedule I hereto and (b) in the event and to the extent that Goldman, Sachs & Co. shall exercise the election to purchase Optional Securities as provided below, the Company agrees to issue and sell to Goldman, Sachs & Co., and Goldman, Sachs & Co. agrees to purchase from the Company, at the same purchase price set forth in clause (a) of this Section 2, the aggregate principal amount of the Optional Securities as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractions of $1,000). 7 The Company hereby grants to Goldman, Sachs & Co. the right to purchase at its election up to $10,000,000 aggregate principal amount of Optional Securities, at the same purchase price set forth in clause (a) of the first paragraph of this Section 2. Any such election to purchase Optional Securities may be exercised by written notice from Goldman, Sachs & Co. to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate principal amount of Optional Securities to be purchased and the date on which such Optional Securities are to be delivered, as determined by Goldman, Sachs & Co. but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless Goldman, Sachs & Co. and the Company otherwise agree in writing, earlier than three or later than ten New York Business Days after the date of such notice. As used in this Agreement, "New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close. 3. Upon the authorization by you of the release of the Securities, the several Purchasers propose to offer the Securities for sale upon the terms and conditions set forth in this Agreement and the Offering Circular and each Purchaser hereby represents and warrants to, and agrees with the Company that: (a) It will offer and sell the Securities only to persons who it reasonably believes are "qualified institutional buyers" ("QIBs") within the meaning of Rule 144A under the Act in transactions meeting the requirements of Rule 144A; and (b) It will not offer or sell the Securities by any form of general solicitation or general advertising, including but not limited to the methods described in Rule 502(c) under the Act. In addition, each Purchaser represents and warrants that it is a qualified institutional buyer or an institutional accredited investor with such knowledge and experience in financial and business matters as are necessary to evaluate the merits and risks of an investment in the Securities, and has advised the Company that it proposes to offer the Securities for resale upon terms and conditions disclosed in this Agreement and in the Offering Circular; and it understands that, for the purposes of the opinions to be delivered pursuant to Section 7(b) hereof, counsel to the Company, will assume the accuracy and truth of the foregoing representations and compliance with the foregoing agreements by each Purchaser. 4. (a) The Securities to be purchased by each Purchaser hereunder will be represented by one or more definitive global Securities in book-entry form which will be deposited by or on behalf of the Company with The Depository Trust Company ("DTC") or its designated custodian. The Company will deliver the Securities to Goldman, Sachs & Co., for the account of each Purchaser, against payment by or on behalf of such Purchaser of the purchase price therefor by wire transfer to the Company in Federal (same day) funds, by causing DTC to credit the Securities to the account of Goldman, Sachs & Co. at DTC. The Company will cause the certificates representing the Securities to be made available to Goldman, Sachs & Co. for checking at least twenty-four hours prior to the Time of Delivery (as defined below) at the office of DTC or its designated custodian (the "Designated Office"). The time and date of such delivery and payment shall be, with respect to the Firm Securities, 6:30 a.m., California time, on May 28, 2003 or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing, and with respect to the Optional Securities, 6:30 a.m., California time, on the date specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of Goldman, Sachs & Co.'s election to purchase such 8 Optional Securities, or such other time and date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and date for delivery of the Firm Securities is herein called the "First Time of Delivery", such time and date for the delivery of the Optional Securities, if not the First Time of Delivery, is herein called the "Second Time of Delivery", and each such time and date for delivery is herein called a "Time of Delivery". (b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross-receipt for the Securities and any additional documents requested by the Purchasers pursuant to Section 7(j) hereof, will be delivered at such time and date at the offices of Sullivan & Cromwell LLP, 1870 Embarcadero Road, Palo Alto, California 94303 (the "Closing Location"), and the Securities will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 2:00 p.m., California time, on the New York Business Day next preceding each Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. 5. The Company agrees with each of the Purchasers: (a) To prepare the Offering Circular in a form approved by you; to make no amendment or any supplement to the Offering Circular which shall be disapproved by you promptly after reasonable notice thereof; and to furnish you with copies thereof; (b) Promptly from time to time to take such action as you may reasonably request to qualify the Securities and the shares of Stock issuable upon conversion of the Securities for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Securities, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) To furnish the Purchasers with copies of the Offering Circular in such quantities as you may reasonably request and each amendment or supplement thereto signed by an authorized officer of the Company with the independent accountants' report(s) in the Offering Circular, and any amendment or supplement containing amendments to the financial statements covered by such report(s), signed by the accountants, and additional written and electronic copies thereof in such quantities as you may from time to time reasonably request, and if, at any time prior to the expiration of nine months after the date of the Offering Circular, any event shall have occurred as a result of which the Offering Circular as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Offering Circular is delivered, not misleading, or, if for any other reason it shall be necessary or desirable during such same period to amend or supplement the Offering Circular, to notify you and upon your request to prepare and furnish without charge to each Purchaser and to any dealer in securities as many written and electronic copies as you may from time to time reasonably request of an amended Offering Circular or a supplement to the Offering Circular which will correct such statement or omission or effect such compliance; (d) During the period beginning from the date hereof and continuing until the date which is 90 days after the Time of Delivery, not to offer, sell, contract to sell or otherwise dispose of, except as 9 provided hereunder, any securities of the Company that are substantially similar to the Securities or the Stock, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than pursuant to employee stock plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; (e) Not to be or become, at any time prior to the expiration of two years after the last Time of Delivery, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act; (f) At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, for the benefit of holders from time to time of Securities, to furnish at its expense, upon request, to holders of Securities and prospective purchasers of the Securities designated by such holders, upon the request of such holders or such prospective purchasers, the information (the "Additional Issuer Information") satisfying the requirements of subsection (d)(4)(i) of Rule 144A under the Act; (g) [RESERVED]; (h) To furnish to its stockholders generally (including the holders of the Securities) as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the date of the Offering Circular), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; (i) During a period of three years from the date of the Offering Circular, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders of the Company, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any securities exchange on which the Securities or any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); (j) During the period of two years after the last Time of Delivery, the Company will not, and will not permit any of its "affiliates" (as defined in Rule 144 under the Securities Act) to, resell any of the Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them; (k) To use the net proceeds received by it from the sale of the Securities pursuant to this Agreement in the manner specified in the Offering Circular under the caption "Use of Proceeds"; (l) To reserve and keep available at all times, free of preemptive rights, shares of Stock for the purpose of enabling the Company to satisfy any obligations to issue shares of its Stock upon conversion of the Securities; and 10 (m) To use its commercially reasonable efforts to list for quotation, subject to notice of issuance, the shares of Stock issuable upon conversion of the Securities on the Nasdaq National Market. 6. The Company covenants and agrees with the several Purchasers that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the issuance of the Securities and the shares of Stock issuable upon conversion of the Securities and all other expenses in connection with the preparation and printing of the Offering Circular and any amendments and supplements thereto and the mailing and delivering of copies thereof to the Purchasers and dealers; (ii) the cost of printing or producing any Agreement among Purchasers, this Agreement, the Registration Rights Agreement, the Indenture, the Blue Sky and Legal Investment Memoranda, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iii) all expenses in connection with the qualification of the Securities and the shares of Stock issuable upon conversion of the Securities for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Purchasers in connection with such qualification and in connection with the Blue Sky and legal investment surveys, if any; (iv) any fees charged by securities rating services for rating the Securities; (v) the cost of preparing the Securities; (vi) the fees and expenses of the Trustee and any agent of the Trustee and the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities; (vii) any cost incurred in connection with the designation of the Securities for trading in PORTAL and the listing of the shares of Stock issuable upon conversion of the Securities; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Purchasers will pay all of their own costs and expenses, including the fees of their counsel, transfer taxes on resale of any of the Securities by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Purchasers hereunder shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed as of such Time of Delivery, and the following additional conditions: (a) Sullivan & Cromwell LLP, counsel for the Purchasers, shall have furnished to you such opinion or opinions, dated such Time of Delivery, with respect to such matters as you may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (b) Morrison & Foerster LLP, counsel for the Company, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has corporate power and authority to own its properties and conduct its business as described in the Offering Circular; (ii) The Company has an authorized capitalization as set forth in the Offering Circular, and all of the issued and outstanding shares of the Company's common stock, $0.001 par 11 value per share, have been duly authorized and validly issued and are fully paid and non-assessable; and the shares of Stock initially issuable upon conversion of the Securities have been duly authorized and reserved for issuance and, when issued and delivered upon conversion of the Securities and in accordance with the provisions of the Securities, the Indenture and this Agreement, will be validly issued, fully paid and non-assessable, and will conform in all material respects to the description of the Stock contained in the Offering Circular; (iii) The Company has been duly qualified to transact business as a foreign corporation and is in good standing under the laws of the States of California, Indiana, New Jersey, New York, Tennessee and Texas; (iv) To such counsel's knowledge, all of the issued shares of capital stock of each subsidiary of the Company are owned directly or indirectly by the Company free and clear of all liens, encumbrances, equities or claims; (v) To such counsel's knowledge and other than as set forth in the Offering Circular, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, and, to such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vi) This Agreement has been duly authorized, executed and delivered by the Company; (vii) The Securities have been duly authorized, executed and delivered by the Company and, assuming due authentication by the Trustee, when issued and paid for in accordance with this Agreement and the Indenture, will constitute legal, valid and binding obligations of the Company entitled to the benefits provided by the Indenture; and the Securities and the Indenture conform in all material respects to the descriptions thereof in the Offering Circular; (viii) The Indenture has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; (ix) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms; (x) The issue and sale of the Securities and the performance by the Company of its obligations under the provisions of the Securities, the Registration Rights Agreement, the Indenture and this Agreement and the consummation of the transactions herein and therein contemplated, will not result in a violation of the charter or bylaws of the Company, and to such counsel's knowledge, will not result in violation of any law, administrative regulation or 12 administrative or court decree applicable to the Company or any subsidiary of the Company or any of their properties, and, to such counsel's knowledge, will not constitute a material breach of the terms, conditions or provisions of or constitute a default under any contract, undertaking, indenture or other agreement by which the Company is now bound or to which it is now a party and which has been included as an exhibit to the Company's Exchange Act Reports filed with the Commission prior to the date hereof and incorporated by reference in the Offering Circular; (xi) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Indenture, except, such as may be required under the Act in connection with the shares of Stock issuable upon conversion of the Securities and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Purchasers; (xii) The statements set forth in the Offering Circular under the caption "Description of Capital Stock", insofar as they purport to constitute a summary of the terms of the Securities and the Stock, and under the caption "Material United States Federal Income Tax Considerations," insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate and correct in all material respects; (xiii) The Exchange Act Reports (other than the financial statements, supporting schedules, footnotes, and other financial and statistical information therein, as to which such counsel need express no opinion), when they were filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission thereunder; (xiv) No registration of the Securities under the Act, and no qualification of an indenture under the United States Trust Indenture Act of 1939 with respect thereto, is required for the offer, sale and initial resale of the Securities by the Purchasers in the manner contemplated by this Agreement and the Offering Circular; and (xv) The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Offering Circular under the caption "Use of Proceeds", will not be an "investment company," as such term is defined in the Investment Company Act of 1940. In addition, such counsel shall state that nothing has come to such counsel's attention that leads such counsel to believe that (1) the Offering Circular and any further amendments or supplements thereto made by the Company prior to the Time of Delivery contained as of the date of the Offering Circular or the Time of Delivery an untrue statement of a material fact or omitted or omits, as the case may be, to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (2) any of the Exchange Act Reports filed by the Company with the Commission prior to the date of the Offering Circular and incorporated by reference therein, when such Exchange Act Reports were so filed, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such 13 documents were so filed, not misleading (it being understood that such counsel need not make any comment with respect to the financial statements, supporting schedules, footnotes, and other financial and statistical information contained in the Offering Circular or any amendments or supplements thereto, or any of the documents included or deemed to be included therein). In addition, Katrina Church, General Counsel of the Company, shall have furnished to you a letter, dated such Time of Delivery, in form and substance satisfactory to you, to the same effect as clause (1) of the immediately preceding paragraph. (c) Townsend and Townsend and Crew LLP, intellectual property counsel for the Company, shall have furnished to you their written opinion, dated such Time of Delivery, in form and substance satisfactory to you, to the effect that: (i) To the best of knowledge of such counsel, the Company has valid, binding and enforceable licenses or other rights to use U.S. Patent No. 6,126,920 (the `920 patent) related to clobetasol propionate foam (OLUX(R)) and betamethasone valerate foam (Luriq(R)); (ii) Attached Schedule A to such opinion ("U.S. Patent Applications") lists pending U.S. patent applications which are being prosecuted by such counsel and which, to the best of their knowledge, are owned by the Company. Where the Company is listed as the owner, an assignment from the inventors to the Company has been recorded or is being recorded in the United States Patent and Trademark Office, or the inventor(s) has a duty to assign to the Company. Based on the Certification by the Officer of the Company (as identified in such opinion), to the best of their knowledge, there are no claims or potential claims to any ownership interest or liens on any of the patents or patent applications listed in Schedule A by any party other than the Company; and (iii) Based on the Certification by the Officer of the Company, to the best of their knowledge, (1) the Company has not received notice of any claim of misappropriation of any intellectual property rights or infringement of any patents held by others, and (2) there is no pending or threatened action, suit, proceeding or claim by others that the Company is infringing a patent or has misappropriated any intellectual property rights; (d) On the date of the Offering Circular prior to the execution of this Agreement and also at each Time of Delivery, Ernst & Young LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto; (e) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Offering Circular any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Offering Circular, and (ii) since the respective dates as of which information is given in the Offering Circular there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Offering Circular, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it 14 impracticable or inadvisable to proceed with the public offering or the delivery of the Securities on the terms and in the manner contemplated in this Agreement and in the Offering Circular; (f) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (g) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or on the Nasdaq National Market; (ii) a suspension or material limitation in trading in the Company's securities on the Nasdaq National Market; (iii) a general moratorium on commercial banking activities declared by any of Federal, New York State or California State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (v) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Securities on the terms and in the manner contemplated in the Offering Circular; (h) The Securities shall have been designated for trading on PORTAL; (i) The Company shall have obtained and delivered to the Purchasers executed copies of a written agreement of those directors and executive officers and other stockholders of the Company listed on Exhibit B-1 in the Form of Exhibit B-2 hereto, subject to such exceptions as previously agreed between the parties hereto (each such agreement, a "Lock-Up Agreement"), by the First Time of Delivery, and executed originals of each Lock-Up Agreement shall have been delivered to you by such time; and (j) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsection (e) of this Section and as to such other matters as you may reasonably request. 8. (a) The Company will indemnify and hold harmless each Purchaser against any losses, claims, damages or liabilities, joint or several, to which such Purchaser may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, and will reimburse each Purchaser for any legal or other expenses reasonably incurred by such Purchaser in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made 15 in the Offering Circular or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Purchaser through Goldman, Sachs & Co. expressly for use therein. (b) Each Purchaser will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Offering Circular, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Circular or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Purchaser through Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Purchasers on the other from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the 16 notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Purchasers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Purchasers, in each case as set forth in the Offering Circular. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Purchasers on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Purchasers agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to investors were offered to investors exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Purchasers' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Purchaser within the meaning of the Act; and the obligations of the Purchasers under this Section 8 shall be in addition to any liability which the respective Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Purchaser shall default in its obligation to purchase the Securities which it has agreed to purchase hereunder, you may in your discretion arrange for you or another party or other parties to purchase such Securities on the terms contained herein. If within thirty-six hours after such default by any Purchaser you do not arrange for the purchase of such Securities, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Securities on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Securities, or the Company notifies you that it has so arranged for the purchase of such Securities, you or the Company shall have the right to postpone the Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Offering Circular, or in any other documents or arrangements, and the Company agrees to prepare promptly any amendments to the Offering Circular which in your opinion may thereby be 17 made necessary. The term "Purchaser" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Securities. (b) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Purchaser or Purchasers by you and the Company as provided in subsection (a) above, the aggregate principal amount of such Securities which remains unpurchased does not exceed one-eleventh of the aggregate principal amount of all the Securities, then the Company shall have the right to require each non-defaulting Purchaser to purchase the principal amount of Securities which such Purchaser agreed to purchase hereunder and, in addition, to require each non-defaulting Purchaser to purchase its pro rata share (based on the principal amount of Securities which such Purchaser agreed to purchase hereunder) of the Securities of such defaulting Purchaser or Purchasers for which such arrangements have not been made; but nothing herein shall relieve a defaulting Purchaser from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Purchaser or Purchasers by you and the Company as provided in subsection (a) above, the aggregate principal amount of Securities which remains unpurchased exceeds one-eleventh of the aggregate principal amount of all the Securities, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Purchasers to purchase Securities of a defaulting Purchaser or Purchasers, then this Agreement shall thereupon terminate, without liability on the part of any non-defaulting Purchaser or the Company, except for the expenses to be borne by the Company and the Purchasers as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Purchaser from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Purchasers, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Purchaser or any controlling person of any Purchaser, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Securities. 11. If this Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Purchaser except as provided in Sections 6 and 8 hereof; but, if for any other reason, the Securities are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Purchasers through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Purchasers in making preparations for the purchase, sale and delivery of the Securities, but the Company shall then be under no further liability to any Purchaser except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, you shall act on behalf of each of the Purchasers, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Purchaser made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the representatives. 18 All statements, requests, notices and agreements hereunder shall be in writing, and if to the Purchasers shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration Department; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Offering Circular, Attention: Secretary; provided, however, that any notice to a Purchaser pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Purchaser at its address set forth in its Purchasers' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by you upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement shall be binding upon, and inure solely to the benefit of, the Purchasers, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Purchaser, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Securities from any Purchaser shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of this Agreement. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 17. The Company is authorized, subject to applicable law, to disclose any and all aspects of this potential transaction that are necessary to support any U.S. federal income tax benefits expected to be claimed with respect to such transaction, and all materials of any kind (including tax opinions and other tax analyses) related to those benefits, without the Purchasers imposing any limitation of any kind. 19 If the foregoing is in accordance with your understanding, please sign and return to us eight counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Purchasers, this letter and such acceptance hereof shall constitute a binding agreement between each of the Purchasers and the Company. It is understood that your acceptance of this letter on behalf of each of the Purchasers is pursuant to the authority set forth in a form of Agreement among Purchasers, the form of which shall be submitted to the Company for examination upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, CONNETICS CORPORATION By: /s/ John L. Higgins ---------------------------------- Name: John L. Higgins Title: CFO Accepted as of the date hereof: GOLDMAN, SACHS & CO. C.E. UNTERBERG, TOWBIN (A CALIFORNIA LIMITED PARTNERSHIP) CIBC WORLD MARKETS CORP. THOMAS WEISEL PARTNERS LLC U.S. BANCORP PIPER JAFFRAY INC. By: /s/ Goldman, Sachs & Co. --------------------------------------- (Goldman, Sachs & Co.) On behalf of each of the Purchasers. [Signature page to Purchase Agreement dated May 21, 2003] 20 SCHEDULE I

