AMENDMENT #3 TO FORM S-1: ADVANCIS PHARMACEUTICAL

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

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

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

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box. o

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

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

This is the initial public offering of shares of our common stock. No public market currently exists for our common stock.

Our shares of common stock have been approved for quotation on the Nasdaq National Market under the symbol “AVNC.” We anticipate that the initial public offering price will be between $12.00 and $14.00 per share.

Investing in our shares involves risks. See “Risk Factors” beginning on page 7.

We have granted the underwriters a 30-day option to purchase up to 900,000 additional shares of common stock at the public offering price less the underwriting discount to cover over-allotments.

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

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2003.

Until , 2003 (25 days after the commencement of this offering), all dealers selling shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. References in this prospectus to our certificate of incorporation and bylaws refer to the certificate of incorporation and bylaws as the same shall be in effect upon the completion of this offering. Unless otherwise specified or the context otherwise requires, references in this prospectus to “we,” “our” and “us” refer to Advancis Pharmaceutical Corporation.

We have focused initially on developing pulsatile formulations of approved and marketed drugs that no longer have patent protection or that have patents expiring in the next three years. We currently have four pulsatile drugs in Phase I/II clinical trials, four pulsatile drugs or drug combinations in late stage preclinical development and are exploring pulsatile formulations for a range of other antibiotics. We are also developing a non-pulsatile, generic formulation of the antibiotic Biaxin XL (extended release clarithromycin), the patent covering the active pharmaceutical ingredient for which expires in 2005. We have licensed to Par Pharmaceutical the distribution and marketing rights to this product. We intend to use any cash flow generated by this product to accelerate development of our pulsatile drug candidates.

We intend to commercialize our pulsatile products through third party collaborations and with an internal marketing and sales force. In July 2003, we entered into a collaboration agreement with GlaxoSmithKline pursuant to which we licensed patents and PULSYS technology for use with its Augmentin (amoxicillin/clavulanate combination) products, which collectively had 2002 U.S. sales of over $1.5 billion, and with limited other amoxicillin products. GlaxoSmithKline will be responsible for the clinical development, manufacture and sale of the products. We received an initial payment of $5 million from GlaxoSmithKline upon signing of our collaboration agreement and can receive milestone payments of up to $52 million if it achieves specified product development goals. In addition, upon commercialization of any of the products, we would receive certain royalty payments and may receive incentive payments of up to $50 million if specified annual sales goals are achieved.

According to sales data compiled by IMS Health, an independent pharmaceutical industry research firm, worldwide anti-infective sales were approximately $44.7 billion in 2002, including $20.3 billion in North America. Antibiotics accounted for approximately $27.2 billion of such 2002 worldwide sales, including more than $10 billion in North America. The large market for antibiotics is expected to continue to grow in light of the aging of the United States population, the increased use of therapies that compromise the immune system such as cancer chemotherapy and the growing prevalence of immune related diseases such as AIDS. Standard antibiotic regimens have significant limitations, including ineffectiveness against resistant bacteria, multiple daily dosing requirements, lengthy treatment periods and the potential for severe side effects. We believe that the growing problem of resistance and other limitations of standard antibiotic regimens are not currently being adequately addressed.

The significant unmet needs in the anti-infective market prompted our founders to search for a more efficient and effective method to attack bacteria. We found that, as a result of the relatively short natural life cycle of bacteria, antibiotics are more effective in killing bacteria when released in three to five pulses that each occur within the first six to eight hours following initial dosing. To exploit this finding, we have developed a proprietary, once-a-day delivery technology called PULSYS that enables rapid, pulsatile delivery of antibiotics and improved bioavailability, or ability to be absorbed by the body. We believe that our novel finding, as implemented through our PULSYS technology, will result in the following therapeutic advantages:


	•	Improved bactericidal activity, or bacteria killing efficiency;

	•	Once daily dosing and shorter length of treatment resulting in increased patient convenience and compliance;

	•	Lower overall drug dose with reduced side effect profile; and

	•	Decreased emergence of antibiotic resistant bacteria.

While our initial focus has been on developing pulsatile antibiotics, we believe that pulsatile dosing may offer therapeutic advantages in the areas of antivirals, antifungals and oncology. We have implemented a multi-layer patent strategy to protect our pulsatile antibiotic products as well as the pulsatile delivery of drugs in other therapeutic categories.

We intend to develop pulsatile drugs that have multiple therapeutic advantages over existing antibiotics. We plan to focus initially on developing improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. We believe that the advantages of this approach include:


	•	Decreased development risk and costs;

	•	Decreased development timeframe because we anticipate that we may rely, in part, on prior regulatory approvals and safety and efficacy data;

	•	Reasonable and predictable production costs; and

	•	Market acceptance due to the use of well-known antibiotics.

Pursue third party collaborations for widely distributed antibiotics. We anticipate collaborating with large pharmaceutical companies to apply our technology to develop pulsatile versions of widely distributed antibiotics, such as those prescribed by general practitioners, as well as combinations of such products. These collaborations will allow us to enter large markets more quickly with the greater financial and marketing resources of our partners.

Develop proprietary antibiotic combination products. We intend to focus our initial internal development efforts on pulsatile formulations of antibiotic combination products that we can market to concentrated groups of pharmaceutical prescribers, such as hospital-based physicians or specialists. This concentration will allow us to commercialize our pulsatile drugs with a relatively small internal sales force. Our initial proprietary pulsatile drug candidate is a fluoroquinolone/metronidazole combination.

License or acquire antibiotic products. We intend to license or acquire antibiotic products that we believe can be improved with our PULSYS technology. We are focused on drugs and drug candidates that would be marketed to concentrated groups of pharmaceutical prescribers and that have been proven to be safe and effective in their traditional formulations.

The following table summarizes the antibiotic compounds we have in clinical trials and which we expect will serve as the basis for drug products or, with additional clinical development, drug combination products.

We have four additional pulsatile antibiotic product candidates in late-stage preclinical development, including two combination products. We recently entered into a collaboration agreement with GlaxoSmithKline pursuant to which we licensed our patents and PULSYS technology for use with its Augmentin (amoxicillin/clavulanate combination) products. In addition, we have licensed to Par Pharmaceutical the distribution and marketing rights to our generic clarithromycin product. We are exploring pulsatile formulations for a range of other antibiotics and antibiotic combinations.

We were incorporated in Delaware in December 1999 and commenced operations in January 2000. Our principal executive offices are located at 20425 Seneca Meadows Parkway, Germantown, Maryland 20876. Our telephone number is (301) 944-6600. Our website is www.advancispharm.com. Information contained on our website is not part of, and is not incorporated into, this prospectus.

Advancis, Advancis Pharmaceutical Corp., the Advancis logo, PULSYS and MAPS are trademarks and trade names of Advancis Pharmaceutical Corporation. All other trademarks, trade names or service marks appearing in this prospectus are the property of their respective owners.



	•	1,637,823 shares of common stock issuable upon exercise of stock options outstanding as of October 6, 2003 at a weighted average exercise price of $0.78 per share;



	•	36,524 shares of common stock issuable upon exercise of outstanding warrants as of October 6, 2003 at a weighted average exercise price of $2.42 per share; and


	•	703,881 shares of common stock issuable upon exercise of stock options that we will grant on the date of this prospectus at the initial offering price to certain officers, directors, employees and a non-employee.



	•	gives effect to a 1 for 1.83008 reverse stock split, effective on October 7, 2003;


	•	assumes the underwriters have not exercised their option to purchase 900,000 shares to cover over-allotments; and

	•	reflects the automatic conversion of 27,565,555 shares of our outstanding convertible preferred stock into 15,062,486 shares of common stock upon completion of this offering.

The following table presents summary historical financial information for us. You should read this information in conjunction with our financial statements and related notes and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The pro forma net loss per share and shares used in computing pro forma net loss per share are calculated as if all of our convertible preferred stock (including shares issued after June 30, 2003) were converted into shares of our common stock on January 1, 2002. The net loss applicable to common stockholders for the six months ended June 30, 2003 does not include $22,600,000 of deemed interest and dividends related to a beneficial conversion feature charge associated with convertible notes and preferred stock issued during 2003 which will be recorded in the second half of 2003. The pro forma balance sheet data below reflects (i) the issuance of 9,292,284 shares of Series E Convertible Preferred Stock after June 30, 2003 for cash and (ii) the conversion of principal and accrued interest with respect to convertible notes in the aggregate principal amount of $5.0 million issued on March 28, 2003 into 2,263,272 shares of Series E Convertible Preferred stock after June 30, 2003. The pro forma as adjusted balance sheet data below reflects (i) the automatic conversion of each outstanding share of all classes of our preferred stock into 0.5464242 shares of common stock upon the completion of this offering and (ii) the issuance and sale of 6,000,000 shares of our common stock in this offering at an initial public offering price of $13.00 per share (the midpoint of the range of the initial offering price), after deducting the underwriting discounts and commissions and estimated offering expenses, and our receipt of the net proceeds from that sale.

An investment in our common stock involves a substantial risk of loss. You should consider carefully the following risks and other information contained in this prospectus before you decide whether to purchase our common stock. If any of these risks should actually occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline, and you may lose all or part of your investment.

From the date we began operations in January 2000 through June 30, 2003, we have incurred operating losses of approximately $30.7 million, including operating losses of approximately $7.3 million for the fiscal year ended December 31, 2001, $14.2 million for the fiscal year ended December 31, 2002 and $7.4 million for the six months ended June 30, 2003. We currently estimate that operating losses for the entire fiscal year ending December 31, 2003 will range from $17 million to $19 million (which assumes the receipt of a $3.0 million progress payment from GlaxoSmithKline (GSK) and includes an approximate $4.0 million stock-based compensation charge, but does not include a beneficial conversion charge of approximately $23.0 million associated with convertible notes and preferred stock issued in 2003). We had average cash expenditures of approximately $1.5 million per month during the first six months of 2003 to maintain our operations and we expect our average monthly expenditures to increase for the remainder of 2003. Our losses to date have resulted principally from research and development costs related to the development of our product candidates, the purchase of equipment and establishment of our facilities and general and administrative costs related to our operations.

We expect to incur substantial losses for the foreseeable future as a result of increases in our research and development costs, including costs associated with conducting preclinical testing and clinical trials, and regulatory compliance activities.

Our chances for achieving profitability will depend on numerous factors, including success in:


	•	developing and testing product candidates;


	•	achieving milestones under our collaboration agreements;


	•	receiving regulatory approvals;

	•	developing proprietary antibiotic products;

	•	commercializing our products; and

	•	establishing our competitive position.

Many of these factors will depend on circumstances beyond our control. We cannot assure you that we will ever become profitable.

Substantially all of our product candidates are based on our finding that bacteria exposed to antibiotics in front-loaded, rapid sequential bursts are eliminated more efficiently and effectively than those exposed to presently available treatment regimens. We have not identified with certainty the actual scientific mechanism that produces the finding that pulsatile delivery of antibiotics is more effective than standard treatment regimens, and we have only limited results from clinical trials involving this finding in humans. While preliminary studies in animals have supported our finding that pulsatile delivery of antibiotics is more effective than standard treatment regimens, no clinical trials testing efficacy in humans have commenced. Ultimately, our finding may be incorrect, in which case our pulsatile drugs would not differ substantially from competing drugs and may be inferior to them. If these products are substantially identical or inferior to products already available, the market for our pulsatile drugs will be reduced or eliminated.

Even if pulsatile dosing is more effective than ordinary dosing, we may be unable to apply this finding successfully to a substantial number of products in the anti-infective market. Our preliminary studies indicate that pulsatile dosing may not provide superior performance for all types of antibiotics. Additionally, we have not conducted any studies with anti-viral or anti-fungal medications. If we cannot apply our technology to a wide variety of antibiotics or other anti-infectives, our potential market will be substantially reduced.

Even if we are correct that pulsatile dosing is more effective than ordinary dosing of antibiotics, our delivery technology must be effective in humans for the administration of pulses at an appropriate level. If our PULSYS delivery technology is not effective in delivering rapid bursts of antibiotics, or is unable to do so at an appropriate level, and we are not able to create an alternative delivery method for pulsatile dosing that proves to be effective, we will be unable to capitalize on any advantage of our discovery. Should this occur, our pulsatile product candidates may not be more effective that those of our competitors, which may decrease or eliminate market acceptance of our products.

We have devoted a substantial amount of our research efforts and capital to the development of pulsatile antibiotics. We are aware that Aventis S.A. is developing Ketek, a drug that belongs to a new class of antibiotics known as ketolides. This antibiotic may compete against our pulsatile antibiotics in the treatment of upper respiratory tract infections. A number of pharmaceutical companies are also developing new classes of compounds, such as oxazolidinones, that may also compete against our pulsatile antibiotics. In addition, other companies are developing technologies to enhance the efficacy of antibiotics by adding new chemical entities that inhibit bacterial metabolic function. If a competitor produces and commercializes an antibiotic or method of delivery of antibiotics that provides superior safety, effectiveness or other significant advantages over our pulsatile antibiotics, the value of our pulsatile drugs would be substantially reduced. As a result, we would need to conduct substantial new research and development activities to establish new product targets, which would be costly and time consuming. In the event we are unable to establish new product targets, we will be unable to generate sources of revenue.

