10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2005

Commission file number: 0-27406

CONNETICS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-3173928
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)
3160 Porter Drive	94304
Palo Alto, California	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (650) 843-2800

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

     As of July 29, 2005, 34,972,877 shares of the Registrant’s common stock at $0.001 par value were outstanding.

CONNETICS CORPORATION

TABLE OF CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		3
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2005 and 2004		4
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2005 and 2004		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk		18
Item 4. Controls and Procedures		19
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders		19
Item 6. Exhibits		20
Signatures		21
Exhibits		22
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONNETICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	June 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	14,562		$	18,261
Marketable securities		237,649			54,122
Restricted cash — current		1,000			1,000
Accounts receivable, net of allowances		15,914			21,206
Inventory, net		7,440			5,020
Prepaid expenses		8,879			7,561
Other current assets		2,168			1,963
Total current assets		287,612			109,133
Property and equipment, net		14,045			11,830
Restricted cash — long term		3,059			2,963
Debt issuance costs, deposits and other assets		11,462			3,707
Goodwill and other intangible assets, net		121,860			128,659
Total assets	$	438,038		$	256,292
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,120		$	14,531
Assumed liabilities related to acquisition of product rights		2,298			2,710
Accrued payroll and related expenses		4,876			5,746
Product rebate and coupon accruals		15,315			10,564
Accrued clinical trial costs		1,683			751
Other accrued liabilities		7,162			3,650
Total current liabilities		46,454			37,952
Convertible senior notes		290,000			90,000
Other non-current liabilities		471			420
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock		35			36
Additional paid-in capital		207,567			237,666
Deferred stock compensation		(4	)		(13	)
Accumulated deficit		(107,630	)		(111,173	)
Accumulated other comprehensive income		1,145			1,404
Total stockholders’ equity		101,113			127,920
Total liabilities and stockholders’ equity	$	438,038		$	256,292

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues:
Product	$	45,239		$	37,999		$	87,429		$	61,565
Royalty and contract		130			254			311			1,670
Total revenues		45,369			38,253			87,740			63,235
Operating costs and expenses:
Cost of product revenues		4,982			3,578			8,748			5,146
Amortization of intangible assets		3,400			3,400			6,799			4,672
Research and development		8,957			5,096			14,855			9,537
Selling, general and administrative		25,356			17,467			53,165			32,760
Total operating costs and expenses		42,695			29,541			83,567			52,115
Income from operations		2,674			8,712			4,173			11,120
Interest income		1,845			152			2,322			500
Interest expense		(1,860	)		(690	)		(2,631	)		(1,381	)
Other income (expense), net		(4	)		(70	)		(63	)		(19	)
Income before income taxes		2,655			8,104			3,801			10,220
Income tax provision		153			647			258			890
Net income	$	2,502		$	7,457		$	3,543		$	9,330
Net income per share:
Basic	$	0.07		$	0.21		$	0.10		$	0.27
Diluted	$	0.07		$	0.19		$	0.09		$	0.25
Shares used to calculate net income per share:
Basic		34,825			35,242			35,259			34,439
Diluted		37,093			41,627			37,785			36,722

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	3,543		$	9,330
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		772			744
Amortization of intangible assets		6,799			4,672
Amortization of convertible senior notes offering costs		550			368
Allowance for discounts, returns and chargebacks		4,121			2,804
Stock compensation expense		9			9
Changes in assets and liabilities:
Accounts receivable		1,174			(6,589	)
Prepaids and other assets		(3,819	)		(1,485	)
Inventory		(2,375	)		(3,290	)
Accounts payable		984			7,944
Product rebates and coupon accruals		4,751			4,301
Accrued and other current liabilities		3,200			920
Other non-current liabilities		51			—
Net cash provided by operating activities		19,760			19,728
Cash flows from investing activities:
Purchases of marketable securities		(238,682	)		(22,578	)
Sales and maturities of marketable securities		54,981			85,809
Purchases of property and equipment		(3,088	)		(1,492	)
Acquisition of patent and product rights		—			(123,529	)
Net cash used in investing activities		(186,789	)		(61,790	)
Cash flows from financing activities:
Transfer to restricted cash		(96	)		(2,696	)
Proceeds from issuance of convertible senior notes, net of issuance costs		193,625			—
Proceeds from issuance of common stock, net of issuance costs		—			56,901
Repurchase of common stock		(35,000	)		—
Proceeds from exercise of stock options and employee stock purchase plan, net of repurchases of unvested shares		4,860			3,021
Net cash provided by financing activities		163,389			57,226
Effect of foreign currency exchange rate changes on cash and cash equivalents		(59	)		(172	)
Net change in cash and cash equivalents		(3,699	)		14,992
Cash and cash equivalents at beginning of period		18,261			17,946
Cash and cash equivalents at end of period	$	14,562		$	32,938

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Policies

     We prepared the accompanying unaudited condensed consolidated financial statements of Connetics Corporation, or Connetics, in accordance with accounting principles generally accepted in the United States for interim financial information and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. We believe that we have included all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation.

     Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For a better understanding of Connetics and its financial statements, we recommend reading these unaudited condensed consolidated financial statements and notes in conjunction with the audited consolidated financial statements and notes to those financial statements for the year ended December 31, 2004, which are included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or SEC.

Principles of Consolidation

     The accompanying condensed consolidated financial statements include the accounts of Connetics and its subsidiaries, Connetics Holdings Pty Ltd., and Connetics Australia Pty Ltd. We eliminated all intercompany accounts and transactions in consolidation. We reclassified certain prior period amounts and balances to conform to the current year presentation. On the condensed consolidated balance sheets as of June 30, 2005, raw material inventory balances that were previously included in prepaid expenses, other current assets, and other assets as of December 31, 2004 and prior periods have been reclassified to inventory; these reclassifications are reflected on the condensed consolidated statements of cash flows for the six months ended June 30, 2005 and 2004. Managed care and Medicaid rebates, or product rebates, and coupon reserves were reclassified from an accounts receivable allowance to product rebates and coupon accruals.

Use of Estimates

     To prepare financial statements in conformity with accounting principles generally accepted in the United States, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates based upon future events.

     We evaluate our estimates on an on-going basis. In particular, we regularly evaluate estimates related to recoverability of accounts receivable and inventory, revenue reserves, assumed liabilities related to acquired product rights and accrued liabilities for clinical trial activities and indirect promotional expense. We base our estimates on historical experience and on various other specific assumptions that we believe to be reasonable under the circumstances. Those estimates and assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Revenue Recognition

     Product Revenues. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. We recognize product revenues net of revenue reserves, which consist of allowances for discounts, returns, rebates, and chargebacks. Management establishes revenue reserves using its best estimate at the time of sale based on historical experience adjusted to reflect known changes in the factors that impact such reserves. We accept from customers the return of products that are within six months before their expiration date. We also authorize returns for damaged products and exchanges for expired products in accordance with our return goods policy and procedures. We establish reserves for all such returns at the time of sale. We include product shipping and handling costs in the cost of product revenues. In connection with distribution service agreements, we recognize revenue net of fees paid to the wholesalers for certain product distribution, inventory management, information, return goods processing, and administrative services. Discounts, allowance for bad debt and chargebacks are shown as a reduction to accounts receivable, and product rebates and coupon reserves are shown as an addition to accrued expenses since these amounts are due to a party other than the direct customer.

     During the three months ended June 30, 2005, we experienced unexpected product returns related to expiring and expired products at our wholesaler customers of OLUX® that were significantly above historical levels. Based on our analysis, we recorded a charge to product revenues of $2.3 million in the three months ended June 30, 2005 for expired and estimated expiring products at our customers associated with product sales recorded in prior periods. Our analysis considered information contained in the reporting provided to us by wholesaler customers under the distribution service agreements; that type of information was not available to us before the second quarter of 2005. This charge resulted in a decrease in product revenues for the three months ended June 30, 2005.