PRINCIPAL OPTIONAL AMOUNT OF AMOUNT OF SECURITIES SECURITIES TO BE TO BE PURCHASER PURCHASED PURCHASED - --------------------------------------------------------- ----------- ----------- Goldman, Sachs & Co. .................................... $56,000,000 $10,000,000 C.E. Unterberg, Towbin (a California Limited Partnership) 4,000,000 -- CIBC World Markets Corp. ................................ 8,000,000 -- Thomas Weisel Partners LLC .............................. 8,000,000 -- U.S. Bancorp Piper Jaffray Inc. ......................... 4,000,000 -- ----------- ----------- Total ................................. $80,000,000 $10,000,000 =========== ===========

ANNEX I Pursuant to Section 7(d) of the Purchase Agreement, the accountants shall furnish letters to the Purchasers to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act") and the applicable published rules and regulations thereunder; (ii) In our opinion, the consolidated financial statements and financial statement schedules audited by us and included in the Offering Circular comply as to form in all material respects with the applicable requirements of the Exchange Act and the related published rules and regulations; (iii) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Offering Circular agrees with the corresponding amounts (after restatements where applicable) in the audited consolidated financial statements for such five fiscal years; (iv) On the basis of limited procedures not constituting an audit in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Offering Circular, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows included in the Offering Circular are not in conformity with generally accepted accounting principles applied on the basis substantially consistent with the basis for the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Offering Circular; (B) any other unaudited statement of operations data and balance sheet items included in the Offering Circular do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Offering Circular; (C) the unaudited financial statements which were not included in the Offering Circular but from which were derived any unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Offering Circular and referred to in clause (B) were not 22 determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Offering Circular; (D) any unaudited pro forma consolidated condensed financial statements included in the Offering Circular do not comply as to form in all material respects with the applicable accounting requirements or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest financial statements included in the Offering Circular or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets or stockholders' equity or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Offering Circular except in each case for changes, increases or decreases which the Offering Circular discloses have occurred or may occur or which are described in such letter; and (F) for the period fro the date of the latest financial statements included in the Offering Circular to the specified date referred to in clause (E) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Offering Circular discloses have occurred or may occur or which are described in such letter; and (v) In addition to the examination referred to in their report(s) included in the Offering Circular and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (iv) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Offering Circular, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. A-2 EXHIBIT A [Form of Registration Rights Agreement] EXHIBIT B-1 List of persons to sign Lock-Up Agreements: Barkas, PH.D., Alexander E. Bauer, M.D., Eugene A. Church, Katrina J. Eckert, R. Andrew Foehr, Matthew W. Gardiner, Rebecca Gilbert, Ph.D., Denise M. Higgins, John L. Kane, John C. Kiley, Thomas D. Miller, Michael P. Oclassen, Glenn A. Panetta, Leon E. Raab, G. Kirk Vontz, C. Gregory Wiggans, Thomas G. EXHIBIT B-2 CONNETICS CORPORATION LOCK-UP AGREEMENT MAY ___, 2003 Goldman, Sachs & Co. 85 Broad Street New York, NY 10004 Re: Connetics Corporation - Lock-Up Agreement Ladies and Gentlemen: The undersigned understands that you, as representatives (the "Representatives"), propose to enter into a Purchase Agreement on behalf of the several Purchasers named in Schedule I to such agreement (collectively, the "Purchasers"), with Connetics Corporation, a Delaware corporation (the "Company"), providing for an offering of convertible senior notes (the "Notes") of the Company that will be convertible into shares of the common stock, par value $0.001 per share (the "Common Stock"), of the Company. In consideration of the agreement by the Purchasers to offer and sell the Notes, and of other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the undersigned agrees that, during the period beginning from the date of the Offering Circular covering the Notes and continuing to and including the date 90 days after the date of such Offering Circular (the "Lock-Up Period"), the undersigned will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, or exercise any registration rights with respect to, any shares of Common Stock, or any options or warrants to purchase any shares of Common Stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of Common Stock, whether now owned or hereafter acquired, owned directly by the undersigned (including holding as a custodian) or with respect to which the undersigned has beneficial ownership within the meaning of the rules and regulations of the Securities and Exchange Commission (collectively, the "Undersigned's Shares"). The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned's Shares even if such shares would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Undersigned's Shares or with respect to any security that includes, relates to, or derives any significant part of its value from such shares. Notwithstanding the foregoing, the undersigned may transfer the Undersigned's Shares (i) as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound in writing by the restrictions set forth herein, (ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, or (iii) with the prior written consent of Goldman, Sachs & Co. on behalf of the Purchasers. For purposes of this agreement, "immediate family" shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. In addition, notwithstanding the foregoing, if the undersigned is a corporation, the corporation may transfer the capital stock of the Company to any wholly-owned subsidiary of such corporation; provided, however, that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding such capital stock subject to the provisions of this agreement and there shall be no further transfer of such capital stock except in accordance with this agreement, and provided further that any such transfer shall not involve a disposition for value. The undersigned now has, and, except as contemplated by clause (i), (ii), or (iii) above, for the duration of this agreement will have, good and marketable title to the Undersigned's Shares, free and clear of all liens, encumbrances, and claims whatsoever. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of the Undersigned's Shares except in compliance with the foregoing restrictions. The undersigned understands that the Company and the Purchasers are relying upon this agreement in proceeding toward consummation of the offering. The undersigned further understands that this agreement is irrevocable and shall be binding upon the undersigned's heirs, legal representatives, successors and assigns. Very truly yours, ------------------------------------ Exact Name of Shareholder ------------------------------------ Authorized Signature ------------------------------------ Title B-2-2 EX-5.1 4 f92728orexv5w1.txt EXHIBIT 5.1 EXHIBIT 5.1 [MORRISON & FOERSTER LLP LETTERHEAD] August 26, 2003 Connetics Corporation 3290 West Bayshore Road Palo Alto, California 94303 Ladies and Gentlemen: We have acted as counsel to Connetics Corporation (the "Company") in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") of the Company's Registration Statement on Form S-3 (the "Registration Statement") relating to the registration under the Securities Act of 1933 of the resale by the holders thereof of a total of $90,000,000 principal amount of 2.25% Convertible Senior Notes due May 30, 2008 (the "Notes") and the shares of common stock issuable upon conversion thereof (the "Shares"). The Notes were issued pursuant to the Indenture dated as of May 28, 2003 between the Company and J.P. Morgan Trust Company, National Association (the "Indenture"). In connection with this opinion, (i) we have reviewed the Registration Statement, the Indenture, the Notes and certain of the Company's other corporate records, documents, instruments and proceedings taken in connection with the authorization and issuance of the Notes and the Shares, and (ii) we have made such inquiries of officers of the Company and public officials and have considered such questions of law as we have deemed necessary for the purpose of rendering the opinions set forth herein. We have assumed the genuineness of all signatures on and the authenticity of all items submitted to us as originals and the conformity to originals of all items submitted to us as copies. We also have relied, as to matters of fact, upon the accuracy of representations and certificates of the Company's officers. We have also relied on the Company's records and have assumed the accuracy and completeness thereof. The opinions hereinafter expressed are subject to the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, including, without limitation, laws relating to fraudulent transfers or conveyances, preferences and equitable subordination. Based on and subject to the foregoing, we are of the opinion that (i) the Notes constitute legal, valid and binding obligations of the Company, and (ii) following the issuance upon conversion of the Notes in accordance with, and in the manner contemplated by, the Notes, the Indenture and the Registration Statement, the Shares will be validly issued, fully paid and nonassessable We express no opinion as to matters governed by laws of any jurisdiction other than the substantive laws of the State of New York (including the applicable choice-of-law rules), the laws of the State of Delaware and the federal laws of the United States of America, in each case as in effect on the date hereof. We consent to the reference to our firm under the caption "Legal Matters" in the prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Morrison & Foerster LLP Morrison & Foerster LLP EX-12.1 5 f92728orexv12w1.txt EXHIBIT 12.1 EXHIBIT 12.1 CONNETICS CORPORATION EXHIBIT STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