Our patents, prior art and infringement investigations were primarily conducted by our senior management and other employees. Although our patent counsel has consulted with management in connection with management’s intellectual property investigations, our patent counsel has not undertaken an extensive independent analysis to determine whether our pulsatile technology infringes upon any issued patents or whether our issued patents or patent applications covering pulsatile dosing could be invalidated or rendered unenforceable for any reason. We are aware of one issued patent owned by a third party that covers certain aspects of delivering drugs by use of two delayed release pulses. The patent covers a drug delivery system employing two delayed release pulses using two polymers. The claims made by this patent could be argued to cover certain aspects of our technology. However, we believe that we will be able to manufacture and market formulations of our pulsatile products without infringing any valid claims under this patent. Any reformulation of our products, if required, could be costly and time-consuming and may not be possible. We cannot assure you that a claim will not be asserted by such patent holder or any other holder of an issued patent that any of our products infringe their patent or that our patents are invalid or unenforceable. We may be exposed to future litigation by third parties based on claims that our products or activities infringe the intellectual property rights of others. We cannot assure you that, in the event of litigation, any claims would be resolved in our favor. Any litigation or claims against us, whether or not valid, may result in substantial costs, could place a significant strain on our financial resources, divert the attention of management and harm


	•	cease selling, incorporating or using any of our products that incorporate the challenged intellectual property;

	•	obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or

	•	redesign our products, which would be costly and time-consuming and may not be possible.

Currently, clarithromycin is covered by a series of patents that are owned or controlled by a company having substantially greater financial and other resources than us. We do not intend to market any clarithromycin products until the patent covering the active pharmaceutical ingredient (API) for clarithromycin expires in 2005, at which time we intend to commercialize a generic, extended release clarithromycin product. We have licensed to Par Pharmaceutical the right to distribute and market this generic clarithromycin product. Under our agreement with Par Pharmaceutical, it has the right to refrain from any marketing activities upon the occurrence of certain events, such as the assertion of patent infringement claims. In addition, subject to a limited exception, we will be obligated to pay for one-half of any costs, expenses or damages resulting from any claims for patent infringement. We are aware of a U.S. patent covering an extended release clarithromycin product and we are also aware of issued patents relating to the production of clarithromycin products. We believe that we will be able to manufacture and market a formulation of a clarithromycin product without infringing these patents. In the event a claim is brought against us, our distributors, licensees or collaborators for patent infringement, we cannot assure you that any legal proceedings would be resolved in our favor. If such a dispute were resolved against us, in addition to potential damages, which could be substantial, the commercial manufacture or sale of our generic clarithromycin product candidate could be enjoined unless a license were obtained. There can be no assurances that if a license is required, such license would be made available on terms acceptable to us, or at all. Any claim of patent infringement may involve substantial expenditures and divert the time and effort of management.

We have not filed for patent protection with respect to specific formulations, materials (including inactive ingredients) or manufacturing process approaches that are incorporated in our individual pulsatile antibiotic products, and we may not seek such patent coverage in the future. In producing our pulsatile antibiotics, we expect to use general formulation techniques used in the industry that would be modified by us and which would, therefore, include know-how and trade secrets that we have developed. We cannot be certain that a patent would issue to cover such intellectual property and currently, we would prefer to keep such techniques and know-how as our trade secrets. In the event a competitor is able to develop technology substantially similar to ours and patent that approach, we may be blocked from using certain of our formulations or manufacturing process approaches, which could limit our ability to develop and commercialize products.

We have not commercialized any products or recognized any revenue from product sales. All of our pulsatile drugs are in early stages of development and currently only four pulsatile product candidates are being tested in Phase I/ II clinical trials. We expect that we must conduct significant additional research and development activities before we will be able to receive final regulatory approval to commercialize any pulsatile products. We must successfully complete Phase I/ II clinical trials, commence and successfully complete Phase III clinical trials and obtain regulatory approval for our pulsatile drugs before we are able to generate revenue from their sales. Even if we succeed in developing and commercializing one or more of our pusatile drugs, we may never generate sufficient or sustainable revenue to enable us to be profitable.

During the early stages of our development, we intend to enter into collaborative arrangements with third parties to develop certain product candidates. These collaborations may be necessary in order for us to:


	•	fund our research and development activities;

	•	fund manufacturing by third parties;

	•	seek and obtain regulatory approvals; and

	•	successfully commercialize our product candidates.

Currently, we have collaborative agreements with GSK and Par Pharmaceutical. In connection with the GSK agreement, we have granted to GSK certain rights regarding the use of patents and our PULSYS technology with amoxicillin/clavulanate combination products and certain other amoxicillin products, including development and marketing rights. In connection with the Par Pharmaceutical agreement, we have licensed to Par Pharmaceutical the distribution and marketing rights to our generic clarithromycin product. We do not have day-to-day control over the activities of GSK or Par Pharmaceutical with respect to any such product candidates. We cannot assure you that GSK or Par Pharmaceutical will fulfill their respective obligations under these agreements. If GSK fails to fulfill its obligations under our agreement, we may be unable to assume the development of the products covered by that agreement or enter into alternative arrangements with a third party. If Par Pharmaceutical fails to fulfill its obligations under our agreement, we may encounter delays in the commercialization of our generic clarithromycin product. Accordingly, our ability to receive any revenue from the product candidates covered by these agreements is dependent on the efforts of GSK and Par Pharmaceutical. We could also become involved in disputes with GSK or Par Pharmaceutical, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. The GSK agreement provides for the payment of royalties in each country for at least ten years from the date of the first commercial sale of any licensed product in such country, but the agreement may be terminated at any time by GSK upon relatively short notice or terminated by either party upon a material breach of the agreement by, or the bankruptcy of, the other party. The Par Pharmaceutical agreement has an indefinite term, but may be terminated at any time by Par Pharmaceutical upon relatively short notice. If either GSK or Par Pharmaceutical terminates or breaches its agreement, or otherwise fails to complete its obligations in a timely manner, our chances of successfully developing or commercializing these product candidates would be materially and adversely affected.

In addition, the growth of our business and development of additional product candidates may require that we seek additional collaborative partners. We cannot assure you that we will be able to enter into collaborative agreements with partners on terms favorable to us, or at all, and any future agreement may expose us to similar risks that we face under our agreements with GSK and Par Pharmaceutical. Our inability to enter into additional collaborative arrangements with other partners, or our failure to maintain such arrangements, would limit the number of product candidates which we could develop and ultimately, decrease our sources of any future revenues.

A component of our business strategy is in-licensing drug compounds developed by other pharmaceutical and biotechnology companies or academic research laboratories that may be marketed and developed or improved upon using our novel technologies. Competition for promising compounds can be intense and currently we have not entered into any arrangement to license any drugs from other companies. If we are not able to identify licensing opportunities or enter into licensing arrangements on acceptable terms, we will be unable to develop a diverse portfolio of products.

We are highly dependent on the principal members of our scientific and management teams, including Edward M. Rudnic, our president and chief executive officer, Steven A. Shallcross, our senior vice president and chief financial officer, Kevin S. Sly, our senior vice president, business development and strategic marketing and Colin E. Rowlings, our senior vice president, pharmaceutical research and development. In order to pursue our product development, marketing and commercialization plans, we will need to hire additional personnel with experience in clinical testing, government regulation, manufacturing, marketing and business development. We may not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. We are not aware of any present intention of any of our key personnel to leave our company or to retire. However, although we have employment agreements with our executive officers, these employees may terminate their services upon 90 days’ advance notice. The loss of any of our key personnel, or the inability to attract and retain qualified personnel, may significantly delay or prevent the achievement of our research, development or business objectives and could materially adversely affect our business, financial condition and results of operations. Although we maintain key man life insurance on Dr. Rudnic, such insurance may not be sufficient to cover the costs of the loss of his services and the expense of recruiting and hiring a new president and chief executive officer.

We obtain active pharmaceutical ingredients (APIs) from certain specialized manufacturers for use in clinical studies that we intend to conduct without assistance from collaborative partners. Although the antibiotics we use in our clinical studies may be obtained from several API suppliers, our applications for regulatory approval may authorize only one API supplier as our source. In the event an authorized supplier in an application for regulatory approval loses its regulatory status as an acceptable source or otherwise becomes unable or unwilling to supply the API to us at a commercially reasonable price, we would need to locate another source. A change to a supplier not previously approved in our application for regulatory approval or an alteration in the procedures or product provided to us by an approved supplier may require formal approval by the U.S. Food and Drug Administration (FDA) before we could use the API in the production of commercial supplies for our products. These factors could result in delays in conducting or completing our clinical trials and ultimately delay our ability to commercialize products.

We have limited experience in conducting and managing clinical trials, and currently, we do not employ any clinical trial managers. We rely, and will continue to rely, on third parties, including our collaborative partners, clinical research organizations and outside consultants, to assist us in managing and monitoring clinical trials. Our reliance on these third parties may result in delays in completion of, or the failure to complete, these trials if they fail to perform their obligations under our agreements.

We must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans before we can obtain regulatory approvals for their commercial sale. In addition, if we make claims of superiority over existing products, we will need to prove such claims in additional clinical trials. For drug products such as our amoxicillin/clarithromycin combination product which contains active ingredients in fixed combinations that have not been previously approved by the FDA, clinical studies may also need to be conducted in order to establish the contribution of each active component to the effectiveness of the combination in an appropriately identified patient population.

Conducting clinical trials is a lengthy, time-consuming and expensive process. Currently we only have four pulsatile drug products in Phase I/II clinical trials and we have not completed such trials and additional studies in animals to extrapolate proper dosage for Phase III clinical efficacy trials in humans. In the event we incorrectly identify a dosage as appropriate for human clinical trials, any results we receive from such trials may not properly reflect the actual efficacy or safety of our products. Furthermore, we do not expect to have results from Phase III clinical efficacy trials in humans until at least 2004.

The commencement and rate of completion of clinical trials for our products may be delayed by many factors, including:


	•	lack of efficacy during the clinical trials;

	•	unforeseen safety issues;

	•	slower than expected rate of patient recruitment; or

	•	government or regulatory delays.

The results from pre-clinical testing and early clinical trials are often not predictive of results obtained in later clinical trials. Although a new product may show promising results in pre-clinical and initial clinical trials, it may subsequently prove unfeasible or impossible to generate sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical studies are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as a result of many factors, including results that do not support our claims, perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development. Our business, financial condition and results of operations may be materially adversely affected by any delays in, or termination of, our clinical trials or a determination by the FDA that the results of our trials are inadequate to justify regulatory approval.

We anticipate that our existing capital resources, including the net proceeds of this offering, and interest earned on such proceeds, will enable us to maintain our current operations for at least the next 24 months. Our requirements for additional capital may be substantial and will depend on many other factors, including:


	•	successful commercialization of our generic formulation of Biaxin XL;

	•	payments received under present or future collaborative partner agreements;

	•	continued progress of research and development of our pulsatile drugs;

	•	our ability to license drugs from others for use with PULSYS;

	•	costs associated with protecting our intellectual property rights;

	•	development of marketing and sales capabilities; and

	•	market acceptance of our products.

We have no significant committed sources of additional capital. To the extent our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our product candidates. We cannot assure you that funds will be available on favorable terms, if at all. To the extent we raise additional capital through the sale of securities, the issuance of those securities could result in dilution to our stockholders. In addition, if we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. If adequate funds are not available, we may be required to curtail significantly our development and commercialization activities.

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims and financial losses resulting from the use or sale of our products. We have

obtained limited product liability insurance coverage for our clinical trials, which we believe is adequate to cover our present activities. However, such insurance may not be adequate to cover any claims made against us. In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses.

Even if we obtain regulatory approval to market our products, our products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any pharmaceutical product that we develop will depend on a number of factors, including:


	•	demonstration of clinical efficacy and safety;

	•	cost-effectiveness;

	•	potential advantages over alternative therapies;

	•	reimbursement policies of government and third-party payors; and

	•	effectiveness of our marketing and distribution capabilities and the effectiveness of such capabilities of our collaborative partners.

Our product candidates, if successfully developed, will compete with a number of products manufactured and marketed by major pharmaceutical companies, biotechnology companies and manufacturers of generic drugs. Our products may also compete with new products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that we or our collaborative partners develop. To the extent current antibiotics already successfully treat certain infections, physicians may not be inclined to prescribe our pulsatile drugs for the same indications. If our products do not achieve significant market acceptance, we will not be able to generate significant revenues or become profitable.

We currently rely on several contractors to manufacture product samples for our clinical studies that we intend to conduct without assistance from collaborative partners. We are in the process of building a manufacturing facility for production of clinical supplies sufficient for use through our Phase II and, in some cases, Phase III clinical trials. We expect that the construction of such facility will be completed by the fourth quarter of 2003 and we expect this facility to be qualified and operational in 2004. We anticipate that construction costs, net of landlord allowances and concessions, will be approximately $7.5 million. We have no experience building manufacturing facilities and we may not be able to build such facility at currently anticipated costs. If the costs of building such facility significantly exceed our current expectations, we will be required to use funds we have allocated for other purposes. In addition, if we are unsuccessful in building our own manufacturing facility and fail to maintain our relationships with our current clinical supply manufacturers or enter into relationships with new manufacturers, we will be unable to conduct our clinical trials effectively.

We intend to rely on third-parties to manufacture products that we intend to sell through our own commercialization and sales efforts. We believe that there are a variety of manufacturers that we may retain to produce these products. However, once we retain a manufacturing source, if we are unable to maintain our relationship with such manufacturer, qualifying a new manufacturing source will be time consuming and expensive, and may cause delays in the development of our products.

We do not have any sales, marketing or distribution capabilities. In order to commercialize any product candidates that receive final regulatory approval, we must either acquire or develop an internal marketing and sales force with technical expertise and with supporting distribution capabilities or make arrangements with

third parties to perform these services for us. In order to market any of our product candidates directly, we must either acquire or develop a sales and distribution infrastructure. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of our management and key personnel, and defer our product development efforts. To the extent that we enter into marketing and sales arrangements with other companies, our revenues will depend on the efforts of others. These efforts may not be successful. If we fail to develop sales, marketing and distribution channels, or enter into arrangements with third parties, we will experience delays in product sales and incur increased costs.