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     Royalty Revenue. We collect royalties from our third-party licensees based on their sales. We recognize royalties either in the quarter in which we receive the royalty payment from the licensee or in the quarter in which we can reasonably estimate the royalty, which is typically one quarter following the related sale by the licensee.

     Contract Revenue. We record contract revenue for research and development, or R&D, and milestone payments as earned based on the performance requirements of the contract. We recognize non-refundable contract fees for which no further performance obligations exist, and for which Connetics has no continuing involvement, on the date we receive the payments or the date when collection is assured, whichever is earlier.

     If, at the time an agreement is executed, there remains significant risk due to the incomplete state of the product’s development, we recognize revenue from non-refundable upfront license fees ratably over the period in which we have continuing development obligations. We recognize revenue associated with substantial “at risk” performance milestones, as defined in the respective agreements, based upon the achievement of the milestones. When we receive advance payments in excess of amounts earned, we classify them as deferred revenue until they are earned.

Inventory

     Inventory consists of raw materials and finished goods primarily related to currently marketed products. In addition, inventory may include similar costs for product candidates awaiting regulatory approval, which are capitalized based on management’s judgment of probable near term commercialization or alternative future uses. We state inventory at the lower of cost (determined on a first-in first-out method) or market. If inventory costs exceed expected market value due to obsolescence or lack of demand, we record reserves in an amount equal to the difference between the cost and the market value. These reserves are based on significant estimates and assumptions by management.

Stock-Based Compensation

     We use the intrinsic-value method of accounting for stock-based awards granted to employees, as allowed under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25, and related interpretations. Accordingly, we do not recognize any compensation in our financial statements in connection with stock options granted to employees when those options have exercise prices equal to or greater than fair market value of our common stock on the date of grant. We also do not record any compensation expense in connection with our Employee Stock Purchase Plan as long as the purchase price is not less than 85% of the fair market value at the beginning or end of each offering period, whichever is lower.

     For options granted to non-employees, we have determined compensation expense in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123, as amended, and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” By those criteria, we quantify compensation expense as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured.

     Although SFAS 123 allows us to continue to follow the APB 25 guidelines, we are required to disclose pro forma net income (loss) and basic and diluted income (loss) per share as if we had applied the fair value based method to all awards. Because the estimated value is determined as of the date of grant, the actual value that the employee ultimately realizes may be significantly different.

7

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands except per share amounts):	2005			2004			2005			2004
Net income, as reported	$	2,502		$	7,457		$	3,543		$	9,330
Add: Stock-based employee compensation expense, net of related tax effects		5			4			9			8
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(4,330	)		(2,617	)		(9,651	)		(5,301	)
Pro forma net income (loss)	$	(1,823	)	$	4,844		$	(6,101	)	$	4,037
Net income (loss) per share:
Basic net income — as reported	$	0.07		$	0.21		$	0.10		$	0.27
Diluted net income — as reported	$	0.07		$	0.19		$	0.09		$	0.25
Basic net income (loss) — pro forma	$	(0.05	)	$	0.14		$	(0.17	)	$	0.12
Diluted net income (loss) — pro forma	$	(0.05	)	$	0.13		$	(0.16	)	$	0.11

     For purposes of this analysis, we estimate the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. We used the following weighted average assumptions in the model:

	Stock Option Plans						Stock Option Plans
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Expected stock volatility		46.3	%		55.8	%		47.1	%		56.6	%
Risk-free interest rate		3.9	%		3.3	%		3.6	%		2.8	%
Expected life (in years)		4.0			3.4			4.0			3.4
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

	Stock Purchase Plan						Stock Purchase Plan
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Expected stock volatility		54.5	%		51.6	%		50.2	%		51.6	%
Risk-free interest rate		1.8	%		3.8	%		1.7	%		3.8	%
Expected life (in years)		1.3			1.6			1.4			1.6
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires us to make highly subjective assumptions, including the expected volatility of our stock. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, we do not believe that the existing models necessarily provide a reliable single measure of the fair value of our options. The weighted average fair value of the options granted, determined using the Black-Scholes model, was $9.80 for the six months ended June 30, 2005 and $8.05 for the six months ended June 30, 2004.

     The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on reported results of future periods.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which requires companies to measure and recognize compensation expense for all stock-based awards at fair value. Stock-based awards include grants of employee stock options. SFAS 123R replaces SFAS 123 and supersedes APB 25, which are discussed above. SFAS 123R requires companies to recognize all stock-based awards to employees and to reflect those awards in the financial statements based on the fair values of the awards. In April 2005, the SEC modified the effective date for SFAS 123R, resulting in the pronouncement being effective for all annual periods beginning after June 15, 2005. We are required to adopt SFAS 123R in our fiscal year beginning January 1, 2006, after which the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based awards, the amortization method for compensation cost, and the transition method to be used at date of adoption. The transition methods permit companies to adopt the model retroactively or prospectively. The prospective method would require that we record compensation expense for all unvested stock options and restricted stock at the beginning of the year we adopt SFAS 123R. Under the retroactive method, we would be permitted to restate prior periods either as of the beginning of the year of adoption or for all periods presented, and we would record compensation expense for all unvested

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stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined which transition method we will use, the effect of adopting SFAS 123R, or whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

     On September 30, 2004, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” concluding that contingently convertible debt instruments should be included in diluted earnings per share computations (if dilutive) regardless of whether the market price trigger (or other contingent feature) has been met. This consensus is effective for reporting periods ending after December 15, 2004, and requires companies to restate prior period earnings per share amounts presented for comparative purposes utilizing a transition method. As of December 31, 2004, we had no outstanding contingently convertible debt. In March 2005, we issued contingently convertible debt and adopted the consensus. Our adoption of EITF No. 04-8 had no impact on diluted earnings per share for the six months ended June 30, 2005 or for prior years.

Note 2. Net Income Per Share

     To compute basic net income per share we divide net income by the weighted average number of common shares outstanding during the period. To compute diluted net income per share, we divide net income by the weighted average of all potential shares of common stock outstanding during the period. For the three months ended June 30, 2004, we included all dilutive stock options, warrants, and convertible debt in the calculation of diluted net income per share. As part of the dilutive calculation we excluded interest expense related to the convertible debt, net of tax effect from net income, to arrive at net income for the three months ended June 30, 2004. For the three and six months ended June 30, 2005 and the six months ended June 30, 2004 the effect of the convertible debt was not included in the calculation of diluted net income per share as it was anti-dilutive.

     The calculation of basic and diluted net income per share is as follows (in thousands except share amounts):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Net income, as reported	$	2,502	$	7,457	$	3,543	$	9,330
Add back: interest expense, net of tax effect		—		649		—		—
Diluted income	$	2,502	$	8,106	$	3,543	$	9,330
Basic weighted-average shares outstanding		34,825		35,242		35,259		34,439
Effect of:
Dilutive stock options		2,268		2,150		2,526		2,247
Dilutive warrants		—		32		—		36
Convertible debt		—		4,203		—		—
Diluted weighted-average shares outstanding		37,093		41,627		37,785		36,722
Net income per share:
Basic	$	0.07	$	0.21	$	0.10	$	0.27
Diluted	$	0.07	$	0.19	$	0.09	$	0.25

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     In calculating diluted net income per share, we excluded the following weighted-average options and convertible debt, as their effect would be anti-dilutive (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Common stock equivalents:
Options		1,480		106		1,247		42
Convertible debt		4,203		—		4,203		4,203
Total		5,683		106		5,450		4,245

     In 2005 and subsequent years, our dilutive securities may include incremental shares issuable upon conversion of all or part of the $200 million in 2.00% convertible senior notes. Since the $200 million principal amount can only be redeemed for cash, it has no impact on the diluted earnings per share calculation. The conversion feature of these notes is triggered when our common stock reaches a certain market price and, if triggered, may require us to pay a stock premium in addition to redeeming the accreted principal amount for cash. In accordance with the consensus from EITF No. 04-8, we will include the dilutive effect of the notes in our calculation of net income per diluted share when the impact is dilutive. As of June 30, 2005, the conversion feature of these notes did not have a dilutive effect because the weighted average market price of our common stock did not exceed the initial conversion price of $35.46 to trigger any shares to be issuable upon conversion. Therefore, the notes had no effect on our dilutive securities or our net income per diluted share for the period ended June 30, 2005.