Three months ended Six months ended For the year ended June 30, June 30, December 31, (in thousands) 2003 2003 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- Income (loss) from continuing operations before income taxes $ (654) $ (8,552) $ (16,409) $ (16,397) $ 33,198 $ (27,283) $ (26,595) Add fixed charges 384 543 658 460 597 1,099 1,424 ------------------------------ ---------------------------------------------------- Earnings (as defined) $ (270) $ (8,009) $ (15,751) $ (15,937) $ 33,795 $ (26,184) $ (25,171) ============================== ==================================================== Fixed charges Interest Expense 175 175 11 46 235 868 1304 Amoritization of debt issuance costs 56 56 0 0 0 0 0 Estimated interest component of rent expenses 153 312 647 414 362 231 120 ------------------------------ ---------------------------------------------------- Total fixed charges 384 543 658 460 597 1099 1424 ============================== ==================================================== Ration of earnings to fixed charges Note (ii) Note (ii) Note (i) Note (i) 56.64 Note (i) Note (i) ------------------------------ ----------------------------------------------------

(i) Earnings, as defined, were insufficient to cover fixed charges by $16.4 million, $16.4 million, $27.3 million, and $26.6 million in the fiscal years 2002, 2001, 1999, and 1998, respectively. (ii) Earnings, as defined, were insufficient to cover fixed charges by $654,000 and $8.6 million in the three and six months ended June 30, 2003. EX-23.1 6 f92728orexv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in this Registration Statement (Form S-3) and related Prospectus of Connetics Corporation for the registration of $90,000,000 of aggregate principal amount of 2.25% Convertible Senior Notes due May 30, 2008 and 4,203,450 shares of its common stock and to the incorporation by reference therein of our report dated January 24, 2003, with respect to the consolidated financial statements and schedule of Connetics Corporation included in its Annual Report (Form 10-K/A) for the year ended December 31, 2002, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Palo Alto, California August 25, 2003 EX-25.1 7 f92728orexv25w1.txt EXHIBIT 25.1 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ---------------------------------------- J. P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) 95-4655078 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 560 MISSION STREET, FLOOR 13 SAN FRANCISCO, CALIFORNIA 94105 (Address of principal executive offices) (Zip Code) William H. McDavid General Counsel 270 Park Avenue New York, New York 10017 Tel: (212) 270-2611 (Name, address and telephone number of agent for service) -------------------------------------------- CONNETICS CORPORATION (Exact name of obligor as specified in its charter) DELAWARE 94-3173928 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 3290 WEST BAYSHORE ROAD PALO ALTO, CA 94303 (Address of principal executive offices) (Zip Code) 2.25% CONVERTIBLE SENIOR NOTES DUE MAY 30, 2008 (Title of the indenture securities) ------------------------------------------------------------- ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency, Washington, D.C. Board of Governors of the Federal Reserve System, Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes. ITEM 2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the trustee, describe each such affiliation. None. ITEMS 3-15 are not applicable because, to the best of the Trustee's knowledge, the obligor is not in default under any Indenture for which the Trustee acts as Trustee. ITEM 16. LIST OF EXHIBITS. List below all exhibits filed as part of this statement of eligibility. Exhibit 1. Articles of Association of the Trustee as Now in Effect (see Exhibit 1 to Form T-1 filed in connection with Form 8K of the Southern California Water Company filing, dated December 7, 2001, which is incorporated by reference). Exhibit 2. Certificate of Authority of the Trustee to Commence Business (see Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 333-41329, which is incorporated by reference). Exhibit 3. Authorization of the Trustee to Exercise Corporate Trust Powers (contained in Exhibit 2). Exhibit 4. Existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Form 8K of the Southern California Water Company filing, dated December 7, 2001, which is incorporated by reference). Exhibit 5. Not Applicable Exhibit 6. The consent of the Trustee required by Section 321 (b) of the Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 333-41329, which is incorporated by reference). Exhibit 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. Exhibit 8. Not Applicable Exhibit 9. Not Applicable 2 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, J. P. Morgan Trust Company, National Association, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of San Francisco, and State of California, on the 26th day of August, 2003. J. P. Morgan Trust Company, National Association By /s/: Mitch Gardner ------------------------------- Mitch Gardner Vice President 3 EXHIBIT 7. Report of Condition of the Trustee. CONSOLIDATED REPORT OF CONDITION OF J.P. Morgan Trust Company, National Association - ----------------------------------------------- (Legal Title) LOCATED AT 1800 Century Park East, Ste. 400 Los Angeles, CA 90067 - -------------------------------------------------------------------------------- (Street) (City) (State) (Zip) AS OF CLOSE OF BUSINESS ON June 30, 2003 --------------------------------- ASSETS DOLLAR AMOUNTS IN THOUSANDS 1. Cash and balances due from depository institutions (from Schedule RC-A): a. Noninterest-bearing balances and currency and coin (1) 30,069 b. Interest bearing balances (2) 0 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) 0 b. Available-for-sale securities (from Schedule RC-B, column D) 106,073 3. Federal Funds sold and securities purchased agreements to resell 0 4. Loans and lease financing receivables (from Schedule RC-C): a. Loans and leases held for sale 0 b. Loans and leases, net of unearned income 41,488 c. LESS: Allowance for loan and lease losses 0 d. Loans and leases, net of unearned income and allowance (item 4.b minus 4.c) 41,488 5. Trading assets (from Schedule RC-D) 0 6. Premises and fixed assets (including capitalized leases) 9,168 7. Other real estate owned (from Schedule RC-M) 0 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 0 9. Customers' liability to this bank on acceptances outstanding 0 10. Intangible assets a. Goodwill 0 b. Other intangible assets (from Schedule RC-M) 162,542 11. Other assets (from Schedule RC-F) 17,245 12. TOTAL ASSETS (sum of items 1 through 11) 367,185 (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. 4 LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) 97,653 (1) Noninterest-bearing (1) 97,653 (2) Interest-bearing 0 b. In foreign offices, Edge and Agreement subsidiaries, and IBF' (1) Noninterest-bearing 0 (2) Interest-bearing 0 14. Federal funds purchased and securities sold under agreements to repurchase 0 15. Trading liabilities (from Schedule RC-D) 0 16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases) (from Schedule RC-M): 0 17. Not applicable 18. Bank's liability on acceptances executed and outstanding 0 19. Subordinated notes and debentures (2) 0 20. Other liabilities (from Schedule RC-G) 47,491 21. Total liabilities (sum of items 13 through 20) 145,144 22. Minority interest in consolidated subsidiaries 0 EQUITY CAPITAL 23. Perpetual preferred stock and related surplus 0 24. Common stock 600 25. Surplus (exclude all surplus related to preferred stock) 181,587 26. a. Retained earnings 39,854 b. Accumulated other comprehensive income (3) 0 27. Other equity capital components (4) 0 28. Total equity capital (sum of items 23 through 27) 222,041 29. Total liabilities, minority interest, and equity capital (sum of items 21, 22, and 28) 367,185 (1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Includes limited-life preferred stock and related surplus. (3) Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, and minimum pension liability adjustments. 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EX-1.1

                                                                     EXHIBIT 1.1

                                                                  Execution Copy




                              CONNETICS CORPORATION

                 2.25% CONVERTIBLE SENIOR NOTES DUE MAY 30, 2008

                                   ----------

                               PURCHASE AGREEMENT


                                                                    May 21, 2003


Goldman, Sachs & Co.,
C.E. Unterberg, Towbin (a California
     Limited Partnership),
CIBC World Markets Corp.,
Thomas Weisel Partners LLC,
U.S. Bancorp Piper Jaffray Inc.,
   As representatives of the several Purchasers
   named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.

Ladies and Gentlemen:

         Connetics Corporation, a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Purchasers named in Schedule I hereto (the "Purchasers") an aggregate of
$80,000,000 principal amount of its 2.25% Convertible Senior Notes due May 30,
2008, convertible into shares of common stock, par value $0.001 per share
("Stock") of the Company (the "Firm Securities"), and, at the election of
Goldman, Sachs & Co., to issue and sell to Goldman, Sachs & Co. up to an
aggregate of $10,000,000 additional principal amount of such notes (the
"Optional Securities") (the Firm Securities and the Optional Securities which
Goldman, Sachs & Co. elects to purchase pursuant to Section 2 hereof are herein
collectively referred to as the "Securities").

         The Purchasers and other holders (including subsequent transferees) of
Securities will be entitled to the benefits of the registration rights
agreement, to be dated as of the First Time of Delivery (as defined in Section
4) (the "Registration Rights Agreement"), between the Company and the Purchaser,
in the form attached hereto as Exhibit A. Pursuant to the Registration Rights
Agreement, the Company will agree to file with the Securities and Exchange
Commission (the "Commission") under the circumstances set forth therein a shelf
registration statement pursuant to Rule 415 under the United States Securities
Act of 1933, as amended (the "Act"), relating to the resale of (i) Securities
initially resold in registered form and (ii) the shares of Stock initially
issuable upon conversion of the Securities by holders thereof, and to take the
actions specified therein to cause such shelf registration statement to be
declared effective.