Our success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate our competitive advantage. Further, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S., and we may encounter significant problems in protecting our proprietary rights in these foreign countries.

The patent positions of pharmaceutical and biotechnology companies, including our patent positions, involve complex legal and factual questions and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that we cover our proprietary technologies with valid and enforceable patents or we effectively maintain such proprietary technologies as trade secrets. We will apply for patents covering both our technologies and product candidates as we deem appropriate. We may fail to apply for patents on important technologies or products in a timely fashion, or at all, and in any event, the applications we do file may be challenged and may not result in issued patents. Any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, if challenged, our patents may be declared invalid. Even if valid, our patents may fail to provide us with any competitive advantages.

We rely upon trade secrets protection for our confidential and proprietary information. We have taken measures to protect our proprietary information; however, these measures may not provide adequate protection. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. While we are not aware of any company using rapid bursts of antibiotics as a treatment method, there are numerous companies actively engaged in the research and development of anti-infectives.


	•	large pharmaceutical companies, such as GSK, Pfizer, Johnson & Johnson, Aventis, Abbott Laboratories, AstraZeneca, Bayer, Bristol-Myers Squibb and Merck, that may develop new drug compounds that render our drugs obsolete or noncompetitive;

	•	smaller pharmaceutical and biotechnology companies and specialty pharmaceutical companies engaged in research and development of novel antibiotics, such as Cubist, Vicuron, InterMune and King; and


	•	drug delivery companies, such as Johnson & Johnson’s Alza division, Biovail and SkyePharma, that may develop a dosing regimen that is more effective than pulsatile dosing.

Many of these competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborative partners, have significantly greater experience than we do in:


	•	developing products;

	•	undertaking preclinical testing and human clinical trials;

	•	obtaining approvals of products from the FDA and other regulatory agencies; and

	•	manufacturing and marketing products.

Developments by others may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses of products or technology. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours.

Our product candidates are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. If our products are marketed abroad, they will also be subject to extensive regulation by foreign governments. None of our product candidates has been approved for sale in the U.S. or any foreign market. The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. The actual time required for satisfaction of FDA pre-market approval requirements may vary substantially based upon the type, complexity and novelty of the product or the medical condition it is intended to treat. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon a manufacturer’s activities. Delays in obtaining regulatory approvals may:


	•	adversely affect the commercialization of any drugs that we or our collaborative partners develop;

	•	impose costly procedures on us or our collaborative partners;

	•	diminish any competitive advantages that we or our collaborative partners may attain; and

	•	adversely affect our receipt of revenues or royalties.

Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.

Any required approvals, once obtained, may be withdrawn. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, we may encounter difficulties including:


	•	delays in clinical trials or commercialization;

	•	product recalls or seizures;

	•	suspension of production and/or distribution;


	•	withdrawals of previously approved marketing applications; and

	•	fines, civil penalties and criminal prosecutions.

We expect to rely on certain of our collaborative partners to file investigational new drug applications and generally direct the regulatory approval process for many of our products. These collaborative partners may not be able to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, we or our collaborative partners will experience delays in, or be precluded from, marketing products developed through our research.

We and our contract manufacturers also are required to comply with applicable FDA good manufacturing practice regulations. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our products. We or our contract manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements. If we or our contract manufacturers fail to comply, we could be subject to fines or other sanctions, or be precluded from marketing our products.

Because of the chemical ingredients of pharmaceutical products and the nature of their manufacturing process, the pharmaceutical industry is subject to extensive environmental regulation and the risk of incurring liability for damages or the costs of remedying environmental problems. We use a number of chemicals and drug substances that can be toxic to humans. These chemicals include acids, solvents and other reagents used in the normal course of our chemical and pharmaceutical analysis, and other materials, such as polymers, inactive ingredients and drug substances, used in the research, development and manufacture of drug products. If we fail to comply with environmental regulations to use, discharge or dispose of hazardous materials appropriately or otherwise to comply with the conditions attached to our operating licenses, the licenses could be revoked and we could be subject to criminal sanctions and/or substantial liability or could be required to suspend or modify our operations.

Environmental laws and regulations can require us to undertake or pay for investigation, clean-up and monitoring of environmental contamination identified at properties that we currently own or operate or that we formerly owned or operated. Further, they can require us to undertake or pay for such actions at offsite locations where we may have sent hazardous substances for disposal. These obligations are often imposed without regard to fault. In the event we are found to have violated environmental laws or regulations, our reputation will be harmed and we may incur substantial monetary liabilities. We currently have insurance coverage that we believe is adequate to cover our present activities. However, this insurance may not be available or adequate to cover any losses arising from contamination or injury resulting from our use of hazardous substances.

The commercial success of our product candidates will depend in part on the availability of reimbursement from third-party payors, including government health administrators, managed care providers and private health insurers. Even if we succeed in bringing any of our proposed products to market, we cannot assure you that third-party payors will consider our products cost-effective or provide reimbursement in whole or in part for their use.

Significant uncertainty exists as to the reimbursement status of newly approved health care products. Third-party payors may conclude that our products are less safe, effective or cost-effective than existing products. Therefore, third-party payors may not approve our products for reimbursement.

If third-party payors do not approve our products for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, reimbursement levels may not be sufficient for us to realize an appropriate return on our investment in product development.

Moreover, the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products. In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals, they could materially adversely affect our business, financial condition and results of operations.

HealthCare Ventures V, L.P. and HealthCare Ventures VI, L.P. currently beneficially own an aggregate of 54.7% of our outstanding common stock, and will beneficially own an aggregate of 40.3% of our outstanding common stock after this offering (38.7% if the underwriters’ over-allotment option is exercised in full). James H. Cavanaugh and Harold R. Werner, members of our board of directors, are general partners of HealthCare Partners V, L.P. and HealthCare Partners VI, L.P., which are the general partners of HealthCare Ventures V, L.P. and HealthCare Ventures VI, L.P., respectively. Accordingly, the HealthCare Ventures partnerships will be able to exert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, as well as over the day-to-day management of our business. The HealthCare Ventures partnerships may direct our affairs in a manner that is not consistent with the interests of our other stockholders. In addition, this concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination or a sale of all or substantially all of our assets.

Sales of substantial amounts of our common stock in the public market, or the perception in the public markets that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Upon completion of this offering, we will have 22,749,218 shares of our common stock outstanding. In addition, upon completion of this offering, options to purchase a total of 2,341,704 shares will be outstanding, of which 136,730 will be vested. We intend to file a registration statement on Form S-8 to register these and all other shares of common stock issuable under our stock incentive plan. Following this offering, our current stockholders and holders of shares of our mandatorily redeemable convertible preferred stock, options and warrants to purchase our common stock, on a fully-diluted basis assuming exercise of all outstanding options and warrants and conversion of the mandatorily redeemable convertible preferred stock, are expected to own 76.1% of the outstanding shares of our common stock, or 73.5% if the underwriters’ over-allotment option is exercised in full. Following the expiration of a 180-day “lock-up” period to which the shares held by our current stockholders will be subject, the holders of those shares will, subject to vesting requirements, generally be entitled to dispose of those shares. Moreover, Lehman Brothers may, in its sole discretion and at any time without notice, release holders from the sale restrictions on their shares. In addition to the adverse effect a price decline could have on holders of our common stock, such a decline could impede our ability to raise capital or to make acquisitions through the issuance of additional shares of our common stock or other equity securities.

After this offering, the holders of approximately 15,062,486 shares of our common stock, including shares to be issued upon the conversion of mandatorily redeemable convertible preferred stock, will have

rights to cause us to file registration statements on their behalf and to include their shares in registration statements that we may file on our behalf or on behalf of other stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the price of our common stock to decline. Furthermore, if we file a registration statement to offer additional shares of our common stock and have to include shares held by those holders, it could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

Provisions in our certificate of incorporation and Delaware law may have the effect of delaying or preventing a merger or acquisition of us, or making a merger or acquisition less desirable to a potential acquirer, even when the stockholders may consider the acquisition or merger favorable. Under the terms of our certificate of incorporation, we are authorized to issue 25 million shares of “blank check” preferred stock, and to determine the price, privileges, and other terms of these shares. The issuance of any preferred stock with superior rights to our common stock could reduce the value of our common stock. In particular, specific rights we may grant to future holders of preferred stock could be used to restrict an ability to merge with or sell our assets to a third party, preserving control by present owners and management and preventing you from realizing a premium on your shares.

In addition, we are subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. These provisions could affect our stock price adversely.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of the common stock may decline below the initial public offering price. Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

Our management will have considerable discretion in the application of the proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We may use the proceeds for corporate purposes that do not immediately enhance our profitability or increase our market value.

The initial public offering price per share is expected to be substantially higher than the net tangible book value per share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. Assuming an offering price of $13.00 per share, you will incur immediate and substantial dilution of $8.71 in the pro forma net tangible book value per share of the common stock from the price you paid. Upon completion of this offering, we will have outstanding stock options to purchase 2,341,704 shares of our common stock (including options to purchase 703,881 shares of our common stock that we will grant on the date of this prospectus at the initial offering price) at a weighted average exercise price of $4.45 per share (assuming the options to purchase 703,881 shares were granted at an initial public offering price of $13.00 per share, the midpoint of the range of the initial offering price) and warrants to purchase 36,524 shares of our common stock at a weighted average exercise price of $2.42 per share. If these stock options and warrants were exercised, you would experience additional dilution. See “Dilution.”

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:


	•	general economic and business conditions;

	•	changes in governmental laws and regulations relating to the development and commercialization of pharmaceutical products;

	•	the financial condition of our collaborative partners;

	•	competition in our industry; and

	•	the other risks described under “Risk Factors” in this prospectus.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. We are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

We will receive approximately $71.3 million in net proceeds from the sale of our common stock in this offering, or approximately $82.2 million if the underwriters’ over-allotment option is exercised in full, based on an assumed initial offering price of $13.00 per share (the midpoint of the range of the initial offering price) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We currently intend to use the proceeds of this offering for research and development activities, including clinical trials for our product candidates, purchases of capital equipment, licensing activities and other general corporate purposes.

The amount and timing of our actual expenditures will depend on numerous factors, including the progress of our research and development activities and clinical trials, the number and breadth of our product development programs, our ability to establish and maintain corporate collaborations and other arrangements and the amount of cash, if any, generated by our operations.


	•	$20.0 million for non-sponsored research and development, including pre-clinical development and clinical trials;

	•	$12.0 million for purchase of capital equipment and other research facility improvements, including the development of manufacturing capability for clinical trials;

	•	$25.0 million in connection with licensing activities; and

	•	$14.3 million for general corporate purposes, including working capital and the possible acquisition of pharmaceutical products and businesses that are complementary to our own. Currently, we have no specific plans or commitments with respect to any acquisition. We cannot assure you that we will complete any acquisitions or that, if completed, any acquisition will be successful.

To the extent that we have research and development activities that are sponsored by strategic partners, such as GlaxoSmithKline, we will have additional funds available for research and development.

We will retain broad discretion in the allocation and use of the proceeds of this offering. Pending application of the proceeds, as described above, we will invest any remaining proceeds in short-term, investment-grade, interest-bearing securities.

We have never declared nor paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant.


	•	on an actual basis;

	•	on a pro forma basis to give effect to (i) the issuance after June 30, 2003 of 9,292,284 shares of Series E Convertible Preferred Stock and (ii) the conversion after June 30, 2003 of principal and accrued interest with respect to convertible notes in the aggregate principal amount of $5.0 million issued on March 28, 2003 into 2,263,272 shares of Series E Convertible Preferred Stock; and

	•	on a pro forma as adjusted basis to give effect to the automatic conversion of 27,565,555 shares of all classes of our preferred stock into 15,062,486 shares of common stock upon the closing of this offering and the receipt of the net proceeds from the sale of 6,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share (the midpoint of the range of the initial offering price) and after deducting the underwriting discounts and commissions and estimated offering expenses.



	•	1,637,823 shares of common stock issuable upon the exercise of options outstanding as of October 6, 2003 at a weighted average exercise price of $0.78 per share;


	•	703,881 shares of common stock issuable upon exercise of stock options that we will grant on the date of this prospectus, at the initial offering price, to certain officers, directors, employees and a non-employee;

	•	1,812,883 additional shares of common stock available for future issuance under our stock incentive plan as of the completion of this offering;


	•	36,524 shares of common stock issuable upon exercise of warrants outstanding as of October 6, 2003 at a weighted average exercise price of $2.42 per share;


	•	$22,600,000 of deemed interest and dividends related to a beneficial conversion feature charge associated with convertible notes and shares of Series E Convertible Preferred Stock issued during 2003, which will be recorded in the second half of 2003; and

	•	17,212 shares of outstanding common stock owned by three non-management directors, which are subject to vesting requirements and, accordingly, not treated as outstanding. Consistent with the provisions of EITF No. 00-23, these shares will be reclassified to equity upon the lapse of the vesting requirements.

The historical net tangible book value of our common stock as of June 30, 2003 was a deficit of $29,504,752, or ($21.39) per share, based on the number of shares of common stock outstanding as of June 30, 2003. Historical net tangible book value per share of common stock is equal to our total tangible assets less total liabilities and mandatorily redeemable convertible preferred stock, divided by the number of shares of our common stock outstanding as of June 30, 2003. Our pro forma net tangible book value as of June 30, 2003 was approximately $24,970,932, or $1.52 per share, based on the pro forma number of shares of common stock outstanding as of June 30, 2003 of 16,441,592, calculated after giving effect to (i) the issuance of 9,292,284 shares of Series E Convertible Preferred Stock after June 30, 2003, (ii) the conversion after June 30, 2003 of principal and accrued interest with respect to convertible notes in the aggregate principal amount of $5.0 million issued in March 2003 into 2,263,272 shares of Series E Convertible Preferred Stock, and (iii) the automatic conversion of 27,565,555 shares of all classes of our preferred stock into 15,062,486 shares of common stock upon the closing of this offering.