Note 3. Comprehensive Income

     The components of comprehensive income are as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income	$	2,502		$	7,457		$	3,543		$	9,330
Foreign currency translation adjustment		48			(233	)		(174	)		(362	)
Change in unrealized gain on securities, net of reclassification adjustments for realized gain (loss)		(1	)		(315	)		(83	)		(431	)
Comprehensive income	$	2,549		$	6,909		$	3,286		$	8,537

     Accumulated other comprehensive income recorded in stockholders’ equity included $103,000 of net unrealized gains on investments and $1.0 million of foreign currency translation adjustments as of June 30, 2005, and, as of December 31, 2004, included $276,000 of unrealized gains on investments and $1.1 million of foreign currency translation adjustments.

4. Convertible Senior Notes and Stock Repurchase

     On March 23, 2005, we issued $150 million of 2.00% convertible senior notes due March 30, 2015 to qualified institutional buyers in a private placement exempt from registration pursuant to Rule 144A of the Securities Act of 1933, as amended. The initial purchasers exercised in full an option to purchase up to an additional $50 million principal amount of notes with the same terms, and the sale was completed on March 30, 2005. The notes were sold at par and we received net cash proceeds of $159 million after expenses of $6.8 million and net of $35.0 million used to repurchase our common stock. We repurchased 1,332,300 shares of common stock at an average price of $26.27 per share.

     The notes are senior, unsecured obligations and rank equal in right of payment with all of our existing and future unsecured and unsubordinated debt. The notes are convertible into cash or, under certain circumstances, cash and shares of our common stock. The initial conversion rate of the notes is 28.1972 shares of common stock per each $1,000 principal amount of notes, subject to adjustment in certain circumstances, which represents a conversion price of approximately $35.46 per share. This conversion price is higher than the prices of our common stock on the dates the notes were issued. The notes bear interest at a rate of 2.00% per annum for the initial five year period, which is payable in arrears on March 30 and September 30 of each year until March 30, 2010. The first interest payment will be made on September 30, 2005. For the remaining five-year period commencing on March 30, 2010, we will pay contingent interest for six-month periods if the average trading price of a note is above a specified level for a specified period prior to the six-month period. In addition, beginning on March 30, 2010, the original principal amount shall be increased at a rate that provides holders with an aggregate annual yield to maturity of 2.00%.

     The holders may convert the notes under the following circumstances: (1) on or before March 30, 2009, if the closing sale price of our common stock is above a specified level, (2) at any time after March 30, 2009, or (3) if a specified

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fundamental change occurs, such as a merger or acquisition of the company. On or after March 30, 2010, holders of the notes may require us to repurchase all or a portion of their notes at 100% of the principal amount of the notes plus accrued and unpaid interest. On or after April 4, 2010, at our option, we may redeem all or a portion of the notes at a redemption price equal to the accreted principal amount of the notes to be redeemed plus accrued and unpaid interest. If we undergo a specified fundamental change, holders will have the right, at their option, except in certain defined circumstances, to require us to purchase for cash all or any portion of their notes at a price equal to the accreted principal amount plus accrued and unpaid interest. If a holder elects to convert its notes in connection with the occurrence of a specified fundamental change, the holder will be entitled to receive additional shares of common stock upon conversion in certain circumstances.

     At March 31, 2005, we did not have a sufficient number of shares of common stock to issue to holders upon conversion of the notes. Pursuant to the exchange arrangement, if we did not have enough common stock at the time of conversion, we would be permitted to issue shares of our newly created Series C Preferred Stock in lieu of common stock. The Series C Preferred Stock was convertible into shares of common stock at a rate of 1,000 shares of common stock for every 1.1 shares of Series C Preferred Stock. At our annual meeting held on April 22, 2005, our stockholders approved an increase of our authorized shares of common stock from 50 million to 100 million shares. As a result, we have a sufficient number of shares of common stock to issue to holders upon conversion, and accordingly, we eliminated the Series C Preferred Stock.

     Offering expenses of $6.8 million related to the issuance of these notes are included in debt issuance costs, deposits, and other assets as of June 30, 2005. We are amortizing those expenses on a straight-line basis over the ten year contractual term of the notes.

5. Inventory

     The components of inventory are as follows (in thousands):

	June 30,		December 31,
	2005		2004
Raw materials	$	2,107	$	677
Finished goods, net of allowance		5,333		4,343
Total inventory	$	7,440	$	5,020

     As of June 30, 2005, inventory included $636,000 in raw materials for Velac®, a product candidate for which we are seeking approval by the Food and Drug Administration, or FDA, for commercial use.

Note 6. Goodwill and Purchased Intangible Assets

     There were no changes in the carrying amount of goodwill during the six months ended June 30, 2005. The components of our other intangible assets at June 30, 2005 are as follows (in thousands):

			June 30, 2005							December 31, 2004
	Useful Life		Gross Carrying		Accumulated					Gross Carrying		Accumulated
	in Years		Amount		Amortization			Net		Amount		Amortization			Net
Acquired product rights		10	$	127,652	$	(17,021	)	$	110,632	$	127,652	$	(10,638	)	$	117,014
Existing technology		10		6,810		(2,866	)		3,944		6,810		(2,525	)		4,285
Patents		10 to 13		1,661		(648	)		1,013		1,661		(572	)		1,089
Total			$	136,123	$	(20,535	)	$	115,589	$	136,123	$	(13,735	)	$	122,388

     Amortization expenses for our other intangible assets were $3.4 million for the three months ended June 30, 2005 and $6.8 million for the six months ended June 30, 2005. For the same reporting periods in 2004, amortization expenses were $3.4 million and $4.7 million, respectively.

     The expected future amortization expense of our other purchased intangible assets is as follows (in thousands):

	Amortization
	Expense
Remaining six months in 2005	$	6,799
For the year ending December 31, 2006		13,598
For the year ending December 31, 2007		13,598
For the year ending December 31, 2008		13,598
For the year ending December 31, 2009		13,598
For the year ending December 31, 2010		13,598
Thereafter		40,800
Total	$	115,589

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Note 7. Guaranties and Indemnifications

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others,” or FIN No. 45. FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. FIN No. 45 also requires the guarantor to make additional disclosures about the obligations associated with its guarantees in its interim and annual financial statements.

     We enter into indemnification provisions under our agreements with other companies in the ordinary course of our business, typically with business partners, contractors, clinical sites, insurers and customers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. The estimated fair value of the indemnity obligations of these agreements is insignificant. Accordingly, we have not recorded liabilities for these agreements as of June 30, 2005. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.

Note 8. Co-Promotion Agreements

     In March 2004, we entered into an agreement with UCB Pharma Inc., or UCB, a subsidiary of UCB Group Inc., pursuant to which we authorized UCB to promote OLUX® and Luxíq® to a segment of U.S. primary care physicians, or PCP’s. In July 2004, UCB acquired Celltech plc, and in connection with other post-acquisition changes, UCB notified us that it intended to discontinue the co-promotion agreement effective March 31, 2005. UCB continued to promote OLUX and Luxíq until that date. We recorded 100% of the revenue from sales generated by promotional efforts of UCB and paid UCB a portion of revenue as a promotional expense, which is included in selling, general and administrative expense. UCB bore the marketing costs for promoting the products (including product samples, marketing materials, etc.). We do not have any financial obligation to UCB on prescriptions generated by PCP’s after March 31, 2005.

     In April 2005, we entered into an agreement with Ventiv Pharma Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc., under which VPS provides sales support for certain of our products to primary care physicians and pediatricians. Product sales activities under this agreement commenced in mid-April 2005. VPS promotes OLUX, Luxíq and Evoclin™. We record 100% of the revenue from product sales generated by promotional efforts of VPS, pay VPS a fee for the personnel providing the promotional efforts, which are included in selling, general and administrative expense, and bear the marketing costs for promoting the products, including product samples and marketing materials.