         1. The Company represents and warrants to, and agrees with, each of the
Purchasers that:

                (a) An offering circular, dated May 21, 2003 (the "Offering
         Circular") has been prepared in connection with the offering of the
         Securities and shares of Stock issuable upon conversion thereof. Any
         reference to the Offering Circular shall be deemed to refer to and
         include the Company's most recent Annual Report on Form 10-K, as
         amended, and all subsequent documents filed with the Commission
         pursuant to Section 13(a), 13(c) or 15(d) of the United States
         Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or
         prior to the date of the Offering Circular and any reference to the
         Offering Circular, as amended or supplemented, as of any specified
         date, shall be deemed to include (i) any documents filed with the
         Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange
         Act after the date of the Offering Circular, and prior to such
         specified date, and (ii) any Additional Issuer Information (as defined
         in Section 5(f)) furnished by the Company prior to the completion of
         the distribution of the Securities; and all documents filed under the
         Exchange Act and so deemed to be included in the Offering Circular or
         any amendment or supplement thereto are hereinafter called the
         "Exchange Act Reports". The Exchange Act Reports, when they were or are
         filed with the Commission, conformed or will conform in all material
         respects to the applicable requirements of the Exchange Act and the
         applicable rules and regulations of the Commission thereunder. The
         Offering Circular and any amendments or supplements thereto and the
         Exchange Act Reports did not and will not, as of their respective
         dates, contain an untrue statement of a material fact or omit to state
         a material fact necessary in order to make the statements therein, in
         the light of the circumstances under which they were made, not
         misleading; provided, however, that this representation and warranty
         shall not apply to any statements or omissions made in reliance upon
         and in conformity with information furnished in writing to the Company
         by a Purchaser through Goldman, Sachs & Co. expressly for use therein;


                (b) Neither the Company nor any of its subsidiaries has
         sustained since the date of the latest audited financial statements
         included in the Offering Circular any loss or interference with its
         business from fire, explosion, flood or other calamity, whether or not
         covered by insurance, or from any labor dispute or court or
         governmental action, order or decree that would be material to the
         Company and its subsidiaries, taken as a whole, otherwise than as set
         forth or contemplated in the Offering Circular; and, since the
         respective dates as of which information is given in the Offering
         Circular, there has not been any change in the capital stock (other
         than grants or exercises of options pursuant to employee stock option
         plans existing on, or upon the conversion or exchange of convertible or
         exchangeable securities outstanding as of, the date of this Agreement)
         or material change in long-term debt of the Company or any of its
         subsidiaries or any material adverse change, or any development
         involving a prospective material adverse change, in or affecting the
         general affairs, management, financial position, stockholders' equity
         or results of operations of the Company and its subsidiaries taken as a
         whole, otherwise than as set forth or contemplated in the Offering
         Circular;


                (c) The Company and its subsidiaries have good title to all real
         property and good and marketable title to all personal property owned
         by them, in each case free and clear of all liens, encumbrances and
         defects except such as are described in the Offering Circular or such
         as do not materially affect the value of such property and do not
         interfere with the use made and proposed to be made of such property by
         the Company and its subsidiaries; and

                                       2

         any real property and buildings held under lease by the Company and its
         subsidiaries are held by them under valid, subsisting and enforceable
         leases, except as the enforcement thereof may be limited by bankruptcy,
         insolvency or similar laws affecting the enforcement of creditors'
         rights generally and subject to the applicability of general principles
         of equity and with such exceptions as are not material and do not
         interfere with the use made and proposed to be made of such property
         and buildings by the Company and its subsidiaries;


                (d) The Company has been duly incorporated and is validly
         existing as a corporation in good standing under the laws of the State
         of Delaware, with power and authority (corporate and other) to own its
         properties and conduct its business as described in the Offering
         Circular, and has been duly qualified as a foreign corporation for the
         transaction of business and is in good standing under the laws of each
         other jurisdiction in which it owns or leases properties or conducts
         any business so as to require such qualification, or is subject to no
         material liability or disability by reason of the failure to be so
         qualified in any such jurisdiction; and each subsidiary of the Company
         has been duly incorporated and is validly existing as a corporation in
         good standing under the laws of its jurisdiction of incorporation;


                (e) The Company has an authorized capitalization as set forth in
         the Offering Circular, and all of the issued shares of capital stock of
         the Company have been duly and validly authorized and issued and are
         fully paid and non-assessable; the shares of Stock initially issuable
         upon conversion of the Securities have been duly authorized and
         reserved for issuance and, when issued and delivered in accordance with
         the provisions of the Securities and the Indenture referred to below,
         will be validly issued, fully paid and non-assessable and will conform
         to the description of the Stock contained in the Offering Circular; and
         all of the issued shares of capital stock of each subsidiary of the
         Company have been duly and validly authorized and issued, are fully
         paid and non-assessable and (except for directors' qualifying shares)
         are owned directly or indirectly by the Company, free and clear of all
         liens, encumbrances, equities or claims;


                (f) The Securities have been duly authorized and, when issued
         and delivered pursuant to this Agreement and authenticated by the
         Trustee (as defined below) in accordance with the provisions of the
         Indenture (as defined below), will have been duly executed,
         authenticated, issued and delivered and will constitute valid and
         legally binding obligations of the Company entitled to the benefits
         provided by the indenture to be dated as of May 28, 2003 (the
         "Indenture") between the Company and J. P. Morgan Trust Company,
         National Association, as Trustee (the "Trustee"), under which they are
         to be issued; and the Securities and the Indenture will conform in all
         material respects to the descriptions thereof in the Offering Circular
         and will be in substantially the form previously delivered to you;


                (g) None of the transactions contemplated by this Agreement
         (including, without limitation, the use of the proceeds from the sale
         of the Securities) will violate or result in a violation of Section 7
         of the Exchange Act, or any regulation promulgated thereunder,
         including, without limitation, Regulations G, T, U, and X of the Board
         of Governors of the Federal Reserve System;


                (h) Prior to the date hereof, neither the Company nor any of its
         affiliates has taken any action which is designed to or which has
         constituted or which might have been expected to

                                       3

         cause or result in stabilization or manipulation of the price of any
         security of the Company in connection with the offering of the
         Securities;


                (i) The issue and sale of the Securities and the compliance by
         the Company with all of the provisions of the Securities, the
         Indenture, the Registration Rights Agreement and this Agreement and the
         consummation of the transactions herein and therein contemplated will
         not conflict with or result in a breach or violation of any of the
         terms or provisions of, or constitute a default under, any indenture,
         mortgage, deed of trust, loan agreement or other material agreement or
         instrument to which the Company or any of its subsidiaries is a party
         or by which the Company or any of its subsidiaries is bound or to which
         any of the property or assets of the Company or any of its subsidiaries
         is subject, nor will such action result in any violation of the
         provisions of the Certificate of Incorporation or By-laws of the
         Company or any statute or any order, rule or regulation of any court or
         governmental agency or body having jurisdiction over the Company or any
         of its subsidiaries or any of their properties; and no consent,
         approval, authorization, order, registration or qualification of or
         with any such court or governmental agency or body is required for the
         issue and sale of the Securities or the consummation by the Company of
         the transactions contemplated by this Agreement, the Indenture or the
         Registration Rights Agreement, except (i) as required pursuant to the
         Registration Rights Agreement, (ii) for the approval of the Stock
         issuable upon conversion of the Securities for quotation on the Nasdaq
         National Market, (iii) such consents and waivers with respect to
         registration rights of certain stockholders that have already been
         obtained and (iv) such consents, approvals, authorizations,
         registrations or qualifications as may be required under state
         securities or Blue Sky laws in connection with the purchase and
         distribution of the Securities by the Purchasers;


                (j) Neither the Company nor any of its subsidiaries is in
         violation of its Certificate of Incorporation or By-laws or in default
         in the performance or observance of any obligation, covenant or
         condition contained in any indenture, mortgage, deed of trust, loan
         agreement, lease or other agreement or instrument to which it is a
         party or by which it or any of its properties may be bound, subject to
         such exceptions as are either (i) disclosed in the Offering Circular or
         (ii) would not be material to the Company and its subsidiaries taken as
         a whole;


                (k) The statements set forth in the Offering Circular under the
         captions "Description of the Notes" and "Description of Capital Stock",
         insofar as they purport to constitute summaries of the terms of the
         Securities and the Stock, and under the caption "Material United States
         Federal Income Tax Considerations", insofar as they purport to describe
         the provisions of the laws and regulations referred to therein,
         represent fair and accurate summaries in all material respects;


                (l) Other than as set forth in the Offering Circular, there are
         no legal or governmental proceedings pending to which the Company or
         any of its subsidiaries is a party or of which any property of the
         Company or any of its subsidiaries is the subject which, if determined
         adversely to the Company or any of its subsidiaries, would individually
         or in the aggregate have a material adverse effect on the current or
         future financial position, stockholders' equity or results of
         operations of the Company and its subsidiaries taken as a whole; and,
         to the best of the Company's knowledge, no such proceedings are
         threatened or contemplated by governmental authorities or threatened by
         others;


                                       4

                (m) When the Securities are issued and delivered pursuant to
         this Agreement, the Securities will not be of the same class (within
         the meaning of Rule 144A(d)(3) under the Act) as securities which are
         listed on a national securities exchange registered under Section 6 of
         the Exchange Act or quoted in a U.S. automated inter-dealer quotation
         system;


                (n) The Company is subject to the reporting requirements of
         Section 13 or 15(d) of the Exchange Act;


                (o) The Company is not, and after giving effect to the offering
         and sale of the Securities will not be, an "investment company", as
         such term is defined in the United States Investment Company Act of
         1940, as amended (the "Investment Company Act");


                (p) Neither the Company, nor any person acting on its behalf,
         has offered or sold the Securities by means of any general solicitation
         or general advertising within the meaning of Rule 502(c) under the Act;


                (q) Within the preceding six months, neither the Company nor any
         other person acting on behalf of the Company has offered or sold to any
         person any Securities, or any securities of the same or a similar class
         as the Securities, other than Securities offered or sold to the
         Purchasers hereunder. The Company will take reasonable precautions
         designed to insure that any offer or sale, direct or indirect, in the
         United States or to any U.S. person (as defined in Rule 902 under the
         Act) of any Securities or any substantially similar security issued by
         the Company, within six months subsequent to the date on which the
         distribution of the Securities has been completed (as notified to the
         Company by Goldman, Sachs & Co.), is made under restrictions and other
         circumstances reasonably designed not to affect the status of the offer
         and sale of the Securities in the United States and to U.S. persons
         contemplated by this Agreement as transactions exempt from the
         registration provisions of the Act;


                (r) It is not necessary in connection with the offer, sale and
         delivery of the Securities to the Purchasers, or in connection with the
         offer, sale and initial resale of the Securities by the Purchasers in a
         manner contemplated by this Agreement, to register the Securities under
         the Act or to qualify an indenture under the Trust Indenture Act of
         1939, as amended (the "Trust Indenture Act") (in giving this
         representation and warranty the Company is relying on the
         representations, warranties and agreements of the Purchasers in this
         Agreement);


                (s) The Securities have been, or prior to the First Time of
         Delivery (as defined in Section 4) will be, designated PORTAL eligible
         securities in accordance with the rules and regulations of the National
         Association of Securities Dealers, Inc.;


                (t) Ernst & Young LLP, which has certified certain financial
         statements of the Company and its subsidiaries, is an independent
         public accountant as required by the Act and the rules and regulations
         of the Commission thereunder;


                (u) The Company has all requisite corporate power to enter into
         this Agreement, the Indenture and the Registration Rights Agreement.
         This Agreement has been and, as of each Time of Delivery, the Indenture
         and the Registration Rights Agreement will have been, duly authorized,
         executed and delivered by the Company and upon such execution by the
         Company (assuming the due authorization, execution and delivery of such
         agreements by the other parties thereto) this Agreement, the Indenture
         and the Registration Rights Agreement

                                       5

         will constitute valid and binding obligations of the Company
         enforceable against the Company in accordance with the terms hereof
         and/or thereof, subject, as to enforcement, to bankruptcy, insolvency,
         reorganization and other laws of general applicability relating to or
         affecting creditors' rights and to general equity principles, and
         except as the enforcement of indemnification and contribution
         provisions hereof and thereof may be limited by applicable law and
         public policy;


                (v) Except as disclosed in the Offering Circular, there are no
         persons with registration rights or other similar rights to have any
         securities of the Company (other than the Securities and the shares of
         Stock issuable upon conversion thereof) registered under the Act under
         any registration statement, which rights have not been satisfied or
         waived;


                (w) None of the holders of outstanding shares of capital stock
         of the Company and no other person has or will have any preemptive or
         other rights to purchase, subscribe for or otherwise acquire (i) the
         shares of Stock to be issued upon conversion of the Securities or any
         rights to such shares (other than those granted by the holders of the
         Securities) or (ii) as a result of or in connection with the
         transactions contemplated by this Agreement, the Indenture or the
         Registration Rights Agreement, any other capital stock of the Company
         or rights thereto;


                (x) The Company and its subsidiaries, taken as a whole, are
         insured by insurers of recognized financial responsibility against such
         losses and risks and in such amounts as are prudent and customary in
         the business in which they are engaged; and neither the Company nor any
         of its subsidiaries has any reason to believe that it will not be able
         to renew its existing insurance coverage as and when such coverage
         expires or to obtain similar coverage from similar insurers as may be
         necessary to continue its business at a cost that would not have a
         material adverse effect on the general affairs, management, the current
         or future consolidated financial position, business prospects,
         stockholders' equity or results of operations of the Company and its
         subsidiaries;


                (y) The Company and each of its subsidiaries holds, and are
         operating in compliance in all material respects with, all material
         franchises, grants, authorizations, licenses, permits, easements,
         consents, certificates and orders of any governmental or
         self-regulatory body required for the conduct of their businesses
         (including those that may be required by the U.S. Food and Drug
         Administration and any federal, state or foreign agencies or bodies
         engaged in the regulation of pharmaceuticals or biohazardous
         substances) (collectively, "Government Licenses") and all such
         Government Licenses are valid and in full force and effect; the Company
         and each of its subsidiaries are in compliance in all material respects
         with all applicable federal, state, local and foreign laws,
         regulations, orders and decrees; neither the Company nor any of its
         subsidiaries has received any notice of proceedings relating to the
         revocation or modification of any material Government Licenses;