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately following this offering. After giving effect to the sale of 6,000,000 shares in this offering at an assumed initial public offering price of $13.00 per share (the midpoint of the range of the initial offering price) and after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of June 30, 2003 would have been $96,310,932 or $4.29 per share. This represents an immediate increase in pro forma net tangible book value of $2.77 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $8.71 per share to new investors purchasing shares in this offering. The following table illustrates this dilution on a per share basis:

The analysis presented above does not give effect to the issuance and sale of 900,000 of our shares of common stock that will occur if the underwriters exercise their option to purchase additional shares from us. If the underwriters exercise such option in full, the pro forma net tangible book value after this offering would be $4.59 per share, the increase in pro forma net tangible book value to existing stockholders would be $3.07 per share and the dilution in pro forma net tangible book value to new investors would be $8.41 per share.

The following table summarizes as of June 30, 2003, on a pro forma basis, the number of shares purchased from us, the total consideration paid and the average price per share paid by our existing stockholders and by the investors purchasing shares in this offering with respect to the number of shares purchased from us at an assumed offering price of $13.00 per share and before deduction of underwriting discounts and commissions and estimated expenses:

The analysis presented in the above table excludes the 2,341,704 shares of common stock issuable upon the exercise of options outstanding upon the completion of this offering and the issuance of 900,000 shares of our common stock that will occur if the underwriters exercise their over-allotment option in full.

The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus. The statement of operations data for the fiscal years ended December 31, 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and 2002 are derived from our audited financial statements appearing elsewhere in this prospectus. The balance sheet data as of December 31, 2000 is derived from our audited financial statements. The statement of operations data for the six months ended June 30, 2002 and 2003 and the balance sheet data as of June 30, 2003 are derived from our unaudited financial statements appearing elsewhere in this prospectus and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. The historical results are not necessarily indicative of the results to be expected in any future period.

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Since we began our operations in January 2000, we have devoted substantially all of our resources to the discovery and development of pharmaceutical products for the treatment of bacterial infections. We have not generated any revenues from product sales. We currently have four pulsatile drugs in Phase I/ II clinical trials, four pulsatile drugs or drug combinations in late stage preclinical development and are exploring pulsatile formulations for a range of other antibiotics and antibiotic combinations. We have also developed a non-pulsatile, generic formulation of Biaxin XL.

Revenues. We have not generated any operating revenues since our inception. Any revenues that we may receive in the near future are expected to consist primarily of license fees, milestone payments and research reimbursement payments to be received from collaborative partners. If our development efforts result in clinical success, regulatory approval and successful commercialization of our products, we could generate revenues from sales of our products and from receipt of royalties on sales of licensed products. We received a payment of $5 million from GlaxoSmithKline upon signing of our license agreement in July 2003, which will be deferred and recognized as revenue throughout the estimated development period of the contract. Remaining milestone payments under this agreement will be recognized as revenue in accordance with our revenue recognition policies set forth in Note 2 to the financial statements included elsewhere in this prospectus.

Research and Development Expenses. We expect our research and development expenses to increase as we continue to develop our product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, costs of contract manufacturing services, costs of materials used in clinical trials and research and development, depreciation of capital resources used to develop our products, costs of facilities and the legal costs of pursuing patent protection of our intellectual property. We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these investments in order to be in a position to realize the potential of our product candidates and proprietary technologies. From inception through June 30, 2003, we spent an aggregate of $22.8 million, including stock-based compensation expenses of $750,000, on research and development. We expect to incur licensing costs in the future that could be substantial, as we increase our efforts to license existing product candidates.

The following table summarizes our product development initiatives for the fiscal years ended December 31, 2000, 2001, 2002 and for the six months ended June 30, 2002 and 2003. Included in this table is the research and development expense recognized in connection with each product candidate currently in clinical development and all preclinical product candidates as a group.


(1)	Many of our research and development costs are not attributable to any individual project because we use resources across several development projects. We record direct costs, including personnel costs and related benefits and stock-based compensation, on a project-by-project basis. We record indirect costs that support a number of our research and development activities in the aggregate.

(2)	We have entered into an agreement under which GlaxoSmithKline will be responsible for funding future clinical development of this product.

We have allocated $20.0 million of the proceeds of this offering for non-sponsored research and development, including pre-clinical development and clinical trials. Conducting clinical trials is a lengthy, time-consuming and expensive process. Currently we only have four pulsatile drug products in Phase I/II clinical trials and we have not completed such trials and additional studies in animals to extrapolate proper dosage for Phase III clinical efficacy trials in humans. The commencement and rate of completion of clinical trials for our products may be delayed by many factors, including:


	•	lack of efficacy during the clinical trials;

	•	unforeseen safety issues;

	•	slower than expected rate of patient recruitment; or

	•	government or regulatory delays.

In addition, we may encounter regulatory delays or rejections as a result of many factors, including results that do not support our claims, perceived defects in the design of clinical trials and changes in regulatory policy during the period of product development. Our business, financial condition and results of operations may be materially adversely affected by any delays in, or termination of, our clinical trials or a determination by the FDA that the results of our trials are inadequate to justify regulatory approval. As part of our commercialization strategy, we may seek to establish collaborative relationships for some of our products in order to help us develop and market some of these product candidates. There can be no assurance that we will be successful in doing so. As a result of these risks and uncertainties, we are unable to estimate the specific timing and future costs of our clinical development programs or the timing of material cash inflows, if any, from our product candidates.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and other related costs for personnel serving executive, finance, accounting, information technology and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees for legal and accounting services. We expect that our general and administrative expenses will increase as we add personnel and become subject to the reporting obligations applicable to public companies. Our general and administrative expenses have increased as a result of our expansion into a new facility in June 2003. From inception through June 30, 2003, we spent an aggregate of $7.9 million, including stock-based compensation expenses of $235,000, on general and administrative expenses.

Stock-Based Compensation. We have recorded deferred stock-based compensation expense in connection with the grant of stock options to employees. Deferred stock-based compensation for options granted to employees is the difference between the fair value for financial reporting purposes of our common stock on the date such options were granted and their exercise price. We recorded deferred stock-based compensation and additional paid in capital of approximately $133,000 and $5.2 million in the year ended December 31, 2002 and the six month period ended June 30, 2003, respectively, related to stock options granted to employees. These amounts were recorded as a component of stockholders’ deficit and are being amortized as charges to operations over the vesting periods of the options. We recorded amortization of deferred stock-based compensation of approximately $30,000 and $280,000 for the year ended December 31, 2002 and the six month period ended June 30, 2003, respectively. For options granted to employees through June 30, 2003, we expect to record additional amortization of deferred stock-based compensation as follows: $1.3 million during the remainder of 2003, $2.0 million in 2004, $1.0 million in 2005, $500,000 in 2006 and $200,000 in 2007.

We recorded stock-based compensation of $155,000 and $520,000 during 2002 and the six month period ended June 30, 2003, respectively, for options granted to non-employee consultants and scientific advisory board (“SAB”) members in accordance with Statement of Financial Accounting Standards No. 123 based on the fair value of the equity instruments issued. Stock-based compensation for options granted to non-employee consultants and SAB members is periodically remeasured as the underlying options vest in accordance with Emerging Issues Task Force Issue No. 96-18. We will recognize an expense for such options throughout the vesting period as the services are provided by the non-employee consultants and SAB members. As of June 30, 2003, the balance of unamortized stock-based compensation for options granted to non-employees was approximately $900,000. This amount will be adjusted based on changes in the fair value of the options at the end of each reporting period. As of June 30, 2003, we expect to amortize the $900,000 unamortized balance as follows: $300,000 during the remainder of 2003, $300,000 in 2004, $200,000 in 2005 and $100,000 in 2006. Stock-based compensation related to options awarded to employees and consultants is assigned to all operating expense categories in the statements of operations.

On September 2, 2003, the board of directors granted additional options to purchase up to 388,754 shares and 10,928 shares of common stock to employees and non-employees, respectively. We will record deferred stock-based compensation and additional paid in capital of approximately $3.7 million in the third quarter of 2003 for options granted to employees, which will be amortized as charges to operations over the vesting periods of the options. For options granted to employees on September 2, 2003, we expect to record additional amortization of deferred stock-based compensation as follows: $600,000 during the remainder of 2003, $1.6 million in 2004, $900,000 in 2005, $400,000 in 2006 and $200,000 in 2007. Stock options granted to non-employees will be recorded in accordance with the provisions of SFAS No. 123 based on the fair value of the options vesting at each reporting period.

We will grant, on the date of this prospectus, options to purchase an aggregate of 703,881 shares of common stock to certain of our officers, directors, employees and a non-employee, exercisable at the initial public offering price. As a result of the grant of 85,313 of such options to a non-employee consultant for past services, we expect to record a one-time stock-based compensation charge of approximately $900,000 on the date of this prospectus. We may record additional stock-based compensation if we grant additional options prior to this offering.

Beneficial Conversion Feature. In March 2003, we issued convertible notes to certain existing investors for an aggregate of $5.0 million. The notes and accrued interest were converted into 2,263,272 shares of Series E Convertible Preferred Stock in July 2003, at a price of $2.25 per share. As a result, we will record a beneficial conversion charge in the form of deemed interest of approximately $1.7 million during the second half of 2003.

In July 2003, we completed the sale of 9,292,284 shares of Series E Convertible Preferred Stock for $2.25 per share. As a result, we will record a beneficial conversion charge in the form of deemed dividends of approximately of $20.9 million during the second half of 2003.

Interest Income (Expense) and Other Expense. Interest income consists of interest earned on our cash, cash equivalents and short-term investments. Interest expense consists of interest incurred on equipment debt and convertible notes.

We have a limited history of operations. We anticipate that our quarterly results of operations will fluctuate for the foreseeable future due to several factors, including payments made or received pursuant to licensing or collaboration agreements, progress of our research and development efforts, and the timing and outcome of regulatory approvals. Our limited operating history makes predictions of future operations difficult or impossible. Since our inception, we have incurred significant losses. As of June 30, 2003, we had an accumulated deficit of approximately $30.6 million. We anticipate incurring additional losses, which may increase, for the foreseeable future.

Revenues. We did not record any revenues during the six months ended June 30, 2003 or 2002.

Research and Development Expenses. Research and development expenses increased by $877,000, or 19%, to $5.5 million for the six months ended June 30, 2003 compared to $4.7 million for the six months ended June 30, 2002. Research and development expense consists of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects, as well as clinical studies. Indirect research and development costs include facilities, depreciation, patents and other indirect overhead costs. Direct costs increased $712,000 primarily as a result of increases of $1.5 million relating to the development of our pulsatile amoxicillin and generic clarithromycin product candidates, partially offset by decreases of an aggregate of $824,000 relating to the development of our pulsatile clarithromycin and metronidazole product candidates. These changes reflect increases of $1.5 million related to personnel, benefits and related costs (which includes $608,000 attributable to stock-based compensation), and the net effect of the timing related to the commencement of clinical studies and related direct costs for these projects. We conducted two Phase I/II clinical studies for our generic clarithromycin product candidate during the six month period ended June 30, 2003 compared to three Phase I/II clinical studies for our pulsatile clarithromycin product candidate and one Phase I/II clinical study for our pulsatile metronidazole product candidate in the comparable period of 2002. As a result, there was a $217,000 decrease in expenses for consultants, supplies and materials due to fewer clinical studies being conducted than in the comparable period of 2002, and lower related clinical studies expenses of $562,000.

Indirect project costs also increased by $165,000 to $1.0 million primarily representing an increase of $159,000 for costs related to new patent filings.

During the remainder of 2003, and thereafter, research and development expense will increase substantially as we increase the number of products for which we conduct clinical trials.

The following table shows the aggregate changes in research and development expenses reflecting all of our project expenses.

General and Administrative Expenses. General and administrative expenses increased $330,000, or 22%, to $1.8 million in the six months ended June 30, 2003 from $1.5 million in the six months ended June 30, 2002. General and administrative expenses consist of salaries and related costs for executive and other administrative personnel. This increase is primarily due to higher compensation and benefits expenses related to new hires, legal expenses resulting from product out-licensing negotiations, consulting fees for business development activities and stock-based compensation expense of $192,000 in 2003.

Net Interest Income (Expense). Net interest expense in the six months ended June 30, 2003 was $98,000 compared to net interest income of $84,000 in the six months ended June 30, 2002. The increase in net interest expense was attributable to lower average cash balances and lower interest earned on cash in 2003, partially offset by lower interest expense due to the amounts of interest capitalized related to leasehold improvements to our new facility in 2003 as compared to 2002.

Revenues. We did not record any revenues during the fiscal years ended December 31, 2002 or 2001.

Research and Development Expenses. Research and development expenses increased $5.6 million, or 106%, to $10.9 million for the fiscal year ended December 31, 2002 from $5.3 million for the fiscal year ended December 31, 2001. Research and development expenses consist of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects as well as clinical studies. Indirect research and development costs include facilities, depreciation, patents and other indirect overhead expenses. Direct costs increased $4.7 million primarily as a result of increases of $3.9 million relating to the development of our pulsatile clarithromycin and generic clarithromycin product candidates, increases of $1.5 million relating to the evaluation of new preclinical product candidates, partially offset by decreases of an aggregate of $728,000 relating to the development of our pulsatile amoxicillin and metronidazole product candidates. These changes reflect increases of $2.0 million related to personnel, benefits and related costs (which includes $142,000 attributable to stock-based compensation), $1.8 million in expenses for consultants, supplies and materials due to an increase in the number of clinical studies, and higher related clinical studies expenses of $913,000. We conducted a total of nine Phase I/II clinical studies in 2002 (four for our generic clarithromycin, three for our pulsatile clarithromycin, and one each for our pulsatile amoxicillin and metronidazole product candidates) compared to a total of four Phase I/II clinical studies in 2001 (one each for our pulsatile amoxicillin,

Indirect project costs also increased by $858,000 to $1.8 million primarily related to an increase of $740,000 for facility related costs, depreciation and overhead due to the expansion of our corporate and research and development facilities in 2002.