Note 9. Commitments

     Our commitments, including those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004, and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2005, consist primarily of operating lease agreements for our facilities as of March 31, 2005, minimum purchase commitments under one of our contract manufacturing agreements, minimum royalty commitments under one of our license agreements, and noncancellable purchase orders as of December 31, 2004.

     In March 2005, we received landlord approval for a sublease signed in August 2004 for approximately 19,500 square feet of office space in Palo Alto, California. Payments under the sublease will commence on January 1, 2006.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion and analysis should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2004, and with the unaudited condensed consolidated financial statements and notes to financial statements included in this Report. Our disclosure and analysis in this Report, in other reports that we file with the Securities and Exchange Commission, in our press releases and in public statements of our officers may contain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act. Forward-looking statements give 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

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“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 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. Some of the factors that, in our view, could cause actual results to differ are discussed under the caption “Factors Affecting Our Business and Prospects” in our 2004 Annual Report on Form 10-K. Our historical operating results are not necessarily indicative of the results to be expected in any future period.

Overview

     We are a specialty pharmaceutical company that develops and commercializes innovative products for the dermatology market. This market is characterized by a large patient population that is served by relatively small, and therefore more accessible, groups of treating physicians. Our products aim to improve the management of dermatological diseases and provide significant product differentiation. We have branded our proprietary foam drug delivery vehicle, VersaFoam®.

     We currently market four pharmaceutical products:

• OLUX, a super high-potency topical steroid prescribed for the treatment of steroid responsive dermatological diseases;

• Luxíq, a mid-potency topical steroid prescribed for scalp dermatoses such as psoriasis, eczema and seborrheic dermatitis;

• Soriatane, an oral medicine for the treatment of severe psoriasis; and

• Evoclin, a topical treatment for acne vulgaris.

     We began selling Soriatane in March 2004 after we acquired the U.S. product rights from Roche. We launched Evoclin commercially in December 2004 after we received product approval from the FDA. Sales of these new products contributed significantly to our revenue growth in 2004 and into 2005.

     In April 2005, we entered into an agreement with Ventiv Pharma Services, LLC, or VPS, a subsidiary of Ventiv Health, Inc., under which VPS will provide sales support for OLUX, Luxíq and Evoclin to primary care physicians and pediatricians. Product sales activities under this agreement commenced in mid-April. We record 100% of the revenue from product sales generated by promotional efforts of VPS, pay VPS a fee for the personnel providing the promotional efforts, and bear the marketing costs for promoting the products, including product samples and marketing materials.

     On June 10, 2005, the FDA issued a non-approvable letter for our product candidate Velac. The FDA based its decision on the fact that a “positive carcinogenicity signal was detected in a Tg.AC mouse dermal carcinogenicity study.” Based on our clinical trials and our analysis of the mouse study, we had concluded that the mouse study was not predictive of human results. We expect to continue working with the FDA to determine if and how Velac may be approved at some future date.

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Critical Accounting Policies

     We have made no material changes to our critical accounting policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Results of Operations

Revenues

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	(In thousands)				(In thousands)
	2005		2004		2005		2004
Product revenues:
Soriatane	$	18,334	$	17,154	$	35,915	$	20,794
OLUX		14,033		15,223		29,825		29,593
Luxíq		5,835		5,614		11,489		11,085
Evoclin		7,037		—		10,104		—
Other		—		8		96		93
Total product revenues		45,239		37,999		87,429		61,565
Royalty and contract revenues:
Royalty		130		172		228		1,525
Contract		—		82		83		145
Total royalty and contract revenues		130		254		311		1,670
Total revenues	$	45,369	$	38,253	$	87,740	$	63,235

     We recorded product revenues of $45.2 million for the three months ended June 30, 2005, compared to $38.0 million for the three months ended June 30, 2004, for an increase of $7.2 million or 19%. The increase in product revenues is primarily attributable to the introduction of two new products, Soriatane in March 2004 and Evoclin in December 2004, which accounted for $1.2 million and $7.0 million of the incremental revenue, respectively. During the three months ended June 30, 2005, we experienced unexpected product returns related to expired and expiring products at our wholesaler customers of OLUX that were significantly above historical levels. Based on our analysis, we recorded a charge to product revenues of $2.3 million in the three months ended June 30, 2005 for expired and estimated expiring products at our customers, associated with product sales recorded in prior periods. Our analysis considered information contained in the reporting provided to us by our wholesaler customers under the distribution service agreements that became available to us in the second quarter of 2005. This additional reserve was recorded as a decrease in product revenues in the second quarter, which partially offset the increased sales from the new products.

     For the six months ended June 30, 2005, our product revenues were $87.4 million compared to $61.6 million for the six months end June 30, 2004, for an increase of $25.8 million or 42%. The increase in product revenues is attributable to Soriatane and Evoclin, which accounted for $15.1 million and $10.1 million of the increase, respectively, partially offset by the additional returns reserve recorded in the second quarter as described above.

     Royalty and contract revenues were $130,000 and $311,000 for the three and six months ended June 30, 2005, compared to $254,000 and $1.7 million, for the comparable periods in 2004, respectively. Royalty and contract revenues were lower for the first half of 2005 compared to the same period in the prior year due to the final royalty payment of $1.2 million made by S.C. Johnson in the first quarter of 2004.

Cost of Product Revenues

     Our cost of product revenues includes the third party costs of manufacturing OLUX, Luxíq and Evoclin, the cost of Soriatane inventory acquired from Roche, depreciation costs associated with Connetics-owned equipment located at the DPT facility in Texas, allocation of overhead, royalty payments based on a percentage of our product revenues, product freight and distribution costs from our distributor in Tennessee and certain manufacturing support and quality assurance costs.

     We recorded cost of product revenues of $5.0 million for the three months ended June 30, 2005, compared to $3.6 million for the comparable periods in 2004, for an increase of $1.4 million or 39%. The increase was primarily due to $1.1 million of increased overhead costs allocated to cost of finished goods sold and $0.4 million of increased production costs relating to our new products Soriatane and Evoclin , partially offset by $0.6 million of decreased royalty payments due on

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lower Soriatane sales to a U.S.-based distributor that exports branded pharmaceuticals to select international markets in the three months ended June 30, 2005. In addition, we recorded a reserve of $0.3 million in the three months ended June 30, 2005 for finished goods product that may not be shipped because less than preferable dating at the time of shipment.

     For the six months ended June 30, 2005 and 2004, our cost of product revenues were $8.7 million and $5.1 million, respectively, for an increase of $3.6 million or 71%. The increase was primarily due to $1.9 million of increased production costs relating to our new products Soriatane and Evoclin and $1.1 million of increased overhead costs allocated to cost of finished goods sold. The increase also included the $0.3 million reserve for finished goods described above.

Amortization of Intangible Assets

     Amortization expenses were $3.4 million for the three months ended June 30, 2005 and $6.8 million for the six months ended June 30, 2005, compared to $3.4 million and $4.7 million, respectively, for the comparable periods in 2004. The $2.1 million increase for the six months ended June 30, 2005 over the same period in 2004 is the result of four months’ amortization of the Soriatane product rights acquired in March 2004 compared to two full quarters in 2005.

Research and Development

     Our research and development, or R&D, expenses include costs of personnel to support our R&D activities, costs of preclinical studies, costs of conducting our clinical trials (such as clinical investigator fees, monitoring costs, data management and drug supply costs), external research programs, and an allocation of facilities costs. Year to year changes in R&D expenses are primarily due to the timing of and sample sizes required for particular trials.

     R&D expenses were $9.0 million for the three months ended June 30, 2005, compared to $5.1 million for the three months ended June 30, 2004, for an increase of $3.9 million or 76%. For the six months ended June 30, 2005 and 2004, R&D expenses were $14.9 million and $9.5 million, respectively, for an increase of $5.4 million or 57%. The increased expenses are primarily attributable to increased clinical trial activity in 2005 as compared to 2004 representing $2.8 million for the three months ended June 30, 2005 and $3.6 million for the six months ended June 30, 2005. The increase was also attributable to increased headcount costs of $0.5 million and $1.0 million, respectively, in the three and six months ended 2005 compared to the same periods in 2004.