                (z) The Company and each of its subsidiaries own or possess, or
         have no reason to believe they cannot acquire on reasonable terms,
         adequate licenses or other rights to use all patents, patent
         applications, trademarks, service marks, trade names, trademark
         registrations, service mark registrations, copyrights, licenses,
         inventions, trade secrets and know-how (collectively, the "Intellectual
         Property") necessary to conduct the businesses now operated by them as
         described in the Offering Circular, and except as stated in the
         Offering Circular, to the

                                       6

         Company's knowledge, no name which the Company or any of its
         subsidiaries uses and no other aspect of the business of the Company or
         any of its subsidiaries as conducted on the date hereof involves or
         gives rise to any infringement of, or license or similar fees for, any
         licenses, patents, patent applications, trademarks, service marks,
         trade names, trademark registrations, service mark registrations,
         copyrights, licenses, inventions, trade secrets, know-how or other
         similar rights of others, and neither the Company nor any of its
         subsidiaries has received any notice alleging any such infringement or
         fee. The Company has duly and properly filed or caused to be filed with
         the U.S. Patent and Trademark Office (the "PTO") and applicable foreign
         and international patent authorities all patent applications described
         in the Offering Circular (the "Patent Applications"); in connection
         with the filing of the Patent Applications, the Company conducted
         reasonable investigations of the published literature and patent
         references relating to the inventions claimed in such applications; to
         the best of the Company's knowledge, it has complied with the PTO's
         duty of candor and disclosure for the Patent Applications and has made
         no misrepresentation in the Patent Applications; the Company is not
         aware of any facts material to a determination of patentability
         regarding the Patent Applications not called to the attention of the
         PTO which would preclude the grant of a patent for the Patent
         Applications; and the Company has no knowledge of any facts which would
         preclude it from having clear title to the Patent Applications;


                (aa) Since the respective dates as of which information is given
         in the Offering Circular, the studies, tests and preclinical and
         clinical trials conducted by or on behalf of the Company that are
         described in the Offering Circular were and, if still pending, are
         being conducted in accordance with experimental protocols, procedures
         and controls pursuant to, where applicable, accepted professional
         scientific standards; the descriptions of the results of such studies,
         tests and trials contained in the Offering Circular are accurate and
         complete in all material respects; the Company is not aware of any
         studies, tests or trials the results of which the Company believes
         reasonably call into question the clinical trial results described or
         referred to in the Offering Circular when viewed in the context in
         which such results are described and the clinical state of development;
         and the Company has not received any notices or correspondence from the
         U.S. Food and Drug Administration or any foreign, state or local
         governmental body exercising comparable authority requiring the
         termination, suspension or material modification of any studies, tests
         or preclinical or clinical trials conducted by or on behalf of the
         Company; and


                (bb) The Company is eligible for use of Form S-3 promulgated
         under the Act.


         2. Subject to the terms and conditions herein set forth, and upon the
basis of the representations, warranties and agreements of the Purchasers
contained herein, (a) the Company agrees to issue and sell to each of the
Purchasers, and each of the Purchasers agrees, severally and not jointly, to
purchase from the Company, at a purchase price of 96.5% of the principal amount
thereof, the principal amount of Firm Securities set forth opposite the name of
such Purchaser in Schedule I hereto and (b) in the event and to the extent that
Goldman, Sachs & Co. shall exercise the election to purchase Optional Securities
as provided below, the Company agrees to issue and sell to Goldman, Sachs & Co.,
and Goldman, Sachs & Co. agrees to purchase from the Company, at the same
purchase price set forth in clause (a) of this Section 2, the aggregate
principal amount of the Optional Securities as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractions of $1,000).


                                       7

         The Company hereby grants to Goldman, Sachs & Co. the right to purchase
at its election up to $10,000,000 aggregate principal amount of Optional
Securities, at the same purchase price set forth in clause (a) of the first
paragraph of this Section 2. Any such election to purchase Optional Securities
may be exercised by written notice from Goldman, Sachs & Co. to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate principal amount of Optional Securities to be
purchased and the date on which such Optional Securities are to be delivered, as
determined by Goldman, Sachs & Co. but in no event earlier than the First Time
of Delivery (as defined in Section 4 hereof) or, unless Goldman, Sachs & Co. and
the Company otherwise agree in writing, earlier than three or later than ten New
York Business Days after the date of such notice. As used in this Agreement,
"New York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.


         3. Upon the authorization by you of the release of the Securities, the
several Purchasers propose to offer the Securities for sale upon the terms and
conditions set forth in this Agreement and the Offering Circular and each
Purchaser hereby represents and warrants to, and agrees with the Company that:


         (a) It will offer and sell the Securities only to persons who it
reasonably believes are "qualified institutional buyers" ("QIBs") within the
meaning of Rule 144A under the Act in transactions meeting the requirements of
Rule 144A; and


         (b) It will not offer or sell the Securities by any form of general
solicitation or general advertising, including but not limited to the methods
described in Rule 502(c) under the Act.


         In addition, each Purchaser represents and warrants that it is a
qualified institutional buyer or an institutional accredited investor with such
knowledge and experience in financial and business matters as are necessary to
evaluate the merits and risks of an investment in the Securities, and has
advised the Company that it proposes to offer the Securities for resale upon
terms and conditions disclosed in this Agreement and in the Offering Circular;
and it understands that, for the purposes of the opinions to be delivered
pursuant to Section 7(b) hereof, counsel to the Company, will assume the
accuracy and truth of the foregoing representations and compliance with the
foregoing agreements by each Purchaser.


         4. (a) The Securities to be purchased by each Purchaser hereunder will
be represented by one or more definitive global Securities in book-entry form
which will be deposited by or on behalf of the Company with The Depository Trust
Company ("DTC") or its designated custodian. The Company will deliver the
Securities to Goldman, Sachs & Co., for the account of each Purchaser, against
payment by or on behalf of such Purchaser of the purchase price therefor by wire
transfer to the Company in Federal (same day) funds, by causing DTC to credit
the Securities to the account of Goldman, Sachs & Co. at DTC. The Company will
cause the certificates representing the Securities to be made available to
Goldman, Sachs & Co. for checking at least twenty-four hours prior to the Time
of Delivery (as defined below) at the office of DTC or its designated custodian
(the "Designated Office"). The time and date of such delivery and payment shall
be, with respect to the Firm Securities, 6:30 a.m., California time, on May 28,
2003 or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing, and with respect to the Optional Securities, 6:30 a.m.,
California time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of Goldman, Sachs & Co.'s election to
purchase such

                                       8

Optional Securities, or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Securities is herein called the "First Time of Delivery", such time and date for
the delivery of the Optional Securities, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".


         (b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Securities and any additional documents requested by the
Purchasers pursuant to Section 7(j) hereof, will be delivered at such time and
date at the offices of Sullivan & Cromwell LLP, 1870 Embarcadero Road, Palo
Alto, California 94303 (the "Closing Location"), and the Securities will be
delivered at the Designated Office, all at such Time of Delivery. A meeting will
be held at the Closing Location at 2:00 p.m., California time, on the New York
Business Day next preceding each Time of Delivery, at which meeting the final
drafts of the documents to be delivered pursuant to the preceding sentence will
be available for review by the parties hereto.


         5. The Company agrees with each of the Purchasers:


         (a) To prepare the Offering Circular in a form approved by you; to make
no amendment or any supplement to the Offering Circular which shall be
disapproved by you promptly after reasonable notice thereof; and to furnish you
with copies thereof;


         (b) Promptly from time to time to take such action as you may
reasonably request to qualify the Securities and the shares of Stock issuable
upon conversion of the Securities for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws so as
to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of the Securities,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;


         (c) To furnish the Purchasers with copies of the Offering Circular in
such quantities as you may reasonably request and each amendment or supplement
thereto signed by an authorized officer of the Company with the independent
accountants' report(s) in the Offering Circular, and any amendment or supplement
containing amendments to the financial statements covered by such report(s),
signed by the accountants, and additional written and electronic copies thereof
in such quantities as you may from time to time reasonably request, and if, at
any time prior to the expiration of nine months after the date of the Offering
Circular, any event shall have occurred as a result of which the Offering
Circular as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such Offering Circular is delivered, not misleading, or, if for any other
reason it shall be necessary or desirable during such same period to amend or
supplement the Offering Circular, to notify you and upon your request to prepare
and furnish without charge to each Purchaser and to any dealer in securities as
many written and electronic copies as you may from time to time reasonably
request of an amended Offering Circular or a supplement to the Offering Circular
which will correct such statement or omission or effect such compliance;


         (d) During the period beginning from the date hereof and continuing
until the date which is 90 days after the Time of Delivery, not to offer, sell,
contract to sell or otherwise dispose of, except as

                                       9

provided hereunder, any securities of the Company that are substantially similar
to the Securities or the Stock, including but not limited to any securities that
are convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than pursuant
to employee stock plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;

         (e) Not to be or become, at any time prior to the expiration of two
years after the last Time of Delivery, an open-end investment company, unit
investment trust, closed-end investment company or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act;


         (f) At any time when the Company is not subject to Section 13 or 15(d)
of the Exchange Act, for the benefit of holders from time to time of Securities,
to furnish at its expense, upon request, to holders of Securities and
prospective purchasers of the Securities designated by such holders, upon the
request of such holders or such prospective purchasers, the information (the
"Additional Issuer Information") satisfying the requirements of subsection
(d)(4)(i) of Rule 144A under the Act;


         (g) [RESERVED];


         (h) To furnish to its stockholders generally (including the holders of
the Securities) as soon as practicable after the end of each fiscal year an
annual report (including a balance sheet and statements of income, stockholders'
equity and cash flows of the Company and its consolidated subsidiaries certified
by independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the date of the Offering Circular), to make available to
its stockholders consolidated summary financial information of the Company and
its subsidiaries for such quarter in reasonable detail;


         (i) During a period of three years from the date of the Offering
Circular, to furnish to you copies of all reports or other communications
(financial or other) furnished to stockholders of the Company, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any securities exchange
on which the Securities or any class of securities of the Company is listed; and
(ii) such additional information concerning the business and financial condition
of the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);


         (j) During the period of two years after the last Time of Delivery, the
Company will not, and will not permit any of its "affiliates" (as defined in
Rule 144 under the Securities Act) to, resell any of the Securities which
constitute "restricted securities" under Rule 144 that have been reacquired by
any of them;


         (k) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the Offering
Circular under the caption "Use of Proceeds";


         (l) To reserve and keep available at all times, free of preemptive
rights, shares of Stock for the purpose of enabling the Company to satisfy any
obligations to issue shares of its Stock upon conversion of the Securities; and


                                       10

         (m) To use its commercially reasonable efforts to list for quotation,
subject to notice of issuance, the shares of Stock issuable upon conversion of
the Securities on the Nasdaq National Market.


         6. The Company covenants and agrees with the several Purchasers that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the issuance of the Securities and the shares of Stock issuable
upon conversion of the Securities and all other expenses in connection with the
preparation and printing of the Offering Circular and any amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Purchasers and dealers; (ii) the cost of printing or producing any Agreement
among Purchasers, this Agreement, the Registration Rights Agreement, the
Indenture, the Blue Sky and Legal Investment Memoranda, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Securities; (iii) all expenses
in connection with the qualification of the Securities and the shares of Stock
issuable upon conversion of the Securities for offering and sale under state
securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Purchasers in connection with such
qualification and in connection with the Blue Sky and legal investment surveys,
if any; (iv) any fees charged by securities rating services for rating the
Securities; (v) the cost of preparing the Securities; (vi) the fees and expenses
of the Trustee and any agent of the Trustee and the fees and disbursements of
counsel for the Trustee in connection with the Indenture and the Securities;
(vii) any cost incurred in connection with the designation of the Securities for
trading in PORTAL and the listing of the shares of Stock issuable upon
conversion of the Securities; and (viii) all other costs and expenses incident
to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the Purchasers
will pay all of their own costs and expenses, including the fees of their
counsel, transfer taxes on resale of any of the Securities by them, and any
advertising expenses connected with any offers they may make.