The following table shows the aggregate changes in research and development expenses reflecting all of our project expenses.

General and Administrative Expenses. General and administrative expenses increased $1.3 million, or 65%, to $3.3 million for the fiscal year ended December 31, 2002 from $2.0 million for the fiscal year ended December 31, 2001. General and administrative expenses consist of salaries and related costs for executive and other administrative personnel. The increase was primarily due to higher compensation and benefits expenses related to new hires. General and administrative expenses included $43,000 of stock-based compensation expense.

Net Interest Income (Expense) and Other Expense. Net interest income and other expense was $54,000 for the fiscal year ended December 31, 2002 compared to net interest income of $70,000 for the fiscal year ended December 31, 2001. The increase in interest income was attributable to higher average cash balances for the fiscal year ended December 31, 2002, partially offset by an increase in interest expense attributable to an increase in our equipment term loan obligations and other expense of $48,000 consisting of bank commitment fees related to a cancelled debt financing.

Revenues. We did not record any revenues during the fiscal years ended December 31, 2001 or 2000.

Research and Development Expenses. Research and development expenses increased $4.2 million, or 367.3%, to $5.3 million for the fiscal year ended December 31, 2001 from $1.1 million for the fiscal year ended December 31, 2000. Research and development expenses consist of direct costs which include salaries and related costs of research and development personnel, and the costs of consultants, materials and supplies associated with research and development projects as well as clinical studies. Indirect costs include facilities, depreciation, patents and other indirect overhead expenses. Direct costs increased $3.5 million primarily as a result of increases of $3.3 million relating to the development of our pulsatile amoxicillin, clarithromycin and metronidazole product candidates, and the development of our generic clarithromycin product candidate.

These changes reflect increases of $1.3 million related to personnel, benefits and related costs, $1.6 million in expenses for consultants, supplies and materials due to an increase in the number of clinical studies, and higher related clinical studies expenses of $503,000. We conducted a total of four Phase I/II clinical studies in 2001 (one each for our pulsatile amoxicillin, clarithromycin and metronidazole product candidates and one for our generic clarithromycin product candidate) and one Phase I/II clinical study in 2000 for our pulsatile clarithromycin product candidate.

Indirect project costs also increased by $679,000 to $942,000 primarily related to an increase for facility related costs and depreciation due to the expansion of our corporate and research and development facilities in 2001.

The following table shows the aggregate changes in research and development expenses reflecting all of our project expenses.

General and Administrative Expenses. General and administrative expenses increased $1.2 million, or 160.5%, to $2.0 million for the fiscal year ended December 31, 2001 from $752,000 for the fiscal year ended December 31, 2000. General and administrative expenses consist of salaries and related costs for executive and other administrative personnel. This increase was primarily due to higher compensation and benefits expenses related to new hires, facilities and related overhead costs.

Net Interest Income (Expense). Net interest income was $70,000 for the fiscal year ended December 31, 2001 compared to net interest income of $67,000 for the fiscal year ended December 31, 2000. The increase in interest income for the fiscal year ended December 31, 2001 was attributable to higher average cash balances in 2001, partially offset by interest expense of $114,000 attributable to our credit facilities. We did not have any debt obligations requiring interest charges for the fiscal year ended December 31, 2000.

We have funded our operations principally with the proceeds of $54.5 million from a series of five preferred stock offerings over the period 2000 through 2003 as follows:

Each share of preferred stock is convertible into 0.5464242 shares of our common stock.

In connection with convertible notes and Series E Convertible Preferred Stock issued in 2003, we will record a beneficial conversion charge of approximately $22.6 million of deemed interest and dividends in the second half of 2003.

We are a party to four credit facilities for an aggregate amount of $6.8 million as of October 6, 2003 used to finance the purchase of equipment. Our facilities dated as of January 2001 and February 2002 have implicit interest rates of between 8.35% and 11.62%. Our facility dated as of March 2002 has an interest rate of floating 30-Day LIBOR plus 250 basis points or fixed costs of funds plus 250 basis points. Our facility dated as of July 2003 has an interest rate of floating 30-Day LIBOR plus 280 basis points or fixed cost of funds plus 280 basis points. As of October 6, 2003, $2.3 million is outstanding under all of these facilities.

At June 30, 2003, cash and cash equivalents were $245,000 compared to $4.1 million at December 31, 2002. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions and high-quality corporate bonds rated AAA to A1+/P1. Also, we maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances.

Net cash used in operations was $3.4 million and $5.6 million for the six months ended June 30, 2003 and 2002, respectively. The net loss for the six months ended June 30, 2003 of $7.5 million was partially offset by non-cash charges for depreciation and amortization of $275,000 and stock-based compensation of $800,000. Net cash used in investing activities during the first half of 2003 was $5.1 million and consisted of facility leasehold improvement payments of $4.8 million and deposits for property and equipment of $1.1 million, partially offset by $830,000 in landlord concessions. Net cash from financing activities for the six months ended June 30, 2003 was $4.7 million which consists primarily of proceeds from convertible notes of $5.0 million, offset by payments of equipment debt financing obligations of approximately $306,000.

Cash used in operations was $12.8 million and $6.4 million for the years ended December 31, 2002 and 2001, respectively. The net loss for 2002 of $14.1 million was partially offset by non-cash charges for depreciation and amortization of $503,000 and stock-based compensation of $185,000. Net cash received from investing activities for the fiscal year ended December 31, 2002 was $3.0 million and consisted of the sale of short-term investment obligations of $6.2 million, offset by restricted cash transfers of $1.4 million, equipment purchases of approximately $1.4 million and deposits for property and equipment of $283,000. Net cash from financing activities for 2002 was $3.6 million, which consisted primarily of proceeds from the issuance of Series D Convertible Preferred Stock of $3.0 million and net proceeds from lines of credit related to equipment financing and note payable of approximately $641,000.

The following table summarizes our contractual obligations at June 30, 2003 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

We intend to spend approximately $13.0 million for capital expenditures in 2003, of which $7.5 million will be for leasehold improvements and $5.5 million will be for equipment. Total leasehold improvements, net of landlord allowances, will be approximately $7.5 million for our new corporate, research and development facility. As of June 30, 2003, obligations of approximately $2.2 million remain outstanding under this project. Approximately $5.5 million will be spent on capital equipment for the initial fit-out of our new corporate, research and development facility. Our $5.5 million line of credit established in July 2003 will be the primary source of funds for this equipment.

Excluded from the above table of commitments at June 30, 2003 are convertible notes dated as of March 28, 2003 pursuant to which we borrowed an aggregate of $5.0 million from HealthCare Ventures VI, L.P. and five other investors. On July 2, 2003, the investors converted their notes plus accrued interest into shares of our Series E Convertible Preferred Stock.

We expect to incur losses from operations for the foreseeable future. We expect to incur increasing research and development expenses, including expenses related to additions to personnel and clinical trials. We expect that our general and administrative expenses will increase in the future as we expand our business development, legal and accounting staff, add infrastructure and incur additional costs related to being a public company, including directors’ and officers’ insurance, investor relations programs and increased professional fees. Our future capital requirements will depend on a number of factors, including the continued progress of our research and development of product candidates, the timing and outcome of regulatory approvals, payments received or made under collaborative agreements, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive products, the availability of financing and our or our partners’ success in developing markets for our product candidates. We believe our existing cash and cash equivalents, together with the net proceeds of the Series E Preferred Stock and this offering, will be sufficient to fund our operating expenses, debt repayments and capital equipment requirements for at least the next two years. Without the proceeds from this offering, we believe that our existing cash and cash equivalents will be sufficient to fund our operating expenses, debt repayments and capital expenditures for at least the next 12 months.

Except for the equipment lines of credit described above, we have no credit facility or other committed sources of capital. To the extent our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital or incur indebtedness to fund our operations. We cannot assure you that additional debt or equity financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. Any future funding may dilute the ownership of our equity investors.

Our exposure to market risk is currently confined to our cash and cash equivalents and restricted cash that have maturities of less than three months. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments, but may increase the interest expense associated with our debt.

Our most liquid assets are cash, cash equivalents and short-term investments. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in the value of our intellectual property. In accordance with generally accepted accounting principles, we have not capitalized the value of this intellectual property on our balance sheet. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of SFAS 146 includes costs to terminate contracts that are not capital leases, costs to consolidate facilities or relocate employees and termination benefits provided to employees who are involuntarily terminated under terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual compensation contract. The provisions of this statement are effective for exit or disposal activities initiated after December 31, 2002. We anticipate that the adoption of SFAS 146 will not have an impact on our financial position, results of operations or cash flows as of June 30, 2003.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative methods of transition and additional disclosure requirements and the new interim disclosure provisions are effective for fiscal years ending after December 15, 2002 and for the first interim period beginning after December 15, 2002, respectively.

In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, except that the provisions of SFAS 149 that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. We are reviewing the provisions of SFAS 149 and do not anticipate that the adoption will have a material impact on our financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150 “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an

issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. We do not anticipate that the adoption of SFAS 150 will have a material impact on our financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for most guarantees, and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. In accordance with FIN 45, we are required to disclose the nature and potential future payments under existing guarantees as of December 31, 2002. We had no guarantees within the scope of FIN 45 as of December 31, 2002 and June 30, 2003.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the consolidation provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We have not entered into any contractual relationships with a variable interest entity as of December 31, 2002 and June 30, 2003.

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition. We will use the milestone payment method of revenue recognition when all milestones in respect of payments to be received under contractual arrangements are determined to be substantive, at-risk and the culmination of an earnings process. Substantive milestones are payments that are conditioned upon events requiring substantive effort, when the amounts of the milestones are reasonable relative to the time, effort and risk involved in achieving them and when the milestones are reasonable relative to each other and the amount of any up-front payment. If these criteria are not met, the timing of the recognition of revenue from the milestone payment may vary.

Accrued Expenses. As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include professional service fees, such as lawyers and accountants, contract service fees, such as amounts paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials, and fees paid to contract

manufacturers in conjunction with the production of clinical materials. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting principles.

Stock-Based Compensation. We have elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation. In the notes to our financial statements we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements. We account for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees or of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The two factors which are most likely to affect charges or credits to operations related to stock-based compensation are the fair value of the common stock underlying stock options for which stock-based compensation is recorded and the volatility of such fair value. If our estimates of the fair value of these equity instruments are too high or too low, our expenses will be overstated or understated. Because shares of our common stock have not been publicly traded, we have valued our stock and stock option grants by considering comparative values of stock of public companies discounted for the risk and limited liquidity of our common stock, the pricing of private sales of our convertible preferred stock, events that have occurred since the date of the grants, economic trends, perspective provided by investment banks and the comparative rights and preferences of the securities we granted compared to the rights and preferences of our other outstanding equity securities.

Income Taxes. As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes by the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We have not recorded any tax provision or benefit for the years ended December 31, 2001 and 2002. We have provided a valuation allowance for the full amount of our net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss carry forwards cannot be sufficiently assured at December 31, 2001 and 2002. At December 31, 2001 and 2002, we had federal net operating loss carryforwards of approximately $3.3 million and $16.1 million, respectively, available to reduce future taxable income, which will begin to expire in 2020. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating loss carryforwards that can be used in future years.

We are a pharmaceutical company focused on developing and commercializing pulsatile drug products that fulfill substantial unmet medical needs in the treatment of infectious disease. We are developing a broad portfolio of drugs based on our novel biological finding that bacteria exposed to antibiotics in front-loaded, sequential bursts, or pulses, are killed more efficiently and effectively than those exposed to standard antibiotic treatment regimens. Based on this finding, we have developed a proprietary, once-a-day pulsatile delivery technology called PULSYS. We have focused initially on developing more effective, pulsatile formulations of approved and marketed drugs that no longer have patent protection or that have patents expiring in the next three years. We intend to commercialize our products through third party collaborations and with an internal marketing and sales force. We recently entered into a collaboration agreement with GlaxoSmithKline pursuant to which we licensed patents and PULSYS technology for use with its Augmentin (amoxicillin/ clavulanate) products, which collectively had 2002 U.S. sales of over $1.5 billion, and with limited other amoxicillin products.

Focus on significant unmet needs in the growing antibiotic market. The large market for antibiotics is expected to continue to grow in light of the aging of the United States population, the increased use of therapies that compromise the immune system such as cancer chemotherapy and the growing prevalence of immune related diseases such as AIDS. In addition, the increased incidence of antibiotic resistant bacteria has limited the effectiveness of many currently available antibiotics. Despite the substantial and growing antibiotic market, there has been little progress in addressing the limitations of currently available antibiotics, such as increased incidence of resistant bacteria and inconvenient multiple daily dosage requirements and lengthy treatments, which reduce patient compliance. Many large pharmaceutical companies have reduced discovery and development efforts in this sector and others have stopped developing antibiotic products. We believe that the unmet needs and apparent lack of emphasis by many large pharmaceutical companies create substantial opportunities in this market.

Broadly applicable approach with multiple advantages. We believe our pulsatile drugs have multiple therapeutic advantages over currently available antibiotics, including improved efficacy, reduced incidence of resistance, fewer side effects, once daily dosing, shorter treatment periods and increased bioavailability (or ability to be absorbed by the body). Although our studies of pulsatile drugs have been limited to antibiotics, we believe that pulsatile dosing may offer therapeutic advantages in the areas of antivirals, antifungals and oncology.