Selling, General and Administrative Expenses

     Our selling, general and administrative, or SG&A, expenses include sales and marketing activities as well as expenses and costs associated with finance, legal, insurance, marketing, sales, and other administrative matters.

     We recorded SG&A expenses of $25.4 million for the three months ended June 30, 2005, compared to $17.5 million for the comparable period in 2004, for an increase of $7.8 million or 45%. The increase primarily consists of $3.5 million in increased direct and indirect promotional activities costs, $1.9 million in marketing and sales expenses such as tradeshows, advertising and conventions, and $1.2 million in increased product samples and market research costs. The increased costs also included $0.5 million in increased headcount costs in the marketing, general and administrative departments, and $0.4 million for increased legal and accounting fees.

     We recorded SG&A expenses of $53.1 million for the six months ended June 30, 2005 compared to $32.8 million for the comparable period in 2004 for an increase of $20.3 million or 62%. The increase primarily consists of $8.7 million in increased direct and indirect promotional activities costs, $4.8 million in marketing and sales expenses such as tradeshows, advertising and conventions, $2.1 million in increased product samples and market research costs, $2.0 million in increased headcount costs in the marketing, general and administrative departments and $1.0 million for increased legal and accounting fees.

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Interest and other income (expense), net

     Interest income was $1.8 million for the three months ended June 30, 2005 and $2.3 million for the six months ended June 30, 2005, compared to $152,000 and $500,000 for the three and six months ended June 30, 2004, respectively. The increase in interest income during 2005 was the result of higher average cash and investment balances in connection with the cash proceeds related to the $200 million convertible senior notes issued in March 2005, as well as increased interest rates on investments.

     Interest expense was $1.9 million for the three months ended June 30, 2005, and $2.6 million for the six months ended June 30, 2005, compared to $0.7 million and $1.4 million, respectively, for the three and six months ended June 30, 2004. The increase in interest expense was primarily due to the sale of convertible senior notes in March 2005.

Income Taxes

     We recognized income tax expense of $0.2 million for the three months ended June 30, 2005, and $0.3 million for the six months ended June 30, 2005, related to U.S. Federal alternate minimum taxes and state income taxes, offset by foreign tax benefit related to our activities in Australia. By comparison, we recognized income tax expense of $0.7 million for the three months ended June 30, 2004, and $0.9 million for the six months ended June 30, 2004. The tax provisions were primarily for U.S. Federal alternative minimum tax. We also recorded foreign tax provisions in the three and six months ended June 30, 2004 related to our Australian operations.

Liquidity and Capital Resources

Working Capital

     We have financed our operations to date primarily through proceeds from equity and debt financings, and product revenues. Cash, cash equivalents and marketable securities totaled $252.2 million at June 30, 2005, up from $72.4 million at December 31, 2004. The increase of $179.8 million was primarily due to receipt of the net cash proceeds of $194.0 million from the issuance of convertible senior notes, partially offset by a $35.0 million repurchase of our common stock. For a more complete description of the terms of the debt instruments and sales, refer to Note 4 in the Notes to Condensed Consolidated Financial Statements elsewhere in this Report. Net operating activities generated $19.8 million of cash for the six months ended June 30, 2005.

     Working capital at June 30, 2005 was $241.2 million compared to $71.2 million at December 31, 2004. In addition to the increased amounts identified above, the other significant change in working capital during the first six months of 2005 was an increase of $2.4 million in inventory to support increased product sales and the anticipated launch of Velac, a product candidate for which we are seeking approval by the Food and Drug Administration, or FDA, for commercial use.

Capital Expenditures

     We made capital expenditures of $3.1 million to purchase property and equipment for the six months ended June 30, 2005 compared to $1.5 million for the same period in 2004. The expenditures in 2005 were primarily for leasehold improvements on, and laboratory equipment purchased for, our new corporate headquarters, which we occupied at the end of February 2005. In addition, in 2004 we used $123.5 million in cash to acquire Soriatane product rights, including transaction-related costs.

Capital Resources

     We believe our existing cash, cash equivalents and marketable securities and cash generated from product sales will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least the next 12 months. We cannot be certain of the amount of our future product revenues. Our product sales may be impacted by patent risks and competition from new products.

     Products under development may not be safe and effective or approved by the FDA, or we may be unable to produce them in commercial quantities at reasonable costs. Additionally, our products may not gain satisfactory market acceptance. The amount of capital we require for operations in the future depends on numerous factors, including the level of product revenues, the extent of commercialization activities, the scope and progress of our clinical research and development programs, the time and costs involved in obtaining regulatory approvals, the cost of filing, prosecuting, and enforcing patent claims and other intellectual property rights, and competing technological and market developments. If we need

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funds in the future to in-license or acquire additional marketed or late-stage development products, a portion of the funds may come from our existing cash, which will result in fewer resources available to our current products and clinical programs. In order to take action on business development opportunities we may identify in the future, we may need to use some of our available cash, or raise additional cash by liquidating some of our investment portfolio and/or raising additional funds through equity or debt financings.

     We currently have no commitments for any additional financings. If we need to raise additional money to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when we need them, we may not be able to market our products as planned or continue development of potential products, or we could be required to delay, scale back, or eliminate some or all of our research and development programs.

Contractual Obligations and Commercial Commitments

     Our commitments, including those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004, consist primarily of operating lease agreements for our facilities as well as minimum purchase commitments under one of our contract manufacturing agreements, minimum royalty commitments under one of our license agreements, and noncancellable purchase orders as of December 31, 2004.

     In March 2005, we received landlord approval for a sublease signed in August 2004 for approximately 19,500 square feet of office space in Palo Alto, California. Payments for the sublease will commence on January 1, 2006.

     As a result of this new leasing arrangement, our operating lease payments will increase as follows (in thousands):

	Increase in
	Operating Lease
	Payments
For the year ending December 31, 2006	$	339
For the year ending December 31, 2007		303
For the year ending December 31, 2008		315
For the year ending December 31, 2009		338
For the year ending December 31, 2010		88
Total	$	1,383

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which requires companies to measure and recognize compensation expense for all stock-based awards at fair value. Stock-based awards include grants of employee stock options. SFAS 123R replaces Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation,” or SFAS 123, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires companies to recognize all stock-based awards to employees and to reflect those awards in the financial statements based on the fair values of the awards. In April 2005, the SEC modified the effective date for SFAS 123R, resulting in the pronouncement being effective for all annual periods beginning after June 15, 2005. We are required to adopt SFAS 123R in our fiscal year beginning January 1, 2006, after which the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based awards, the amortization method for compensation cost, and the transition method to be used at date of adoption. The transition methods permit companies to adopt the model retroactively or prospectively. The prospective method would require that we record compensation expense for all unvested stock options and restricted stock at the beginning of the year of we adopt of SFAS 123R. Under the retroactive method, we would be permitted to restate prior periods either as of the beginning of the year of adoption or for all periods presented, and we would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined which transition method we will use, the impact of adopting SFAS 123R, or whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

Factors that May Affect Future Results, Financial Condition and the Market Price of Securities

     Please also read Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2004, where we have described our business and the challenges and risks we may face in the future.

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     There are many factors that affect our business and results of operations, some of which are beyond our control. In our Annual Report on Form 10-K we list some of the important factors that may cause the actual results of our operations in future periods to differ materially from the results currently expected or desired. Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. The factors discussed in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K in particular under the caption “Factors Affecting Our Business and Prospects,” should be carefully considered when evaluating our business and prospects.

Our Business Strategy May Cause Fluctuating Operating Results

     Our operating results and financial condition may fluctuate from quarter to quarter and year to year depending upon the relative timing of events or uncertainties that may arise. For example, the following events or occurrences could cause fluctuations in our financial performance from period to period:

• changes in the levels we spend to develop new product lines,

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

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

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

• increasing regulatory requirements that may affect timing of new product development and ultimate commercialization,

• the development of new competitive products by others,

• the mix of products that we sell during any time period,

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

• our responses to price competition,

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

• fluctuations in royalties paid by third parties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in the reported market risks or foreign currency exchange risks from those we reported under Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2004.