         7. The obligations of the Purchasers hereunder shall be subject, in
their discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of such Time of Delivery,
true and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed as of such Time of Delivery,
and the following additional conditions:


         (a) Sullivan & Cromwell LLP, counsel for the Purchasers, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to such matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably request to
enable them to pass upon such matters;


         (b) Morrison & Foerster LLP, counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:


                (i) The Company is a corporation duly organized, validly
         existing and in good standing under the laws of the State of Delaware
         and has corporate power and authority to own its properties and conduct
         its business as described in the Offering Circular;


                (ii) The Company has an authorized capitalization as set forth
         in the Offering Circular, and all of the issued and outstanding shares
         of the Company's common stock, $0.001 par

                                       11

         value per share, have been duly authorized and validly issued and are
         fully paid and non-assessable; and the shares of Stock initially
         issuable upon conversion of the Securities have been duly authorized
         and reserved for issuance and, when issued and delivered upon
         conversion of the Securities and in accordance with the provisions of
         the Securities, the Indenture and this Agreement, will be validly
         issued, fully paid and non-assessable, and will conform in all material
         respects to the description of the Stock contained in the Offering
         Circular;


                (iii) The Company has been duly qualified to transact business
         as a foreign corporation and is in good standing under the laws of the
         States of California, Indiana, New Jersey, New York, Tennessee and
         Texas;


                (iv) To such counsel's knowledge, all of the issued shares of
         capital stock of each subsidiary of the Company are owned directly or
         indirectly by the Company free and clear of all liens, encumbrances,
         equities or claims;


                (v) To such counsel's knowledge and other than as set forth in
         the Offering Circular, there are no legal or governmental proceedings
         pending to which the Company or any of its subsidiaries is a party or
         of which any property of the Company or any of its subsidiaries is the
         subject which, if determined adversely to the Company or any of its
         subsidiaries, would individually or in the aggregate have a material
         adverse effect on the current or future consolidated financial
         position, stockholders' equity or results of operations of the Company
         and its subsidiaries taken as a whole, and, to such counsel's
         knowledge, no such proceedings are threatened or contemplated by
         governmental authorities or threatened by others;


                (vi) This Agreement has been duly authorized, executed and
         delivered by the Company;


                (vii) The Securities have been duly authorized, executed and
         delivered by the Company and, assuming due authentication by the
         Trustee, when issued and paid for in accordance with this Agreement and
         the Indenture, will constitute legal, valid and binding obligations of
         the Company entitled to the benefits provided by the Indenture; and the
         Securities and the Indenture conform in all material respects to the
         descriptions thereof in the Offering Circular;


                (viii) The Indenture has been duly authorized, executed and
         delivered by the Company and constitutes a legal, valid and binding
         obligation of the Company, enforceable in accordance with its terms,
         subject, as to enforcement, to bankruptcy, insolvency, reorganization
         and other laws of general applicability relating to or affecting
         creditors' rights and to general equity principles;


                (ix) The Registration Rights Agreement has been duly authorized,
         executed and delivered by the Company and constitutes a legal, valid
         and binding obligation of the Company enforceable against the Company
         in accordance with its terms;


                (x) The issue and sale of the Securities and the performance by
         the Company of its obligations under the provisions of the Securities,
         the Registration Rights Agreement, the Indenture and this Agreement and
         the consummation of the transactions herein and therein contemplated,
         will not result in a violation of the charter or bylaws of the Company,
         and to such counsel's knowledge, will not result in violation of any
         law, administrative regulation or

                                       12

         administrative or court decree applicable to the Company or any
         subsidiary of the Company or any of their properties, and, to such
         counsel's knowledge, will not constitute a material breach of the
         terms, conditions or provisions of or constitute a default under any
         contract, undertaking, indenture or other agreement by which the
         Company is now bound or to which it is now a party and which has been
         included as an exhibit to the Company's Exchange Act Reports filed with
         the Commission prior to the date hereof and incorporated by reference
         in the Offering Circular;


                (xi) No consent, approval, authorization, order, registration or
         qualification of or with any such court or governmental agency or body
         is required for the issue and sale of the Securities or the
         consummation by the Company of the transactions contemplated by this
         Agreement, the Registration Rights Agreement or the Indenture, except,
         such as may be required under the Act in connection with the shares of
         Stock issuable upon conversion of the Securities and such consents,
         approvals, authorizations, registrations or qualifications as may be
         required under state securities or Blue Sky laws in connection with the
         purchase and distribution of the Securities by the Purchasers;


                (xii) The statements set forth in the Offering Circular under
         the caption "Description of Capital Stock", insofar as they purport to
         constitute a summary of the terms of the Securities and the Stock, and
         under the caption "Material United States Federal Income Tax
         Considerations," insofar as they purport to describe the provisions of
         the laws and documents referred to therein, are accurate and correct in
         all material respects;


                (xiii) The Exchange Act Reports (other than the financial
         statements, supporting schedules, footnotes, and other financial and
         statistical information therein, as to which such counsel need express
         no opinion), when they were filed with the Commission, complied as to
         form in all material respects with the requirements of the Exchange
         Act, and the rules and regulations of the Commission thereunder;


                (xiv) No registration of the Securities under the Act, and no
         qualification of an indenture under the United States Trust Indenture
         Act of 1939 with respect thereto, is required for the offer, sale and
         initial resale of the Securities by the Purchasers in the manner
         contemplated by this Agreement and the Offering Circular; and


                (xv) The Company is not and, after giving effect to the offering
         and sale of the Securities and the application of the proceeds thereof
         as described in the Offering Circular under the caption "Use of
         Proceeds", will not be an "investment company," as such term is defined
         in the Investment Company Act of 1940.


         In addition, such counsel shall state that nothing has come to such
counsel's attention that leads such counsel to believe that (1) the Offering
Circular and any further amendments or supplements thereto made by the Company
prior to the Time of Delivery contained as of the date of the Offering Circular
or the Time of Delivery an untrue statement of a material fact or omitted or
omits, as the case may be, to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or (2) any of the Exchange Act Reports filed by the Company with
the Commission prior to the date of the Offering Circular and incorporated by
reference therein, when such Exchange Act Reports were so filed, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such

                                       13

documents were so filed, not misleading (it being understood that such counsel
need not make any comment with respect to the financial statements, supporting
schedules, footnotes, and other financial and statistical information contained
in the Offering Circular or any amendments or supplements thereto, or any of the
documents included or deemed to be included therein).


         In addition, Katrina Church, General Counsel of the Company, shall have
furnished to you a letter, dated such Time of Delivery, in form and substance
satisfactory to you, to the same effect as clause (1) of the immediately
preceding paragraph.


         (c) Townsend and Townsend and Crew LLP, intellectual property counsel
for the Company, shall have furnished to you their written opinion, dated such
Time of Delivery, in form and substance satisfactory to you, to the effect that:


                (i) To the best of knowledge of such counsel, the Company has
         valid, binding and enforceable licenses or other rights to use U.S.
         Patent No. 6,126,920 (the `920 patent) related to clobetasol propionate
         foam (OLUX(R)) and betamethasone valerate foam (Luriq(R));


                (ii) Attached Schedule A to such opinion ("U.S. Patent
         Applications") lists pending U.S. patent applications which are being
         prosecuted by such counsel and which, to the best of their knowledge,
         are owned by the Company. Where the Company is listed as the owner, an
         assignment from the inventors to the Company has been recorded or is
         being recorded in the United States Patent and Trademark Office, or the
         inventor(s) has a duty to assign to the Company. Based on the
         Certification by the Officer of the Company (as identified in such
         opinion), to the best of their knowledge, there are no claims or
         potential claims to any ownership interest or liens on any of the
         patents or patent applications listed in Schedule A by any party other
         than the Company; and


                (iii) Based on the Certification by the Officer of the Company,
         to the best of their knowledge, (1) the Company has not received notice
         of any claim of misappropriation of any intellectual property rights or
         infringement of any patents held by others, and (2) there is no pending
         or threatened action, suit, proceeding or claim by others that the
         Company is infringing a patent or has misappropriated any intellectual
         property rights;


         (d) On the date of the Offering Circular prior to the execution of this
Agreement and also at each Time of Delivery, Ernst & Young LLP shall have
furnished to you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set forth in
Annex I hereto;


         (e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Offering Circular any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Offering Circular, and (ii) since the
respective dates as of which information is given in the Offering Circular there
shall not have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole, otherwise than as set forth or contemplated in
the Offering Circular, the effect of which, in any such case described in clause
(i) or (ii), is in the judgment of the Representatives so material and adverse
as to make it

                                       14

impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities on the terms and in the manner contemplated in this Agreement
and in the Offering Circular;


         (f) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;


         (g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on the Nasdaq National Market; (ii)
a suspension or material limitation in trading in the Company's securities on
the Nasdaq National Market; (iii) a general moratorium on commercial banking
activities declared by any of Federal, New York State or California State
authorities or a material disruption in commercial banking or securities
settlement or clearance services in the United States; (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war or (v) the occurrence of any other
calamity or crisis or any change in financial, political or economic conditions
in the United States or elsewhere, if the effect of any such event specified in
clause (iv) or (v) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated in the Offering Circular;


         (h) The Securities shall have been designated for trading on PORTAL;


         (i) The Company shall have obtained and delivered to the Purchasers
executed copies of a written agreement of those directors and executive officers
and other stockholders of the Company listed on Exhibit B-1 in the Form of
Exhibit B-2 hereto, subject to such exceptions as previously agreed between the
parties hereto (each such agreement, a "Lock-Up Agreement"), by the First Time
of Delivery, and executed originals of each Lock-Up Agreement shall have been
delivered to you by such time; and


         (j) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsection (e) of this Section and as
to such other matters as you may reasonably request.


         8. (a) The Company will indemnify and hold harmless each Purchaser
against any losses, claims, damages or liabilities, joint or several, to which
such Purchaser may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Offering Circular, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact necessary to make the statements therein not
misleading, and will reimburse each Purchaser for any legal or other expenses
reasonably incurred by such Purchaser in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made

                                       15

in the Offering Circular or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by any
Purchaser through Goldman, Sachs & Co. expressly for use therein.


         (b) Each Purchaser will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in the
Offering Circular, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Offering Circular or
any such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Purchaser through Goldman, Sachs &
Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.


         (c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to,
or an admission of, fault, culpability or a failure to act, by or on behalf of
any indemnified party.


         (d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Purchasers on
the other from the offering of the Securities. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the

                                       16

notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Purchasers on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Purchasers on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Purchasers, in each case as set forth
in the Offering Circular. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the Purchasers
on the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Purchasers agree that it would not be just and equitable if contribution
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Purchasers were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to
investors were offered to investors exceeds the amount of any damages which such
Purchaser has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. The Purchasers' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.


         (e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Purchaser within the meaning of the Act; and the obligations of the Purchasers
under this Section 8 shall be in addition to any liability which the respective
Purchasers may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.


         9. (a) If any Purchaser shall default in its obligation to purchase the
Securities which it has agreed to purchase hereunder, you may in your discretion
arrange for you or another party or other parties to purchase such Securities on
the terms contained herein. If within thirty-six hours after such default by any
Purchaser you do not arrange for the purchase of such Securities, then the
Company shall be entitled to a further period of thirty-six hours within which
to procure another party or other parties satisfactory to you to purchase such
Securities on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Securities, or the Company notifies you that it has so arranged for the
purchase of such Securities, you or the Company shall have the right to postpone
the Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Offering Circular,
or in any other documents or arrangements, and the Company agrees to prepare
promptly any amendments to the Offering Circular which in your opinion may
thereby be

                                       17

made necessary. The term "Purchaser" as used in this Agreement shall include any
person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Securities.


         (b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such
Securities which remains unpurchased does not exceed one-eleventh of the
aggregate principal amount of all the Securities, then the Company shall have
the right to require each non-defaulting Purchaser to purchase the principal
amount of Securities which such Purchaser agreed to purchase hereunder and, in
addition, to require each non-defaulting Purchaser to purchase its pro rata
share (based on the principal amount of Securities which such Purchaser agreed
to purchase hereunder) of the Securities of such defaulting Purchaser or
Purchasers for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Purchaser from liability for its default.


         (c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of Securities
which remains unpurchased exceeds one-eleventh of the aggregate principal amount
of all the Securities, or if the Company shall not exercise the right described
in subsection (b) above to require non-defaulting Purchasers to purchase
Securities of a defaulting Purchaser or Purchasers, then this Agreement shall
thereupon terminate, without liability on the part of any non-defaulting
Purchaser or the Company, except for the expenses to be borne by the Company and
the Purchasers as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Purchaser from liability for its default.


         10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Purchasers, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Purchaser or any controlling person of any Purchaser, or the Company, or
any officer or director or controlling person of the Company, and shall survive
delivery of and payment for the Securities.


         11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Purchaser except as
provided in Sections 6 and 8 hereof; but, if for any other reason, the
Securities are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Purchasers through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Purchasers in making preparations for the
purchase, sale and delivery of the Securities, but the Company shall then be
under no further liability to any Purchaser except as provided in Sections 6 and
8 hereof.