Anticipated reduced development risk, cost and time frame. We intend to reduce development risk and expense and decrease time to market for our drug candidates by focusing on developing improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. Since these existing drugs have already been proven to be safe and effective, we anticipate being able to rely, in part, on prior regulatory approvals and existing safety and efficacy data in seeking FDA approval of our pulsatile drugs. We expect that our ability to rely on these prior approvals and existing data will significantly reduce the costs associated with generating our own pre-clinical and clinical data and accelerate our drug development process.

Pipeline of product candidates in clinical and pre-clinical trials. We currently have four pulsatile drugs in Phase I/II clinical trials, four pulsatile drugs or drug combinations in late stage preclinical development and are exploring pulsatile formulations for a range of other antibiotics and antibiotic combinations. We are also developing a non-pulsatile, generic formulation of Biaxin XL (extended release clarithromycin), the patent covering the active pharmaceutical ingredient for which expires in 2005. We have licensed to Par Pharmaceutical the distribution and marketing rights to this product. We intend to use any cash flow generated by this product to accelerate development of our pulsatile drug candidates.

Multiple PULSYS commercialization strategies. We anticipate collaborating with other large pharmaceutical companies, in addition to GlaxoSmithKline, to apply our technology to develop pulsatile versions of widely distributed antibiotics, such as those prescribed by general practitioners, as well as combinations of such products. These collaborations will allow us to enter large markets more quickly with the greater financial and marketing resources of our partners. We also intend to develop proprietary antibiotic combination products and will seek to in-license or acquire antibiotic products that we believe can be improved with our PULSYS technology. Our internal product development and drug acquisition activities are focused on drugs that we can sell to concentrated groups of pharmaceutical prescribers, such as hospital-based physicians and specialists. This concentration will allow us to commercialize our proprietary pulsatile drugs with a relatively small internal sales force. These strategies provide us with a broad range of opportunities to achieve commercial success.

Multi-level patent strategy. We have implemented a multi-level patent strategy in order to protect our pulsatile drugs. The first level is comprised of “umbrella” patents and patent applications to protect the pulsatile delivery of general classes of drugs, such as antibiotics and antivirals. The second level is comprised of “sub-umbrella” patents and patent applications, protecting the pulsatile delivery of subclasses of drugs, such as beta-lactam antibiotics with enzyme inhibitors. The third level includes filing patent applications for specific pulsatile drugs. We intend to continue to use and enhance this strategy in order to protect our intellectual property. We currently own seven issued U.S. patents, eight allowed U.S. patents, over 30 U.S. patent applications and several international patent applications.

Infectious diseases are caused by pathogens such as bacteria, viruses and fungi that enter the body through the skin or mucous membranes of the lungs, nasal passages and gastrointestinal tract, and overwhelm the body’s immune system. These pathogens establish themselves in various tissues and organs throughout the body and cause a number of serious and, in some cases, lethal infections.

We believe that the antibiotic market presents a highly attractive opportunity for the following reasons:

Substantial market. Antibiotics, along with antiviral medications and antifungal medications, constitute the primary categories of the anti-infective market. According to sales data compiled by IMS Health, an independent pharmaceutical industry research firm, worldwide anti-infective sales were approximately $44.7 billion in 2002, including $20.3 billion in North America. Antibiotics accounted for approximately $27.2 billion of such 2002 worldwide sales, including more than $10 billion in North America.

Increased resistance to existing therapies. Certain medical practices and sociological factors have led to increased bacterial resistance to many currently available antibiotics. Bacterial resistance has been fostered through the erroneous prescription of anti-infective drugs for non-bacterial infections and unconfirmed infections and the administration of broad spectrum antibiotics before the specific disease-causing pathogen has been identified. In addition, the lack of patient compliance with prescribed course of therapies has contributed to bacterial resistance to currently marketed compounds. For example, it is estimated that penicillin is ineffective against one-third of all Streptococcus pneumoniae, a type of bacteria that can cause pneumonia, meningitis and ear infections. The increased prevalence of resistant bacteria has resulted in prolonged hospitalizations, increased healthcare costs and higher mortality rates.

Growing need for improved new drugs. Social and demographic factors are contributing to the growth in the antibiotic market and the need for new, more effective therapies. The aging population of the United States is more likely to have suppressed immune systems and will require drugs that are effective against increasingly resistant strains of bacteria. Patients diagnosed with diseases that target the immune system, such as AIDS, increasingly require therapies that are more effective to combat infection. In addition, the pharmaceutical industry continues to develop therapeutics, such as cancer chemotherapy, that weaken the immune system as a side effect of the primary therapy. As a result, there is a strong demand for new treatments that are more potent, more effective against resistant strains and that cause fewer side effects.

Difficulties in developing new classes of anti-infective compounds. We believe that the growing problem of resistance and other limitations of currently available antibiotics are not being adequately addressed. Moreover, many of the large pharmaceutical companies have reduced research and development efforts in this sector and others have stopped producing anti-infective products, possibly because of the difficulties involved in developing new antibiotic compounds.

Reduced development risk and costs. In vitro and early in vivo testing of anti-infective drugs has been shown to be more predictive of human clinical results than testing in other therapeutic categories. Accordingly, there is reduced development risk and cost associated with the production of anti-infective products.

Limitations of standard treatment regimens. In addition to the increased incidence of antibiotic resistant bacteria, we believe that standard antibiotic treatment regimens have several other limitations, including multiple daily dosage requirements, lengthy treatment periods, limited effectiveness and severe side effects, all of which decrease patient compliance and ultimately, therapeutic efficacy.

The significant unmet needs in the anti-infective market prompted our founders to search for a more efficient method to attack bacteria. We found that, as a result of the relatively short natural life cycle of bacteria, antibiotics are more effective in killing bacteria when released in three to five pulses that each occur within the first six to eight hours following initial dosing. To exploit this finding, we have developed a proprietary, once-a-day delivery technology called PULSYS that enables rapid, pulsatile delivery of antibiotics and improved bioavailability, or ability to be absorbed by the body. We believe that our novel finding, as implemented through our PULSYS technology, will result in the following therapeutic advantages:


	•	Improved bactericidal activity, or bacteria killing efficiency;

	•	Once daily dosing and shorter length of treatment resulting in increased patient convenience and compliance;

	•	Lower overall drug dose with reduced side effect profile; and

	•	Decreased emergence of antibiotic resistant bacteria.

Our approach to improving antibiotic effectiveness represents a departure from traditional methods, which were focused on increasing drug dosages and searching for new classes of drugs. Our pulsatile dosing approach attempts to increase antibiotic effectiveness by better addressing the growth cycle and natural defense mechanisms of bacteria. Studies have shown that antibiotics are generally more effective against bacteria that are actively growing. Following the administration of a dose of immediate release antibiotics, surviving bacteria generally react by entering into a dormant state during which the bacteria are more difficult to kill. Our preclinical studies show that our pulsatile approach is more effective because the gradually increasing staggered releases of drugs do not appear to trigger the natural defense mechanisms in bacteria that cause the bacteria to enter into a dormant state. As a result, the active bacteria may be acted upon and killed more easily by the antibiotic agent. By keeping the bacteria in an active, non-defensive state, we may be able to increase antibiotic effectiveness without increasing overall dosages.

The graph below illustrates drug concentration in a patient’s bloodstream over a 24-hour period comparing drugs administered through our PULSYS system with standard twice daily dosing. The standard dosing regimen reflects the administration of an immediate release tablet at the start of a day, followed by an additional immediate release tablet 12 hours later. The PULSYS profile reflects the administration of a single dose designed to release the drug in four front-loaded pulses, with no additional doses administered for the balance of the day.

We have evaluated the effectiveness of antibiotics administered in front-loaded, sequential pulses in both laboratory and animal studies. Our preliminary findings indicate that the pulsatile dosing of certain antibiotics not only eliminates more bacteria and may lower the development of antibiotic-resistant bacteria strains, but that it is able to do so at significantly lower drug concentrations and with shorter courses of therapy than those required under currently available treatments. For example, our preclinical studies with amoxicillin have shown that:


	•	Standard regimens of amoxicillin (immediate release products taken two or three times daily) inhibited growth of a resistant strain of Strep. pneumoniae, but did not have a bactericidal effect, whereas pulsatile dosing of amoxicillin had a significant bactericidal effect against such resistant strain of Strep. pneumoniae;

	•	Strep. pneumoniae became more resistant after three or four days of two or three times a day dosing of amoxicillin, but did not become resistant after once daily dosing with our PULSYS system over the same time period; and

	•	Amoxicillin delivered through our PULSYS system eliminated a sensitive strain of Strep. pneumoniae at antibiotic levels that would not have otherwise be expected to inhibit bacterial growth.

We currently have five drug candidates, including four pulsatile drug candidates, in Phase I/II clinical trials. During Phase I studies, a drug is initially introduced into healthy human subjects and tested for safety, dosage, tolerance, absorption, metabolism, distribution and excretion. During Phase II studies, a drug is introduced to patients that have the medical condition that the drug is intended to treat. Phase II studies are intended to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Phase II studies may often be combined with Phase I studies (referred to as Phase I/II studies) in certain instances when safety issues

may be less prevalent. Currently, our drug products primarily represent improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. Since these existing drugs have already been proven to be safe and effective, we anticipate being able to rely, in part, on prior regulatory approvals and existing safety and efficacy data in seeking FDA approval of our pulsatile drugs.

Our drug candidates in Phase I/II clinical trials have been administered to an aggregate of 298 subjects. Of these subjects, 119 subjects have been treated with our pulsatile drug products and 179 subjects have been treated with different formulations of our generic clarithromycin product. Our initial results from our Phase I/II clinical trials on our pulsatile drug candidates support our ability to deliver each of these product candidates in a pulsatile manner. We are conducting additional Phase I/II clinical trials to optimize the dosing profile. Studies for our pulsatile products differ in scope and purpose from those for our generic product; the latter are primarily to demonstrate bioequivalence. We have conducted preliminary bioequivalence tests with our generic clarithromycin product and are planning pivotal in vivo bioequivalence tests to support an ANDA filing for this product.

In order to develop drugs based on our novel biological finding, we created a proprietary, once-a-day drug delivery technology called PULSYS that enables gradually increasing staggered doses of antibiotics. The PULSYS dosage form consists of a tablet that contains multiple pellets with varying release profiles that are combined in a proportion to produce optimum medication levels during the first few hours after dosing. We anticipate that our pulsatile drugs will each provide for once-a-day dosing. PULSYS utilizes commonly used inactive ingredients and common manufacturing processes. We are also exploring the administration of pulsatile drugs in forms other than tablets.

PULSYS drugs are designed using MAPS, our proprietary enabling design regimen, which we created to evaluate and develop new pulsatile drug candidates. MAPS combines computer simulations with microbiology and other laboratory experiments to analyze the physical, chemical, biological and microbiological properties of each specific antibiotic in order to optimize selection and design of pulsatile drug candidates. This analysis includes an evaluation of the solubility, permeability, stability and metabolism profiles of antibiotics as a function of position in the gastro-intestinal tract. We attempt to optimize overall antibiotic bioavailability by adjusting the timing and composition of pulses. By examining the bioavailability of antibiotics prior to the selection of PULSYS candidates, we believe that we will increase the likelihood of successful product development.

We intend to use our novel finding and related proprietary technology to develop and commercialize more efficient, effective and convenient pharmaceutical products, with an initial focus on antibiotics. To achieve this objective, we have adopted the following product development and commercialization strategies:

Commercialize products with multiple advantages. We intend to develop pulsatile drugs that have multiple therapeutic advantages over currently available antibiotics, including improved efficacy, reduced incidence of resistance, fewer side effects, once daily dosing, shorter treatment periods and increased bioavailability.

Focus initially on existing antibiotics. We intend to reduce development risk and expense and decrease time to market for our drug candidates by focusing on improved versions of approved and marketed drugs, either delivered alone or in combination with other drugs. The additional benefits of developing improved formulations of existing and approved antibiotics include reasonable and predictable production costs and higher probability of market acceptance due to the use of well-known antibiotics.

In addition, since these existing products have already been proven to be safe and effective, we anticipate being able to rely on existing approvals and existing safety and efficacy data, which would allow us to reduce the amount of new data that we will need to generate in order to support FDA approval of our products.

Pursue third party collaborations for widely distributed antibiotics. We anticipate collaborating with other large pharmaceutical companies, in addition to GlaxoSmithKline, to apply our technology to develop pulsatile versions of widely distributed antibiotics, such as those prescribed by general practitioners, as well

as combinations of such products. These collaborations will allow us to enter large markets more quickly with the greater financial and marketing resources of our partners. In addition, we intend to incorporate our technology into products that are under development and to apply our technology to produce improved formulations of broad spectrum antibiotics that have not been successfully commercialized because of problems such as inconvenient dosing regimens or efficacy concerns.

Develop proprietary antibiotic combination products. We intend to focus our initial internal development efforts on pulsatile formulations of antibiotic combination products that we can sell to concentrated groups of customers, such as hospital-based physicians or specialists. This concentration will allow us to commercialize our pulsatile drugs with a relatively small internal sales force. Our initial proprietary pulsatile drug candidate is a fluoroquinolone/ metronidazole combination.

License or acquire antibiotic products. We intend to license or acquire antibiotic products that we believe can be improved with our PULSYS technology. We are focused on drugs and drug candidates that would be sold in niche markets and that have been proven to be safe and effective in their traditional formulations.

The following table summarizes the antibiotic compounds we have in clinical trials and late stage preclinical development. We expect that these compounds will serve as the basis for drug products or, with additional clinical development, drug combination products. Each of our product candidates is still in the early stage of development. Due to our on-going research and development efforts, additional or alternative compounds may be selected to replace or supplement the compounds described below.