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Item 4. Controls and Procedures

     In May 2005, we became aware that we had failed to file two Current Reports on Form 8-K in connection with the creation (March 2005) and elimination (May 2005) of Series C Preferred Stock. The Series C Preferred was created to be used for conversion of the convertible notes in the event that we did not have sufficient common stock for that purpose. Because our stockholders authorized an increase in our authorized common stock in April 2005, the Series C Preferred was no longer necessary. Although we disclosed this issue in other filings with the SEC, most notably our Proxy Statement, we did not timely file it on Form 8-K. As a result of our failure to file these two Forms 8-K, Connetics is ineligible to register its securities on a Registration Statement on Form S-3 until May 26, 2006.

     Connetics’ disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, undertook a re-evaluation of the effectiveness of the design and operation of Connetics’ disclosure controls and procedures and made certain changes designed to prevent similar omissions in the future. We have further educated our financial and legal reporting personnel regarding items for which a Form 8-K is required, and have implemented additional disclosure controls and procedures designed to avoid such inadvertent filing failures. This evaluation was performed as of June 30, 2005.

     Based on that re-evaluation, and taking into account the modifications, our CEO and our CFO concluded that Connetics’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective in timely alerting them to material information required to be included in our periodic SEC reports. Notwithstanding the issues raised and discussed above, our CEO and CFO also concluded that during the quarter ended June 30, 2005, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     On April 22, 2005, we held our annual meeting of stockholders. At the meeting, the stockholders acted on the following matters by the following votes:

1) Election of the following directors:

Name	For		Withheld
Alexander E. Barkas, MD		30,102,471		2,810,017
Eugene Bauer, M.D.		18,678,008		14,234,479
Andrew Eckert		22,765,545		10,146,942
Denise Gilbert, Ph.D.		31,125,696		786,792
John C. Kane		30,262,799		2,649,689
Thomas D. Kiley		31,544,126		1,368,362
Leon E. Panetta		20,638,966		12,273,521
G. Kirk Raab		29,843,519		3,068,969
Thomas G. Wiggans		31,466,209		1,466,279

2) Adoption of the 2005 Stock Plan (not approved):

For	Against		Abstain
5,687,886		22,321,253		261,999

3) Approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation:

For	Against		Abstain
28,468,459		4,281,306		162,723

4) Ratification of the appointment of Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2005:

For	Against		Abstain
32,667,617		244,361		513

19

Item 6. Exhibits

Exhibit
Number	Description
3.1*	Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Company’s Form S-1 Registration Statement No. 33-80261)
3.2*	Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on May 15, 1997 (previously filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated and filed May 23, 1997)
3.3*	Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock, as filed with the Delaware Secretary of State on May 15, 1997 (previously filed as Exhibit A to Exhibit 1 to the Company’s Form 8-A filed on May 23, 1997)
3.4*	Certificate of Elimination of Rights, Preferences and Privileges of Connetics Corporation, as filed with the Delaware Secretary of State on December 11, 2001 (previously filed as Exhibit 3.5 to the Company’s Annual Report on Form 10-K/ A for the year ended December 31, 2001)
3.5*	Certificate of Designation of Rights, Preferences and Privileges of Series C Preferred Stock, as filed with the Delaware Secretary of State on March 22, 2005 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 6, 2005)
3.6*	Certificate of Elimination of Rights, Preferences and Privileges of Series C Preferred Stock of Connetics Corporation, as filed with the Delaware Secretary of State on May 18, 2005 (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 6, 2005)
3.7*	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Connetics Corporation (previously filed as Exhibit 4.7 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.1*	Form of Change in Control Agreement between the Company and outside directors of the Company (previously filed as Exhibit 10.13 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.2*	Change of Control Agreement dated January 1, 2002 between the Company and Thomas G. Wiggans (previously filed as Exhibit 10.14 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.3*	Change of Control Agreement dated January 1, 2002 between the Company and G. Kirk Raab (previously filed as Exhibit 10.15 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.4*	Non-Qualified Stock Option Agreement between Connetics Corporation and James A. Trah (previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005)
10.5*	Non-Qualified Stock Option Agreement between Connetics Corporation and Michael Eison (previously filed as Exhibit 10.25 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.6	Non-Qualified Stock Option Agreement between Connetics Corporation and Stefan Weiss
10.7	1995 Directors’ Stock Option Plan (as amended through February 10, 2005),and forms of Option Agreement
10.8	Description of Compensation Payable to Non-Employee Directors
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certification of the Chief Executive Officer ††
32.2	Section 1350 Certification of the Chief Executive Officer ††

*

Incorporated by this reference to the previous filing, as indicated.

††

The certifications attached as Exhibits 32.1 and 32.2 that accompany this quarterly report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Connetics Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

20

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Connetics Corporation
By:	/s/ John L. Higgins
	John L. Higgins
	Executive Vice President, Finance and Corporate Development and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer and Duly Authorized Officer of the Registrant)

Date: August 5, 2005

21

INDEX TO EXHIBITS

Exhibit
Number	Description
3.1*	Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Company’s Form S-1 Registration Statement No. 33-80261)
3.2*	Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on May 15, 1997 (previously filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated and filed May 23, 1997)
3.3*	Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock, as filed with the Delaware Secretary of State on May 15, 1997 (previously filed as Exhibit A to Exhibit 1 to the Company’s Form 8-A filed on May 23, 1997)
3.4*	Certificate of Elimination of Rights, Preferences and Privileges of Connetics Corporation, as filed with the Delaware Secretary of State on December 11, 2001 (previously filed as Exhibit 3.5 to the Company’s Annual Report on Form 10-K/ A for the year ended December 31, 2001)
3.5*	Certificate of Designation of Rights, Preferences and Privileges of Series C Preferred Stock, as filed with the Delaware Secretary of State on March 22, 2005 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 6, 2005)
3.6*	Certificate of Elimination of Rights, Preferences and Privileges of Series C Preferred Stock of Connetics Corporation, as filed with the Delaware Secretary of State on May 18, 2005 (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 6, 2005)
3.7*	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Connetics Corporation (previously filed as Exhibit 4.7 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.1*	Form of Change in Control Agreement between the Company and outside directors of the Company (previously filed as Exhibit 10.13 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.2*	Change of Control Agreement dated January 1, 2002 between the Company and Thomas G. Wiggans (previously filed as Exhibit 10.14 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.3*	Change of Control Agreement dated January 1, 2002 between the Company and G. Kirk Raab (previously filed as Exhibit 10.15 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.4*	Non-Qualified Stock Option Agreement between Connetics Corporation and James A. Trah (previously filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005)
10.5*	Non-Qualified Stock Option Agreement between Connetics Corporation and Michael Eison (previously filed as Exhibit 10.25 to the Company’s Form S-1 Registration Statement filed on June 20, 2005)
10.6	Non-Qualified Stock Option Agreement between Connetics Corporation and Stefan Weiss
10.7	1995 Directors’ Stock Option Plan (as amended through February 10, 2005),and forms of Option Agreement
10.8	Description of Compensation Payable to Non-Employee Directors
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certification of the Chief Executive Officer ††
32.2	Section 1350 Certification of the Chief Executive Officer ††

*

Incorporated by this reference to the previous filing, as indicated.