         12. In all dealings hereunder, you shall act on behalf of each of the
Purchasers, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Purchaser made or given
by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.



                                       18


      All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Purchasers shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the Offering
Circular, Attention: Secretary; provided, however, that any notice to a
Purchaser pursuant to Section 8(c) hereof shall be delivered or sent by mail,
telex or facsimile transmission to such Purchaser at its address set forth in
its Purchasers' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.

      13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Purchasers, the Company and, to the extent provided in Sections 8 and 10
hereof, the officers and directors of the Company and each person who controls
the Company or any Purchaser, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Securities from any Purchaser shall be deemed a successor or assign by reason
merely of such purchase.

      14. Time shall be of the essence of this Agreement.


      15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.


      16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.

      17. The Company is authorized, subject to applicable law, to disclose any
and all aspects of this potential transaction that are necessary to support any
U.S. federal income tax benefits expected to be claimed with respect to such
transaction, and all materials of any kind (including tax opinions and other tax
analyses) related to those benefits, without the Purchasers imposing any
limitation of any kind.



                                       19

      If the foregoing is in accordance with your understanding, please sign and
return to us eight counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Purchasers, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Purchasers and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Purchasers is pursuant to the authority set forth in a form of Agreement
among Purchasers, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.

                                         Very truly yours,


                                         CONNETICS CORPORATION

                                         By:  /s/ John L. Higgins
                                              ----------------------------------
                                              Name: John L. Higgins
                                              Title: CFO


Accepted as of the date hereof:


GOLDMAN, SACHS & CO.
C.E. UNTERBERG, TOWBIN (A CALIFORNIA
   LIMITED PARTNERSHIP)
CIBC WORLD MARKETS CORP.
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY INC.

By:        /s/ Goldman, Sachs & Co.
     ---------------------------------------
            (Goldman, Sachs & Co.)

     On behalf of each of the Purchasers.

            [Signature page to Purchase Agreement dated May 21, 2003]



                                       20

                                   SCHEDULE I



                                                               PRINCIPAL         OPTIONAL
                                                               AMOUNT OF         AMOUNT OF
                                                               SECURITIES       SECURITIES
                                                                  TO BE           TO BE
                      PURCHASER                                 PURCHASED        PURCHASED
- ---------------------------------------------------------      -----------      -----------
                                                                          
Goldman, Sachs & Co. ....................................      $56,000,000      $10,000,000
C.E. Unterberg, Towbin (a California Limited Partnership)
                                                                 4,000,000               --
CIBC World Markets Corp. ................................        8,000,000               --
Thomas Weisel Partners LLC ..............................        8,000,000               --
U.S. Bancorp Piper Jaffray Inc. .........................        4,000,000               --
                                                               -----------      -----------

                  Total .................................      $80,000,000      $10,000,000
                                                               ===========      ===========


                                                                         ANNEX I

      Pursuant to Section 7(d) of the Purchase Agreement, the accountants shall
furnish letters to the Purchasers to the effect that:

            (i) They are independent certified public accountants with respect
      to the Company and its subsidiaries within the meaning of the Securities
      Exchange Act of 1934 (the "Exchange Act") and the applicable published
      rules and regulations thereunder;

            (ii) In our opinion, the consolidated financial statements and
      financial statement schedules audited by us and included in the Offering
      Circular comply as to form in all material respects with the applicable
      requirements of the Exchange Act and the related published rules and
      regulations;

            (iii) The unaudited selected financial information with respect to
      the consolidated results of operations and financial position of the
      Company for the five most recent fiscal years included in the Offering
      Circular agrees with the corresponding amounts (after restatements where
      applicable) in the audited consolidated financial statements for such five
      fiscal years;

            (iv) On the basis of limited procedures not constituting an audit in
      accordance with generally accepted auditing standards, consisting of a
      reading of the unaudited financial statements and other information
      referred to below, a reading of the latest available interim financial
      statements of the Company and its subsidiaries, inspection of the minute
      books of the Company and its subsidiaries since the date of the latest
      audited financial statements included in the Offering Circular, inquiries
      of officials of the Company and its subsidiaries responsible for financial
      and accounting matters and such other inquiries and procedures as may be
      specified in such letter, nothing came to their attention that caused them
      to believe that:

                  (A) the unaudited consolidated statements of operations,
            consolidated balance sheets and consolidated statements of cash
            flows included in the Offering Circular are not in conformity with
            generally accepted accounting principles applied on the basis
            substantially consistent with the basis for the unaudited condensed
            consolidated statements of income, consolidated balance sheets and
            consolidated statements of cash flows included in the Offering
            Circular;

                  (B) any other unaudited statement of operations data and
            balance sheet items included in the Offering Circular do not agree
            with the corresponding items in the unaudited consolidated financial
            statements from which such data and items were derived, and any such
            unaudited data and items were not determined on a basis
            substantially consistent with the basis for the corresponding
            amounts in the audited consolidated financial statements included in
            the Offering Circular;

                  (C) the unaudited financial statements which were not included
            in the Offering Circular but from which were derived any unaudited
            condensed financial statements referred to in clause (A) and any
            unaudited income statement data and balance sheet items included in
            the Offering Circular and referred to in clause (B) were not

                                       22

            determined on a basis substantially consistent with the basis for
            the audited consolidated financial statements included in the
            Offering Circular;

                  (D) any unaudited pro forma consolidated condensed financial
            statements included in the Offering Circular do not comply as to
            form in all material respects with the applicable accounting
            requirements or the pro forma adjustments have not been properly
            applied to the historical amounts in the compilation of those
            statements;

                  (E) as of a specified date not more than five days prior to
            the date of such letter, there have been any changes in the
            consolidated capital stock (other than issuances of capital stock
            upon exercise of options and stock appreciation rights, upon
            earn-outs of performance shares and upon conversions of convertible
            securities, in each case which were outstanding on the date of the
            latest financial statements included in the Offering Circular or any
            increase in the consolidated long-term debt of the Company and its
            subsidiaries, or any decreases in consolidated net current assets or
            stockholders' equity or other items specified by the
            Representatives, or any increases in any items specified by the
            Representatives, in each case as compared with amounts shown in the
            latest balance sheet included in the Offering Circular except in
            each case for changes, increases or decreases which the Offering
            Circular discloses have occurred or may occur or which are described
            in such letter; and

                  (F) for the period fro the date of the latest financial
            statements included in the Offering Circular to the specified date
            referred to in clause (E) there were any decreases in consolidated
            net revenues or operating profit or the total or per share amounts
            of consolidated net income or other items specified by the
            Representatives, or any increases in any items specified by the
            Representatives, in each case as compared with the comparable period
            of the preceding year and with any other period of corresponding
            length specified by the Representatives, except in each case for
            decreases or increases which the Offering Circular discloses have
            occurred or may occur or which are described in such letter; and

            (v) In addition to the examination referred to in their report(s)
      included in the Offering Circular and the limited procedures, inspection
      of minute books, inquiries and other procedures referred to in paragraphs
      (iii) and (iv) above, they have carried out certain specified procedures,
      not constituting an audit in accordance with generally accepted auditing
      standards, with respect to certain amounts, percentages and financial
      information specified by the Representatives, which are derived from the
      general accounting records of the Company and its subsidiaries, which
      appear in the Offering Circular, and have compared certain of such
      amounts, percentages and financial information with the accounting records
      of the Company and its subsidiaries and have found them to be in
      agreement.



                                      A-2

                                    EXHIBIT A

                     [Form of Registration Rights Agreement]

                                   EXHIBIT B-1

List of persons to sign Lock-Up Agreements:

Barkas, PH.D., Alexander E.

Bauer, M.D., Eugene A.

Church, Katrina J.

Eckert, R. Andrew

Foehr, Matthew W.

Gardiner, Rebecca

Gilbert, Ph.D., Denise M.

Higgins, John L.

Kane, John C.

Kiley, Thomas D.

Miller, Michael P.

Oclassen, Glenn A.

Panetta, Leon E.

Raab, G. Kirk

Vontz, C. Gregory

Wiggans, Thomas G.

                                   EXHIBIT B-2


                              CONNETICS CORPORATION

                                LOCK-UP AGREEMENT

                                  MAY ___, 2003

Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004

       Re: Connetics Corporation - Lock-Up Agreement

Ladies and Gentlemen:

      The undersigned understands that you, as representatives (the
"Representatives"), propose to enter into a Purchase Agreement on behalf of the
several Purchasers named in Schedule I to such agreement (collectively, the
"Purchasers"), with Connetics Corporation, a Delaware corporation (the
"Company"), providing for an offering of convertible senior notes (the "Notes")
of the Company that will be convertible into shares of the common stock, par
value $0.001 per share (the "Common Stock"), of the Company.

      In consideration of the agreement by the Purchasers to offer and sell the
Notes, and of other good and valuable consideration the receipt and sufficiency
of which is hereby acknowledged, the undersigned agrees that, during the period
beginning from the date of the Offering Circular covering the Notes and
continuing to and including the date 90 days after the date of such Offering
Circular (the "Lock-Up Period"), the undersigned will not offer, sell, contract
to sell, pledge, grant any option to purchase, make any short sale or otherwise
dispose of, or exercise any registration rights with respect to, any shares of
Common Stock, or any options or warrants to purchase any shares of Common Stock,
or any securities convertible into, exchangeable for or that represent the right
to receive shares of Common Stock, whether now owned or hereafter acquired,
owned directly by the undersigned (including holding as a custodian) or with
respect to which the undersigned has beneficial ownership within the meaning of
the rules and regulations of the Securities and Exchange Commission
(collectively, the "Undersigned's Shares").

      The foregoing restriction is expressly agreed to preclude the undersigned
from engaging in any hedging or other transaction which is designed to or which
reasonably could be expected to lead to or result in a sale or disposition of
the Undersigned's Shares even if such shares would be disposed of by someone
other than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale or any purchase, sale or grant of any
right (including without limitation any put or call option) with respect to any
of the Undersigned's Shares or with respect to any security that includes,
relates to, or derives any significant part of its value from such shares.

      Notwithstanding the foregoing, the undersigned may transfer the
Undersigned's Shares (i) as a bona fide gift or gifts, provided that the donee
or donees thereof agree to be bound in writing by the restrictions set forth
herein, (ii) to any trust for the direct or indirect benefit of the undersigned
or the immediate family of the undersigned, provided that the trustee of the
trust agrees to be bound in writing by the restrictions set forth herein, and
provided further that any such transfer shall not involve a disposition for
value, or (iii) with the prior written consent of Goldman, Sachs & Co. on behalf
of the Purchasers. For purposes of this agreement, "immediate family" shall mean
any relationship by blood, marriage or adoption, not more remote than first
cousin. In addition, notwithstanding the foregoing, if the undersigned is a
corporation, the corporation may transfer the capital stock of the Company to
any wholly-owned subsidiary of such corporation; provided, however, that in any
such case, it shall be a condition to the transfer that the transferee execute
an agreement stating that the transferee is receiving and holding such capital
stock subject to the provisions of this agreement and there shall be no further
transfer of such capital stock except in accordance with this agreement, and
provided further that any such transfer shall not involve a disposition for
value. The undersigned now has, and, except as contemplated by clause (i), (ii),
or (iii) above, for the duration of this agreement will have, good and
marketable title to the Undersigned's Shares, free and clear of all liens,
encumbrances, and claims whatsoever. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of the Undersigned's Shares except in compliance
with the foregoing restrictions.

      The undersigned understands that the Company and the Purchasers are
relying upon this agreement in proceeding toward consummation of the offering.
The undersigned further understands that this agreement is irrevocable and shall
be binding upon the undersigned's heirs, legal representatives, successors and
assigns.

                                            Very truly yours,

                                            ------------------------------------
                                            Exact Name of Shareholder

                                            ------------------------------------
                                            Authorized Signature

                                            ------------------------------------
                                            Title

                                      B-2-2

EX-5.1

                                                                     EXHIBIT 5.1

                      [MORRISON & FOERSTER LLP LETTERHEAD]

                                 August 26, 2003

Connetics Corporation
3290 West Bayshore Road
Palo Alto, California 94303

Ladies and Gentlemen:

         We have acted as counsel to Connetics Corporation (the "Company") in
connection with the preparation and filing with the Securities and Exchange
Commission (the "Commission") of the Company's Registration Statement on Form
S-3 (the "Registration Statement") relating to the registration under the
Securities Act of 1933 of the resale by the holders thereof of a total of
$90,000,000 principal amount of 2.25% Convertible Senior Notes due May 30, 2008
(the "Notes") and the shares of common stock issuable upon conversion thereof
(the "Shares"). The Notes were issued pursuant to the Indenture dated as of May
28, 2003 between the Company and J.P. Morgan Trust Company, National Association
(the "Indenture").