(1)	Non-pulsatile equivalent to Biaxin XL tablets (clarithromycin extended-release tablets).

(2)	We are conducting in vitro studies of each of our preclinical products.

For an explanation of the terms Preclinical, Phase I, Phase II, Phase I/ II, Phase III and ANDA, please refer to the information under the heading “Government Regulation” below.

Our research and development group is actively engaged in identifying additional candidates for our product development pipeline, such as cefpodoxime, doxycycline and a cephalosporin/clarithromycin combination. In identifying our product opportunities, our research and development group works directly with our formulation group to examine the practical aspects of drug development, including manufacturability and applicable regulatory issues.

We intend to explore the use of our pulsatile dosing approach beyond antibiotics to other therapeutic categories, such as antiviral and antifungal therapies and treatments for cancer. Although we have not tested the effectiveness of pulsatile dosing for these applications, we believe that our approach may yield benefits similar to those we have found for the treatment of bacterial infections.

We intend to develop the pulsatile drugs listed below, incorporating one or more of the following improvements:


	•	Once-a-day formulation;

	•	Lower dose;

	•	Shorter duration of therapy;

	•	Reduced side effect profile;

	•	Combination product with superior efficacy over either product alone;

	•	Improved pediatric dosage form; and

	•	Geriatric dosage form.

Amoxicillin (marketed by GSK as Amoxil and marketed by other companies as a generic product) is a semi-synthetic antibiotic that is effective for the treatment of a variety of conditions, including ear, nose and throat infections, urinary tract infections, skin infections and lower respiratory infections. In 2002, amoxicillin had U.S. sales of approximately $490 million. Amoxicillin is generally recommended for dosing two or three times daily, for a period of ten to 14 days.

Our in vitro studies demonstrated that standard regimens of amoxicillin (immediate release products taken twice daily or three-times daily) inhibited growth of a resistant strain of Strep. pneumoniae, but did not


	•	Strep. pneumoniae became more resistant after three or four days of two or three times a day dosing of amoxicillin, but did not become resistant after once daily dosing with our PULSYS system over the same time period; and

	•	Amoxicillin delivered through our PULSYS system eliminated a sensitive strain of Strep. pneumoniae at antibiotic levels that would not have otherwise be expected to inhibit bacterial growth.

Our initial results from Phase I/ II clinical trials support our ability to deliver amoxicillin in a pulsatile manner. We are currently conducting additional Phase I/ II clinical trials to optimize the dosing profile.

We intend to develop pulsatile amoxicillin products alone and in combination with other drugs. We anticipate marketing our amoxicillin products and amoxicillin combination products through third party collaborations.

Clarithromycin (marketed by Abbott Laboratories as Biaxin and Biaxin XL, a once daily treatment) is a semi-synthetic antibiotic, which is available as tablets and granules for oral suspension. Clarithromycin is effective for the treatment of various mild to moderate infections, including pharyngitis/tonsillitis, sinusitis, chronic bronchitis and pneumonia. In 2002, clarithromycin had U.S. sales of approximately $650 million, including sales for both Biaxin and Biaxin XL. Clarithromycin is generally prescribed for twice daily dosing, for a period of seven to 14 days.

In our in vivo (mice) studies, mice infected with Strep. pneumoniae had a 90% survival rate when treated with clarithromycin dosed once daily in a pulsatile manner as compared to a 50% survival rate when treated with twice daily dosing of immediate release clarithromycin. Moreover, mice in the pulsatile treatment group achieved maximum survivability after five days of treatment compared to maximum survivability after eight days of treatment in the immediate release group. In the same study, mice infected with H. influenzae had a 90% survival rate when treated with clarithromycin dosed in a pulsatile manner as compared to a 10% survival rate when treated with immediate release clarithromycin.

Our initial results from Phase I/II clinical trials support our ability to deliver clarithromycin in a pulsatile manner. We are currently conducting additional Phase I/II clinical trials to optimize the dosing profile.

We intend to develop pulsatile clarithromycin products alone and in combination with other drugs. We anticipate marketing our clarithromycin products and clarithromycin combination products through third party collaborations.

Metronidazole (marketed by Pfizer as Flagyl and as a generic product by other companies) is a synthetic antibiotic with antiprotozoal and antibacterial activity. Metronidazole products are effective for the treatment of a variety of conditions, including trichomoniasis and amebiasis. In 2002, metronidazole had U.S. sales of approximately $75 million. Metronidazole is typically dosed twice daily, for a period of one to ten days.

Our in vitro studies indicate that metronidazole dosed in a pulsatile manner is as effective against sensitive and highly resistant bacteria as three-times daily dosing of immediate release metronidazole. We found that metronidazole quickly killed bacteria in vitro when administered in a pulsatile fashion. Bacterial colony counts were reduced to undetectable levels after ten hours and were maintained at this level for the duration of the 96-hour experiment against specific sensitive strains of bacteria. These data suggest that a more convenient, once-daily alternative to the standard one to three times daily regimen could be achieved with PULSYS.

Our initial results from Phase I/ II clinical trials support our ability to deliver metronidazole in a pulsatile manner. We intend to conduct additional Phase I/ II clinical trials to optimize the dosing profile.

We intend to develop pulsatile metronidazole products alone and in combination with other drugs. We anticipate marketing our metronidazole products and metronidazole combination products through an internal sales force.

Amoxicillin/clavulanate (marketed by GSK as Augmentin, and sold by other companies as a generic product) is an antibacterial combination consisting of the semi-synthetic antibiotic, amoxicillin, and the beta-lactamase inhibitor, clavulanate. The combination of amoxicillin and clavulanate is effective for the treatment of a variety of conditions, including ear, nose and throat infections, genitourinary tract infections, skin infections and lower respiratory infections. In 2002, amoxicillin/clavulanate products had U.S. sales of approximately $1.9 billion. Amoxicillin/clavulanate is generally recommended for administration two or three times daily, for a period of ten to 14 days. We have entered into a license agreement with GSK for the development of a pulsatile formulation of the amoxicillin/clavulanate combination. We are cooperating with GSK, as it designs additional preclinical experiments and additional Phase I/II clinical trials and develops its commercialization strategy.

Amoxicillin and clarithromycin are each effective for the treatment of various infections such as the elimination of H. pylori in gastric ulcer therapy. We intend to develop a value-added amoxicillin/clarithromycin combination product which we believe may deliver performance superior to either drug alone.

Our in vitro studies have shown that the combination of amoxicillin/clarithromycin when delivered in vitro in a pulsatile fashion was at least as effective in killing bacteria, and in some instances, more effective than the individual antibiotics in eliminating bacteria, even at doses that were significantly lower than the doses used when administered individually. These results indicate that the combination may be more effective than either of the individual antibiotics administered alone.

Our initial results from Phase I/II clinical trials of each of amoxicillin and clarithromycin, as described above, support our ability to deliver each of these antibiotics in a pulsatile manner. As described above, we are currently conducting Phase I/II clinical trials to optimize the dosing profiles of each of amoxicillin and clarithromycin.

We anticipate marketing this combination product through third party collaborations.

Cefuroxime axetil (marketed by GSK as Ceftin and by other companies as a generic product) is a semi-synthetic antibiotic, available as tablets and granules for oral suspension. Cefuroxime is effective for the treatment of various mild to moderate infections, including urinary tract infections and skin/skin structure infections. In 2002, cefuroxime had U.S. sales of approximately $365 million. Cefuroxime is generally prescribed for twice daily dosing, for a period of seven to ten days.

In our in vitro studies, cefuroxime administered once daily in a pulsatile manner demonstrated initial bactericidal activity against Staph. aureus and Strep. pneumoniae comparable to twice-daily, immediate release treatment. In contrast to the twice-daily treatment regimen, pulsatile cefuroxime continued to reduce bacterial colonies for two days following the initial day of treatment.

We intend to develop a value-added formulation of cefuroxime or another similar drug in the cephalosporins class alone and in combination with other drugs, which we would market through third party collaborations.

Ciprofloxacin (marketed by Bayer as Cipro) is a synthetic broad-spectrum antibiotic, which is available as tablets and granules for oral suspension. Ciprofloxacin is effective for the treatment of various mild to moderate infections, including urinary tract infections, sinusitis and lower respiratory tract infections. In 2002, ciprofloxacin had U.S. sales of approximately $1 billion. Ciprofloxacin is typically dosed twice daily, for a period of three to 14 days.

Our in vitro studies indicate that ciprofloxacin dosed once daily in a pulsatile manner is as effective as twice daily dosing of immediate release ciprofloxacin without altering the overall daily dose. We found that ciprofloxacin quickly killed bacteria in vitro when administered in a pulsatile fashion. These data suggest that a more convenient, once-daily alternative to twice-daily, immediate release ciprofloxacin could be achieved with PULSYS.

We intend to develop a pulsatile formulation of ciprofloxacin primarily for use in combination with other antibiotic drugs, such as metronidazole, which we are also developing with the PULSYS system. We anticipate marketing our ciprofloxacin combination products through an internal sales force. In the event we produce a pulsatile product candidate consisting solely of ciprofloxacin, we anticipate marketing such product through a third party collaboration.

We intend to develop a pulsatile fluoroquinolone/metronidazole product. We believe that the combination of fluoroquinolone and metronidazole will prove to be effective for the treatment of infections caused by a mixture of anaerobic and aerobic bacteria, such as diabetic foot infections or post-surgery intra-abdominal infections.

Based on the results of our pulsatile fluoroquinolone and metronidazole experiments, we believe that a combination product containing fluoroquinolone and metronidazole may perform in a fashion superior to either drug alone, particularly when one or both drugs is delivered in a pulsatile manner.

We anticipate marketing this combination product through an internal sales force targeting gastro-intestinal surgeons.

As part of our analysis in evaluating a pulsatile clarithromycin product, we identified an opportunity to formulate a generic equivalent of Biaxin XL, which we believe we can commercialize without infringing upon the patents held by Abbott Laboratories. We filed a patent application covering the production method of our generic version of this product in October 2000 and are currently in the final stages of clinical trials. In 2002, Abbott’s sales of immediate release clarithromycin were approximately $315 million and its sales of extended release clarithromycin were approximately $335 million. Although this product does not incorporate our pulsatile drug delivery technology, we believe that it presents an opportunity to generate cash flow to accelerate development of our pulsatile drug candidates. We expect sales of this product to begin within the next two years. We have licensed to Par Pharmaceutical the distribution and marketing rights to this product.

In July 2003, we entered into a license agreement with GlaxoSmithKline pursuant to which we licensed patents and PULSYS technology to GSK for use with its Augmentin (amoxicillin/clavulanate combination) products and with limited other amoxicillin products. Under the agreement, GSK will be responsible, at its cost and expense, to use commercially reasonable efforts for the clinical development, manufacture and sale of the licensed products. We received an initial non-refundable, non-creditable payment of $5 million from GSK upon signing of the agreement and would be entitled to receive milestone payments from GSK not to

exceed an aggregate of $52 million if it achieves certain product development goals, including commencement of clinical trials and the filing and approval of an NDA with the FDA. In addition, we will receive royalty payments on the commercial sale of products developed under the agreement. We may also receive sales milestone payments of up to $50 million if specified annual sales goals are achieved. The agreement provides for the payment of royalties in each country for at least ten years from the date of the first commercial sale of any licensed product in such country, but the agreement may be terminated at any time by GSK upon relatively short notice or terminated by either party upon a material breach of the agreement by, or the bankruptcy of, the other party. Our receipt of milestone payments, royalty payments and sales milestone payments under the agreement will depend on the ability of GSK to develop and commercialize the products covered by the agreement and is subject to certain conditions and limitations. We cannot assure you that we will receive any milestone or royalty payments or that our collaboration with GSK will result in the approval and marketing of any drug.

In September 2003, we entered into an agreement pursuant to which we licensed to Par Pharmaceutical the distribution and marketing rights to our generic clarithromycin product. Under the agreement, we will be responsible for the clinical development, regulatory approval and arranging for the initial manufacture of the product and Par Pharmaceutical will be responsible for the marketing and sale of the product. We are entitled to receive milestone payments from Par Pharmaceutical not to exceed an aggregate of $6 million upon achievement of certain goals, including acceptance of an ANDA by the FDA and commercial launch of the product. In addition, we will receive royalty payments equal to over 50% of the net profits from the sale of the product, which royalty rate may be reduced to an amount as low as 25% at our election, upon the assumption by Par Pharmaceutical of certain of our obligations and risks relating to the development of the product. The agreement has an indefinite term, but may be terminated at any time by Par Pharmaceutical upon relatively short notice. Our receipt of milestone and royalty payments under the agreement are subject to certain conditions and limitations and will depend on our success in developing the product and the ability of Par Pharmaceutical to commercialize and sell the product. We cannot assure you that we will receive any milestone or royalty payments or that our collaboration with Par Pharmaceutical will result in the marketing of any drug. Par Pharmaceutical has the right to refrain from marketing activities upon the occurrence of certain events, such as the assertion of patent infringement claims. In addition, subject to a limited exception, we will be obligated to pay for one-half of any costs, expenses or damages resulting from any claims for patent infringement.

We currently rely on third-party contract manufacturers to produce sufficient quantities of our product candidates for use in the preclinical studies and clinical trials that we are conducting. However, we are in the process of developing the capability to manufacture the necessary supplies for use in our pre-clinical studies and clinical trials. We anticipate that our pilot facility will satisfy our drug production needs through at least Phase II and, in some cases, through Phase III clinical trials. We believe that our initial focus on the production of improved formulations of approved and marketed drugs will reduce the risk and time involved in the establishment of manufacturing capabilities because production of these drugs involves well-known, common manufacturing processes. Until we complete construction of our manufacturing facility, we must depend on third-party contract manufacturers for production of our clinical supplies.