††

The certifications attached as Exhibits 32.1 and 32.2 that accompany this quarterly report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Connetics Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

22

EX-10.6

Exhibit 10.6

CONNETICS CORPORATION

NON-QUALIFIED STOCK OPTION AGREEMENT

          Connetics Corporation, a Delaware corporation (“Connetics” or the “Corporation”), hereby grants to Stefan Weiss (the “Optionee”) an option to purchase 20,000 shares of Common Stock (the “Option”) subject to the following terms and conditions of this Non-Qualified Stock Option Agreement (the “Option Agreement”):

I. NOTICE OF STOCK OPTION GRANT

Stefan Weiss
3160 Porter Drive
Palo Alto, CA 94304
Date of Grant	July 11, 2005
Vesting Commencement Date	July 1, 2005
Exercise Price per Share	$17.93
Total Number of Shares of Common
Stock Subject to the Option (the “Shares”)	20,000 Shares
Total Exercise Price	$358,600.00
Type of Option:	Nonstatutory Stock Option
Term/Expiration Date:	July 11, 2015

     Vesting Schedule:
          This Option may be exercised, in whole or in part, in accordance with the following schedule:

          1/8 of the Shares subject to the Option shall vest six months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period:
          This Option may be exercised for (3) three months after the Optionee ceases to be a Service Provider for any reason other than death or Disability. In the event the Optionee ceases to be a Service Provider as the result of death or Disability, this Option may be exercised for (12) twelve months after the Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above.

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II. AGREEMENT

          1.    Grant of Option. The Corporation hereby grants to the Optionee named in the Notice of Stock Option Grant (the “Notice”) attached as Part I of this Option Agreement an option (the “Option”) to purchase the number of Shares, as set forth in the Notice, at the exercise price per share set forth in the Notice (the “Exercise Price”), subject to the terms and conditions of the Notice and this Option Agreement.

                This Option is subject to and conditioned upon Optionee’s acceptance of the Option by returning to the Corporation an executed original of this Option Agreement. This Option shall be null and void and of no force and effect, unless the Optionee executes and returns to the Corporation this Option Agreement.

                This Option is granted as an inducement material to the Optionee’s entering into service with the Corporation as an Employee. The Grantee has not previously been a Service Provider of the Company or any Parent or Subsidiary of the Company.

               This Option is not intended to be an incentive stock option under Section 422 of the Code.

          2.    Exercise of Option.

               (a)      Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice and the applicable provisions of this Option Agreement.

               (b)      Method of Exercise. This Option is exercisable by delivery of an exercise notice or by such other procedure as specified from time to time by the Board, which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”). The exercise notice shall be completed by the Optionee and delivered to Connetics in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Board. The exercise notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by Connetics of such fully executed exercise notice accompanied by such aggregate Exercise Price.

                          No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

2

          3.      Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

                    (c)      cash; or

                    (d)      check; or

                    (e)      consideration received by Connetics under a cashless exercise program implemented by Connetics in connection with this Option Agreement; or

                    (f)      surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.

          4.      Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

          5.      No Obligation to Exercise Option. The grant and acceptance of this Option imposes no obligation on the Optionee to exercise it.

          6.      No Obligation to Continue Business Relationship. The Corporation and any its’ subsidiaries are not by this Option obligated to continue to maintain a business relationship with the Optionee.

          7.      Term of Option. This Option may be exercised only within the term set out in the Notice, and may be exercised during such term only in accordance with the terms of this Option Agreement.

          8.      Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

                    (g)      Exercising the Option. The Optionee may incur regular federal income tax liability upon exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, Connetics will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

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                    (h)      Disposition of Shares. The Optionee holds the Shares acquired upon exercise of the Option for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

          9.      No Rights as Stockholder until Exercise. The Optionee shall have no rights as a stockholder with respect to the Shares until a stock certificate has been issued to the Optionee and is fully paid for in accordance with paragraph 3. With respect to certain changes in the capitalization of the Corporation, no adjustment shall be made for dividends or similar rights for which the record date is prior to the date such stock certificate is issued.

          10.     Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

                    (a)      Changes in Capitalization. Subject to any required action by the stockholders of Connetics, the number of shares of Common Stock covered by the Option as well as the Exercise Price shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by Connetics; provided, however, that conversion of any convertible securities of Connetics shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided in this Option Agreement, no issuance by Connetics of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.

                    (b)      Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of Connetics, the Board shall notify the Optionee prior to the effective date of such proposed transaction. The Board in its discretion may permit the Optionee to exercise the Option prior to such transaction as to all of the Shares, including Shares as to which the Option would not otherwise be vested and exercisable. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.

                    (i)      Merger or Asset Sale. In the event of a merger of Connetics with or into another corporation, or the sale of substantially all of the assets of Connetics, the Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Shares, including Shares as to which it would not otherwise be vested and exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of time as determined by the Board, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share subject to the Option immediately prior to the merger or sale of assets, the consideration

4

(whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Board may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

          11.      Entire Agreement; Governing Law. This Option Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes in its entirety all prior undertakings and agreements of Connetics and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by Connetics and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California.

          12.      NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE OF THIS AGREEMENT IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF CONNETICS (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES UNDER THIS AGREEMENT). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED UNDER THIS AGREEMENT AND THE VESTING SCHEDULE SET FORTH IN THIS AGREEMENT DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR CONNETICS’ RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

5

III.      DEFINITIONS

          A.      “Applicable Laws” means the requirements relating to the administration of stock options under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where the Optionee may be resident.

          B.      “Board” means the Board of Directors of Connetics.

          C.      “Code” means the Internal Revenue Code of 1986, as amended.

          D.      “Common Stock” means the common stock of Connetics.

          E.      “Corporation” means Connetics Corporation, a Delaware corporation.

          F.      “Consultant” means any person, including an advisor, engaged by Connetics or a Parent or Subsidiary to render services to such entity.

          G.      “Director” means a member of the Board.

          H.      “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          I.      “Employee” means any person, including Officers and Directors, employed by Connetics or any Parent or Subsidiary of Connetics. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by Connetics or (ii) transfers between locations of Connetics or between Connetics, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by Connetics shall be sufficient to constitute “employment” by Connetics.

          J.      “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          K.      “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)      If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable;

(ii)      If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common

6

Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or

(iii)      In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

          L.      “Officer” means a person who is an officer of Connetics within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated under the Exchange Act.

          M.      “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          N.      “Service Provider” means an Employee, Director or Consultant.

          O.      “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

7

     By your signature and the signature of Connetics’ representative below, you and Connetics agree that this Option is granted under and governed by the terms and conditions of the this Option Agreement. Optionee has reviewed this Option Agreement in its’ entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of this Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to this Option Agreement. Optionee further agrees to notify Connetics upon any change in the residence address indicated below.

OPTIONEE:	CONNETICS CORPORATION
/s/ Stefan Weiss Signature	/s/ Thomas G. Wiggans By: Thomas G. Wiggans
Stefan Weiss Print Name	Chief Executive Officer Title
Residence Address

8

EX-10.7

Exhibit 10.7

CONNETICS CORPORATION

1995 DIRECTORS’ STOCK OPTION PLAN

(as amended by the Board of Directors on February 17, 2001,
effective by vote of the stockholders as of May 17, 2001)
(as further amended by the Board of Directors on December 13, 2001 and February 10, 2005)

     1.      Purposes of the Plan. The purposes of this Directors’ Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board.

               All options granted hereunder shall be “nonstatutory stock options”.

     2.      Definitions. As used herein, the following definitions shall apply:

               (a)      “Board” shall mean the Board of Directors of the Company.

               (b)      “Code” shall mean the Internal Revenue Code of 1986, as amended.

               (c)      “Common Stock” shall mean the Common Stock of the Company.

               (d)      “Company” shall mean Connetics Corporation, a Delaware corporation.

               (e)      “Continuous Status as a Director” shall mean the absence of any interruption or termination of service as a Director.

               (f)      “Director” shall mean a member of the Board.

               (g)      “Employee” shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.

               (h)      “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

               (i)      “Option” shall mean a stock option granted pursuant to the Plan. All options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code).

               (j)      “Optioned Stock” shall mean the Common Stock subject to an Option.

               (k)      “Optionee” shall mean an Outside Director who receives an Option.

               (l)      “Outside Director” shall mean a Director who is not an Employee.

               (m)      “Parent” shall mean a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code.

               (n)      “Plan” shall mean this 1995 Directors’ Stock Option Plan.

-1-

               (o)      “Share” shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan.