         In connection with this opinion, (i) we have reviewed the Registration
Statement, the Indenture, the Notes and certain of the Company's other corporate
records, documents, instruments and proceedings taken in connection with the
authorization and issuance of the Notes and the Shares, and (ii) we have made
such inquiries of officers of the Company and public officials and have
considered such questions of law as we have deemed necessary for the purpose of
rendering the opinions set forth herein.

         We have assumed the genuineness of all signatures on and the
authenticity of all items submitted to us as originals and the conformity to
originals of all items submitted to us as copies. We also have relied, as to
matters of fact, upon the accuracy of representations and certificates of the
Company's officers. We have also relied on the Company's records and have
assumed the accuracy and completeness thereof. The opinions hereinafter
expressed are subject to the effect of bankruptcy, insolvency, reorganization,
arrangement, moratorium or other similar laws relating to or affecting the
rights of creditors generally, including, without limitation, laws relating to
fraudulent transfers or conveyances, preferences and equitable subordination.

         Based on and subject to the foregoing, we are of the opinion that (i)
the Notes constitute legal, valid and binding obligations of the Company, and
(ii) following the issuance upon conversion of the Notes in accordance with, and
in the manner contemplated by, the Notes, the Indenture and the Registration
Statement, the Shares will be validly issued, fully paid and nonassessable

         We express no opinion as to matters governed by laws of any
jurisdiction other than the substantive laws of the State of New York (including
the applicable choice-of-law



rules), the laws of the State of Delaware and the federal laws of the United
States of America, in each case as in effect on the date hereof.

         We consent to the reference to our firm under the caption "Legal
Matters" in the prospectus included in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.

                                               Very truly yours,

                                               /s/ Morrison & Foerster LLP

                                               Morrison & Foerster LLP

EX-12.1

                                                                    EXHIBIT 12.1

                              CONNETICS CORPORATION

                                     EXHIBIT
                       STATEMENT OF COMPUTATION OF RATIOS
                          OF EARNINGS TO FIXED CHARGES



                                     Three months ended  Six months ended               For the year ended
                                          June 30,            June 30,                         December 31,
(in thousands)                              2003                2003          2002      2001       2000       1999       1998
                                            ----                ----          ----      ----       ----       ----       ----
                                                                                                 
Income (loss) from continuing
operations before income taxes           $     (654)         $   (8,552)   $ (16,409) $ (16,397) $ 33,198  $ (27,283) $ (26,595)

Add fixed charges                               384                 543          658        460       597      1,099      1,424

                                         ------------------------------    ----------------------------------------------------
   Earnings (as defined)                 $     (270)         $   (8,009)   $ (15,751) $ (15,937) $ 33,795  $ (26,184) $ (25,171)
                                         ==============================    ====================================================

Fixed charges

   Interest Expense                             175                 175           11         46       235        868       1304
   Amoritization of debt
    issuance costs                               56                  56            0          0         0          0          0
   Estimated interest component
    of rent expenses                            153                 312          647        414       362        231        120

                                         ------------------------------    ----------------------------------------------------
Total fixed charges                             384                 543          658        460       597       1099       1424
                                         ==============================    ====================================================

Ration of earnings to fixed
  charges                                 Note  (ii)           Note (ii)     Note (i)   Note (i)    56.64    Note (i)   Note (i)
                                         ------------------------------    ----------------------------------------------------


(i)      Earnings, as defined, were insufficient to cover fixed charges by $16.4
         million, $16.4 million, $27.3 million, and $26.6 million in the fiscal
         years 2002, 2001, 1999, and 1998, respectively.

(ii)     Earnings, as defined, were insufficient to cover fixed charges by
         $654,000 and $8.6 million in the three and six months ended June 30,
         2003.

EX-23.1

                                                                    EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

         We consent to the reference to our firm under the caption "Experts" in
this Registration Statement (Form S-3) and related Prospectus of Connetics
Corporation for the registration of $90,000,000 of aggregate principal amount of
2.25% Convertible Senior Notes due May 30, 2008 and 4,203,450 shares of its
common stock and to the incorporation by reference therein of our report dated
January 24, 2003, with respect to the consolidated financial statements and
schedule of Connetics Corporation included in its Annual Report (Form 10-K/A)
for the year ended December 31, 2002, filed with the Securities and Exchange
Commission.

                                               /s/ ERNST & YOUNG LLP
Palo Alto, California
August 25, 2003

EX-25.1

                                                                    EXHIBIT 25.1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                            -------------------------

                                    FORM T-1

                            STATEMENT OF ELIGIBILITY
                    UNDER THE TRUST INDENTURE ACT OF 1939 OF
                   A CORPORATION DESIGNATED TO ACT AS TRUSTEE

                   -------------------------------------------
               CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
                     A TRUSTEE PURSUANT TO SECTION 305(b)(2)

                    ----------------------------------------

                J. P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION
               (Exact name of trustee as specified in its charter)

                                                             95-4655078
     (State of incorporation                              (I.R.S. employer
     if not a national bank)                             identification No.)

560 MISSION STREET, FLOOR 13
SAN FRANCISCO, CALIFORNIA                                         94105
(Address of principal executive offices)                      (Zip Code)

                               William H. McDavid
                                 General Counsel
                                 270 Park Avenue
                            New York, New York 10017
                               Tel: (212) 270-2611
            (Name, address and telephone number of agent for service)

                  --------------------------------------------
                             CONNETICS CORPORATION
               (Exact name of obligor as specified in its charter)

           DELAWARE                                           94-3173928
(State or other jurisdiction of                           (I.R.S. employer
incorporation or organization)                           identification No.)


3290 WEST BAYSHORE ROAD
PALO ALTO, CA                                                   94303
(Address of principal executive offices)                     (Zip Code)

                 2.25% CONVERTIBLE SENIOR NOTES DUE MAY 30, 2008
                       (Title of the indenture securities)
          -------------------------------------------------------------

ITEM 1.    GENERAL INFORMATION.

           Furnish the following information as to the trustee:

     (a)   Name and address of each examining or supervising authority to
           which it is subject.

           Comptroller of the Currency, Washington, D.C.
           Board of Governors of the Federal Reserve System, Washington, D.C.

     (b)   Whether it is authorized to exercise corporate trust powers.

           Yes.

ITEM 2.    AFFILIATIONS WITH OBLIGOR.

     If the Obligor is an affiliate of the trustee, describe each such
     affiliation.

     None.

ITEMS 3-15 are not applicable because, to the best of the Trustee's knowledge,
      the obligor is not in default under any Indenture for which the Trustee
      acts as Trustee.

ITEM 16.   LIST OF EXHIBITS.

     List below all exhibits filed as part of this statement of eligibility.

     Exhibit 1.   Articles of Association of the Trustee as Now in Effect
                  (see Exhibit 1 to Form T-1 filed in connection with Form 8K of
                  the Southern California Water Company filing, dated December
                  7, 2001, which is incorporated by reference).

     Exhibit 2.   Certificate of Authority of the Trustee to Commence
                  Business (see Exhibit 2 to Form T-1 filed in connection with
                  Registration Statement No. 333-41329, which is incorporated by
                  reference).

     Exhibit 3.   Authorization of the Trustee to Exercise Corporate Trust
                  Powers (contained in Exhibit 2).

     Exhibit 4.   Existing By-Laws of the Trustee (see Exhibit 4 to Form
                  T-1 filed in connection with Form 8K of the Southern
                  California Water Company filing, dated December 7, 2001, which
                  is incorporated by reference).

     Exhibit 5.   Not Applicable

     Exhibit 6.   The consent of the Trustee required by Section 321 (b) of
                  the Act (see Exhibit 6 to Form T-1 filed in connection with
                  Registration Statement No. 333-41329, which is incorporated by
                  reference).

     Exhibit 7.   A copy of the latest report of condition of the Trustee,
                  published pursuant to law or the requirements of its
                  supervising or examining authority.

     Exhibit 8.   Not Applicable

     Exhibit 9.   Not Applicable


                                       2

                                    SIGNATURE

       Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, J. P. Morgan Trust Company, National Association, has duly caused this
statement of eligibility and qualification to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of San Francisco, and
State of California, on the 26th day of August, 2003.


                                J. P. Morgan Trust Company, National Association


                                By    /s/: Mitch Gardner
                                   -------------------------------
                                      Mitch Gardner
                                      Vice President



                                       3

EXHIBIT 7. Report of Condition of the Trustee.


CONSOLIDATED REPORT OF CONDITION OF
J.P. Morgan Trust Company, National Association
- -----------------------------------------------
                 (Legal Title)

LOCATED AT

1800 Century Park East, Ste. 400       Los Angeles,        CA             90067
- --------------------------------------------------------------------------------
(Street)                           (City)          (State)          (Zip)

AS OF CLOSE OF BUSINESS ON        June 30, 2003
                           ---------------------------------

ASSETS  DOLLAR AMOUNTS IN THOUSANDS
                                                                                           

1.     Cash and balances due from depository institutions (from Schedule RC-A):
           a. Noninterest-bearing balances and currency and coin (1)                              30,069
           b. Interest bearing balances (2)                                                            0
2.     Securities:
           a. Held-to-maturity securities (from Schedule RC-B, column A)                               0
           b. Available-for-sale securities (from Schedule RC-B, column D)                       106,073
3.     Federal Funds sold and securities purchased agreements to resell                                0
4.     Loans and lease financing receivables (from Schedule RC-C):
           a. Loans and leases held for sale                                                           0
           b. Loans and leases, net of unearned income                                 41,488
           c. LESS: Allowance for loan and lease losses                                     0
           d. Loans and leases, net of unearned income and
              allowance (item 4.b minus 4.c)                                                      41,488
5.     Trading assets (from Schedule RC-D)                                                             0
6.     Premises and fixed assets (including capitalized leases)                                    9,168
7.     Other real estate owned (from Schedule RC-M)                                                    0
8.     Investments in unconsolidated subsidiaries and associated companies
       (from Schedule RC-M)                                                                            0
9.     Customers' liability to this bank on acceptances outstanding                                    0
10.    Intangible assets
           a. Goodwill                                                                                 0
           b. Other intangible assets (from Schedule RC-M)                                       162,542
11.    Other assets (from Schedule RC-F)                                                          17,245
12.             TOTAL ASSETS (sum of items 1 through 11)                                         367,185



(1)    Includes cash items in process of collection and unposted debits.

(2)    Includes time certificates of deposit not held for trading.




                                       4


LIABILITIES
                                                                                           

13.    Deposits:
           a. In domestic offices (sum of totals of columns A and C from
                Schedule RC-E)                                                                    97,653
                (1) Noninterest-bearing (1)                                          97,653
                (2) Interest-bearing                                                     0
           b. In foreign offices, Edge and Agreement subsidiaries, and IBF'
                (1) Noninterest-bearing                                                                0
                (2) Interest-bearing                                                                   0
14.    Federal funds purchased and securities sold under agreements to repurchase                      0
15.    Trading liabilities (from Schedule RC-D)                                                        0
16.    Other borrowed money (includes mortgage indebtedness and obligations
       under capitalized leases) (from Schedule RC-M):                                                 0
17.    Not applicable
18.    Bank's liability on acceptances executed and outstanding 0
19.    Subordinated notes and debentures (2)                                                           0
20.    Other liabilities (from Schedule RC-G)                                                     47,491
21.    Total liabilities (sum of items 13 through 20)                                            145,144
22.    Minority interest in consolidated subsidiaries                                                  0

EQUITY CAPITAL

23.    Perpetual preferred stock and related surplus                                                   0
24.    Common stock                                                                                  600
25.    Surplus (exclude all surplus related to preferred stock)                                  181,587
26.    a. Retained earnings                                                                       39,854
       b. Accumulated other comprehensive income (3)                                                   0
27.    Other equity capital components (4)                                                             0
28.    Total equity capital (sum of items 23 through 27)                                         222,041
29.    Total liabilities, minority interest, and equity capital
       (sum of items 21, 22, and 28)                                                             367,185



(1)   Includes total demand deposits and noninterest-bearing time and savings
      deposits.

(2)   Includes limited-life preferred stock and related surplus.

(3)   Includes net unrealized holding gains (losses) on available-for-sale
      securities, accumulated net gains (losses) on cash flow hedges, and
      minimum pension liability adjustments.

(4)   Includes treasury stock and unearned Employee Stock Ownership Plan shares.




                                       5