               (p)      “Subsidiary” shall mean a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

     3.      Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 600,000 Shares (the “Pool”) of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock.

               If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. If Shares which were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan.

     4.      Administration of and Grants of Options under the Plan.

               (a)      Administrator. Except as otherwise required herein, the Plan shall be administered by the Board.

               (b)      Procedure for Grants. All grants of Options hereunder shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:

                         (i)      No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors.

                         (ii)      Each Outside Director who first becomes an Outside Director after the effective date of this Plan shall be automatically granted an Option (the “First Option”) to purchase 30,000 Shares on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy.

                         (iii)      Each Outside Director (including Outside Directors who were not eligible for a First Option) shall thereafter be automatically granted an Option to purchase 15,000 Shares (a “Subsequent Option”) on the date of each Annual Meeting of the Company’s shareholders at which such Outside Director is elected, provided that, on such date, he or she shall have served on the Board for at least six (6) months prior to the date of such Annual Meeting.

                         (iv)      Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on such date on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder.

                         (v)      Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained shareholder approval of the Plan in accordance with Section 17 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 17 hereof.

-2-

                         (vi)      The terms of each First Option granted hereunder shall be as follows:

                                      (1)      the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof.

                                      (2)      the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the First Option, determined in accordance with Section 8 hereof.

                                      (3)      the First Option shall become exercisable in installments cumulatively as to 25% of the Shares subject to the First Option on each of the first, second, third and fourth anniversaries of the date of grant of the Option.

                         (vii)      The terms of each Subsequent Option granted hereunder shall be as follows:

                                      (1)      the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof.

                                      (2)      the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the Subsequent Option, determined in accordance with Section 8 hereof.

                                      (3)      the Subsequent Option shall become exercisable as to one hundred percent (100%) of the Shares subject to the Subsequent Option on the first anniversary of the date of grant of the Subsequent Option.

               (c)      Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan.

               (d)      Effect of Board’s Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan.

               (e)      Suspension or Termination of Option. If the President or his or her designee reasonably believes that an Optionee has committed an act of misconduct, the President may suspend the Optionee’s right to exercise any option pending a determination by the Board of Directors (excluding the Outside Director accused of such misconduct). If the Board of Directors (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such

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misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee’s behalf at a hearing before the Board or a committee of the Board.

     5.      Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions.

               The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time.

     6.      Term of Plan; Effective Date. The Plan shall become effective on the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan.

     7.      Term of Options. The term of each Option shall be ten (10) years from the date of grant thereof.

     8.      Exercise Price and Consideration.

               (a)      Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option.

               (b)      Fair Market Value. The fair market value shall be determined by the Board; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation (“Nasdaq”) System) or, in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing price on such system or exchange on the date of grant of the Option, as reported in The Wall Street Journal. With respect to any Options granted hereunder concurrently with the initial effectiveness of the Plan, the fair market value shall be the Price to Public as set forth in the final prospectus relating to such initial public offering.

               (c)      Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law.

     9.      Exercise of Option.

               (a)      Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable prior to shareholder approval of the Plan in accordance with Section 17 hereof has been obtained.

                         An Option may not be exercised for a fraction of a Share.

                         An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to

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exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan.

                         Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

               (b)      Termination of Status as a Director. If an Outside Director ceases to serve as a Director, he or she may, but only within twelve (12) months after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate.

               (c)      Disability of Optionee. Notwithstanding Section 9(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Internal Revenue Code), he or she may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board) from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate.

               (d)      Death of Optionee. In the event of the death of an Optionee:

                         (i)      During the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as Director for six (6) months (or such lesser period of time as is determined by the Board) after the date of death. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired.

                         (ii)      Within three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, in no event may the option be exercised after its term set forth in Section 7 has expired.

     10.      Nontransferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules

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thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section.

     11.      Adjustments Upon Changes in Capitalization; Corporate Transactions.

               (a)      Adjustment. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.

               (b)      Corporate Transactions. In the event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company’s assets, (iii) a merger or consolidation in which the Company is not the surviving corporation, or (iv) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, the Company shall give to the Eligible Director, at the time of adoption of the plan for liquidation, dissolution, sale, merger, consolidation or reorganization, either a reasonable time thereafter within which to exercise the Option, including Shares as to which the Option would not be otherwise exercisable, prior to the effectiveness of such liquidation, dissolution, sale, merger, consolidation or reorganization, at the end of which time the Option shall terminate, or the right to exercise the Option, including Shares as to which the Option would not be otherwise exercisable (or receive a substitute option with comparable terms), as to an equivalent number of shares of stock of the corporation succeeding the Company or acquiring its business by reason of such liquidation, dissolution, sale, merger, consolidation or reorganization.

     12.      Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant.

     13.      Amendment and Termination of the Plan.

               (a)      Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the shareholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. Notwithstanding the foregoing, the provisions set forth in Section 4 of this Plan (and any other Sections of this Plan that affect the formula award terms required to be specified in this Plan by Rule 16b-3) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder.

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               (b)      Effect of Amendment or Termination. Any such amendment or termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company.

     14.      Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

     15.      Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

     16.      Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve.

     17.      Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the granting of an Option hereunder. If such shareholder approval is obtained at a duly held shareholders’ meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. If such shareholder approval is obtained by written consent, it may be obtained by the written consent of the holders of a majority of the outstanding shares of the Company. Options may be granted, but not exercised, before such shareholder approval.

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EX-10.8

EXHIBIT 10.8

DESCRIPTION OF COMPENSATION PAYABLE TO
NON-EMPLOYEE DIRECTORS

     On May 4, 2005, the Compensation Committee of the Board of Directors of Connetics Corporation approved the payment of the following compensation to each non-employee director of the Board in respect of his or her service on the Board, effective April 1, 2005:

• An annual retainer fee of $30,000. The annual retainer fee is payable, at the director’s election, in cash or shares of Connetics’ common stock.

• An initial stock option grant to purchase 30,000 shares of Connetics’ common stock, granted on the date on which the individual first becomes a director. The exercise price for the option is equal to the fair market value of the common stock on the date of grant. The option vests in four equal installments on the first, second, third and fourth anniversaries of the date of grant.

• An annual stock option grant to purchase 15,000 shares of Connetics’ common stock in each year the director is re-elected to the Board if, on the date of grant, the director has served on the Board for at least six months. The exercise price for the option is equal to the fair market value of Connetics’ common stock on the date of grant. The option is exercisable in full on the first anniversary of the date of grant.

• A fee of $2,000 for each Board meeting attended in person, which will increase to $2,500 effective January 1, 2006.

• A fee of $500 for each regularly scheduled Board meeting attended by telephone, which will increase to $1,000 effective January 1, 2006.

• A fee of $1,000 for each Board committee meeting attended in person or $500 for each Board committee meeting attended by telephone.

• An annual retainer of $15,000 for the chair of the Audit Committee, which is payable in cash in quarterly installments.

• An annual retainer of $7,500 for the chair of the Compensation Committee and for the chair of the Governance and Nominating Committee, which is payable in cash in quarterly installments.

• Reimbursement of out-of pocket expenses incurred by the director in connection with attending Board meetings.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas G. Wiggans, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Connetics Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2005	/s/ Thomas G. Wiggans
	Thomas G. Wiggans
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John L. Higgins, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Connetics Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2005	/s/ John L. Higgins
	John L. Higgins
	Chief Financial Officer; Executive Vice President, Finance and Corporate Development

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

     In connection with the quarterly report of Connetics Corporation (the “Registrant”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas G. Wiggans, Chief Executive Officer of the Registrant, certify, in accordance with Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

     This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Date: August 5, 2005	/s/ Thomas G. Wiggans
	Thomas G. Wiggans
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

     In connection with the quarterly report of Connetics Corporation (the “Registrant”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John L. Higgins, Chief Financial Officer; Executive Vice President, Finance and Corporate Development of the Registrant, certify, in accordance with Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

     This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Date: August 5, 2005	/s/ John L. Higgins
	John L. Higgins
	Chief Financial Officer; Executive Vice President, Finance and Corporate Development