We intend to rely on third-party contract manufacturers to produce sufficient quantities of our drugs for certain of our Phase III clinical trial supplies. In addition, since we intend to rely on third parties for large scale commercialization, we have and will continue to engage those contract manufacturers who have the capability to manufacture drug products in bulk quantities for commercialization.

In connection with our manufacturing activities, we generate hazardous waste. We are subject to federal and state regulation regarding the disposal of hazardous and potentially hazardous waste. We may incur costs to comply with such regulations now or in the future.

We have no sales, marketing or distribution capabilities. In order to commercialize any of our product candidates, we must either make arrangements with third parties to perform these services for us or acquire or develop internal sales, marketing and distribution capabilities. We intend to rely on partnerships with larger companies for the sale of widely distributed antibiotics and for international sales. We intend to develop an internal sales force to enable us to market and sell our proprietary combination products in concentrated markets. We also intend to use such an internal sales force to market and sell acquired or licensed products improved with PULSYS.

The pharmaceutical industry is highly competitive and characterized by a number of established, large pharmaceutical companies, as well as smaller emerging companies. Our main competitors are:


	•	large pharmaceutical companies, such as GSK, Pfizer, Johnson & Johnson, Aventis, Abbott Laboratories, AstraZeneca, Bayer, Bristol-Myers Squibb and Merck, that may develop new drug compounds that render our drugs obsolete or noncompetitive;

	•	smaller pharmaceutical and biotechnology companies and specialty pharmaceutical companies engaged in research and development of novel antibiotics, such as Cubist, Vicuron, InterMune and King; and

	•	drug delivery companies, such as Johnson & Johnson’s Alza division, Biovail and SkyePharma, that may develop a dosing regimen that is more effective than pulsatile dosing.

In addition, with respect to our generic version of Biaxin XL, we will compete with Abbott Laboratories, the manufacturer of the branded drug, and other manufacturers of generic products.

Many of our competitors possess greater financial, managerial and technical resources and have established reputations for successfully developing and marketing drugs, all of which put us at a competitive disadvantage. We may also face competition for the in-licensing of products from other companies that may be able to offer better terms to the licensors. Furthermore, new developments, including the development of methods of preventing the incidence of disease, such as vaccines, occur rapidly in the pharmaceutical industry. These developments may render our product candidates or technologies obsolete or noncompetitive.

Our success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing upon the proprietary rights of others and to prevent others from infringing on our proprietary rights. We seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Further, all of our employees have executed agreements assigning to us all rights to any inventions and processes they develop while they are employed by us.

In addition, we intend to use license agreements to access external products and technologies, as well as to convey our own intellectual property to others. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Protection of our intellectual property rights is subject to a number of risks.

We currently own seven issued U.S. patents, eight allowed U.S. patents and over 30 U.S. patent applications. Our issued patents cover certain compositions and methods using pulsatile dosing. We also own

We are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, and promotion of drugs under the Federal Food, Drug and Cosmetic Act and the Public Health Services Act, and by comparable agencies in foreign countries. FDA approval is required before any dosage form of any new drug, a generic equivalent of a previously approved drug, or a new combination of previously approved drugs, can be marketed in the United States. All applications for FDA approval must contain information relating to pharmaceutical formulation, stability, manufacturing, processing, packaging, labeling and quality control.

The process required by the FDA before a new drug may be marketed in the United States generally involves:


	•	completion of preclinical laboratory and animal testing;

	•	submission of an investigational new drug application (IND) which must become effective before the commencement of clinical trials;

	•	performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug product’s intended use; and

	•	submission to and approval by the FDA of a New Drug Application (NDA).


	PRECLINICAL: Preclinical studies generally include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies, to assess the safety and efficacy of the product. Preclinical trials also provide a basis for design of human clinical studies.

	Human clinical trials are typically conducted in three sequential phases which may overlap:

	PHASE I: During Phase I studies, the drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

	PHASE II: During Phase II studies, the drug is introduced to patients that have the medical condition that the drug is intended to treat. Phase II studies are intended to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Phase II studies may often be combined with Phase I studies (referred to as Phase I/II studies) in certain instances when safety issues may be less prevalent.

	PHASE III: When Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population, often at geographically dispersed clinical study sites.

The drug sponsor, the FDA or the institutional review board at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a concern that the subjects are being exposed to an unacceptable health risk.

The results of product development, preclinical animal studies and human studies are submitted to the FDA as part of the NDA. The NDA also must contain extensive manufacturing information. The FDA may approve or disapprove the NDA if applicable FDA regulatory criteria are not satisfied or it may require additional clinical data to continue to evaluate the NDA.

In our NDA submissions, we intend to rely, in part, on prior FDA approvals of the antibiotic ingredients utilized in our products and on data generated by other parties which help to demonstrate the safety and effectiveness of those ingredients. In the case of products that we may develop in conjunction with sponsors of previously approved products, we expect that we will have a specific right of reference to the data contained in the prior applications. In any case in which we do not have a specific right of reference from the sponsor of the previously approved product, we anticipate our NDA submissions would be covered by Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act. The submission or approval of a NDA covered by Section 505(b)(2) can be subject to a number of limitations. However, we do not believe that these limitations will apply to any of the products which are the subject of our current development projects. All data necessary to satisfy the FDA of the safety and effectiveness of our own versions of these products will have to be generated by or for us and submitted to the FDA in support of our applications. These data are expected to include data establishing the safety and efficacy of the pulsatile dosage and any other differences between the dosage form and the conditions for use of our products and the dosage form and conditions for use of the previously approved products. In the case of antibiotic ingredients not previously approved to be manufactured and sold in the combinations that we propose, it will also be necessary for us to satisfy the FDA’s combination drug policy with data establishing that each active component contributes to the effectiveness of the combination and that the dosage of each component is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy. In its review of our NDA submissions, the FDA will have broad discretion to require us to generate data on these matters, and it is impossible to predict the number or nature of the studies that may be required before the agency will grant an approval. No assurance can be given that NDAs submitted for our products will receive FDA approval on a timely basis, or at all.

Because all of the products that we have in development contain antibiotic ingredients that were submitted to the FDA for approval prior to November 20, 1997, we will not, under current law, be able to submit to the FDA patent information covering those products. Therefore, once approved, the FDA’s Orange Book, which lists patent information on drug products, will not include patent information on our products. As a consequence, potential competitors who submit 505(b)(2) or ANDA applications for generic versions of our NDA-approved products will not have to provide certifications regarding any of our patents that they may infringe or to provide us notice if they intend to market their products prior to expiration of those patents. Additionally, if we bring a patent infringement action against any such applicants, an automatic 30-month stay of approval of those potentially infringing products will not be granted. However, we would be entitled to pursue traditional patent-law procedures and remedies, such as preliminary and permanent injunctions.

Under the Prescription Drug User Fee Act (PDUFA) generally, the submission of an NDA is subject to substantial application user fees, currently exceeding $500,000, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently exceeding $30,000 per product and $200,000 per establishment. These fees are typically increased annually. However, because our products in development contain only active ingredients that have been previously approved in other applications, we do not believe that we will be subject to any of these user fees. We could become subject to such fees, however, if the FDA determines that any of our applications seek approval of a new “indication for use” beyond those previously approved for those active ingredients. In addition, the PDUFA statute has been subject to significant amendments in connection with its regular reauthorization. There can be no assurance that, under existing PDUFA provisions or under amendments thereto, we will continue to be exempt from user fees in the future.

The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, established abbreviated FDA approval procedures for those proprietary drugs that are no longer protected by patents and which are shown to be equivalent to previously approved proprietary drugs. Approval to manufacture these drugs is obtained by filing an abbreviated new drug application (ANDA). An ANDA is a submission that contains data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation data and quality control procedures. As a substitute for clinical safety and efficacy data on the product, the applicant is generally required to provide data from studies in humans establishing that the ANDA drug formulation is bioequivalent to the previously approved proprietary drug. A product is not eligible for ANDA approval if it is not determined by the FDA to be equivalent to the referenced brand-name drug or if it is intended for a different use. However, such a product might be approved under an NDA with supportive data from clinical trials.

One advantage of the ANDA approval process is that an ANDA applicant generally can rely upon equivalence data in lieu of conducting preclinical testing and clinical trials to demonstrate that a product is safe and effective for its intended use. We intend to follow this process with respect to our generic clarithromycin product. We do not believe that our generic clarithromycin product will infringe any outstanding patent after expiration of the clarithromycin API patent. Because that product utilizes an active ingredient first submitted to the FDA for approval prior to November 20, 1997, we will not have to submit certifications with respect to outstanding patents covering Biaxin XL and will not be subject to a potential 30-month stay of the approval of our product in the event that the holder(s) of those patents choose to bring a patent infringement claim against us. However, traditional patent law procedures and remedies may be pursued by the patent holders, including preliminary and permanent injunctions against marketing of our product and damages for marketing an infringing product. Therefore, because of the inapplicability of the patent listing and certification procedures, resolution of potential patent infringement claims with respect to our product may be impossible until after we have obtained approval of our ANDA. This may cause delays in our ability or willingness to market the product upon ANDA approval and/or may subject us to a risk of substantial monetary damages in the event that we market the product prior to the resolution of any infringement claims that may be made.

No assurance can be given that any ANDA submitted for any of our products will receive FDA approval on a timely basis, if at all, or that the FDA will not require us to submit NDAs for products that we believe are eligible for ANDA submission.

Satisfaction of FDA pre-market approval requirements typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or the medical condition it is intended to treat. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon a manufacturer’s activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.

Once approved, a product approval may be withdrawn if compliance with pre-and post-market regulatory standards are not maintained or if problems are identified at a later date. In addition, the FDA may require post-marketing studies to monitor the safety and/or effectiveness of approved products and may limit further marketing of the product based on the results of these post-marketing studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals.

The FDA also strictly regulates the promotional claims that may be made about prescription drug products. In particular, the FDA requires substantiation of any claims of superiority of one product over another including, in many cases, requirements that such claims be proven by adequate and well controlled head-to-head clinical trials. To the extent that market acceptance of our products may depend on their superiority over existing therapies, any restriction on our ability to advertise or otherwise promote claims of

From time to time, including presently, legislation is drafted and introduced that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

We and are products are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, and disposal of hazardous or potentially hazardous substances. We may incur substantial costs to comply with such laws and regulations now or in the future.

Outside the United States, our ability to market our products will also be contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all the risks associated with FDA approval described above. The requirements governing conduct of clinical trials and marketing authorization vary widely from country to country.

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the application and assessment report, each member state must decide whether to recognize approval. We plan to choose the European regulatory filing procedure that we believe will allow us to obtain regulatory approvals quickly. However, the chosen regulatory strategy may not secure regulatory approvals or approvals of the chosen product indications. In addition, these approvals, if obtained, may take longer than anticipated.

We cannot assure you that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.

As of October 6, 2003, we had 63 employees, 17 of whom are senior management, 19 are in supervisory positions and 27 are non-management. Of the 63 employees, 41 perform scientific and research activities and 19 hold advanced degrees.

Our principal executive offices are located in an approximately 62,000 square foot facility in Germantown, Maryland. We moved into this facility in May 2003 and expect to complete the transfer of our laboratory function to this facility by October 2003. The lease for this facility expires in June 2013. We also have an approximately 8,432 square foot lab and office facility in Gaithersburg, Maryland, the lease for which expires in November 2003. We do not intend to renew the lease for the Gaithersburg facility.

Edward M. Rudnic, Ph.D. founded Advancis Pharmaceutical Corporation and has been our president, chief executive officer and a director since our inception. Dr. Rudnic has over 20 years of industry experience in the development and commercialization of a wide range of pharmaceutical products. From 1997 to 1999, Dr. Rudnic directed the research and development activities in the U.S. for Shire Pharmaceuticals. Shire acquired Pharmavene, Inc. in 1997, a start-up company focused on the design and commercialization of drug delivery systems, where Dr. Rudnic was senior vice president for development and technical operations from 1996 to 1997 and vice president, pharmaceutical research and development from 1991 to 1996. From 1990 to 1991, he was an independent consultant. From 1985 to 1990, he held positions of increasing responsibility as a director of formulation development and head of pharmaceutical process development at Schering-Plough Corporation. Dr. Rudnic was a research investigator at E.R. Squibb and Sons, developing oral controlled-release dosage forms and novel drug delivery concepts, from 1982 to 1985. Dr. Rudnic has a B.S. in pharmacy, M.S. in pharmaceutics and a Ph.D. in pharmaceutical sciences from the University of Rhode Island. Dr. Rudnic is a registered pharmacist. He holds adjunct professorships at the University of Rhode Island and the University of Maryland. Dr. Rudnic was elected to our board of directors pursuant to a stockholders’ agreement between us and holders of our preferred stock.

Steven A. Shallcross joined us in October 2001 as senior vice president and chief financial officer. Mr. Shallcross has also served as our treasurer since August 2003. Mr. Shallcross has over 17 years of senior financial and operations experience in emerging organizations, acquisitions and restructurings. Mr. Shallcross was the vice president of finance and chief financial officer at Bering Truck Corporation, a truck manufacturer, from 1997 to 2001. From 1993 to 1997, Mr. Shallcross served as vice president of operations at Precision Scientific, Inc., a manufacturer of scientific laboratory equipment. He was the controller of Precision Scientific from 1993 to 1994. Mr. Shallcross received a bachelor’s degree in accounting from the University of Illinois, and received an M.B.A from the University of Chicago, Graduate School of Business. Mr. Shallcross is also a certified public accountant.

Kevin S. Sly joined us in February 2002 as senior vice president, business development and strategic marketing. Mr. Sly has over 20 years of experience in the design, development and management of products, services and businesses incorporating biomedical and pharmaceutical technologies. From 1995 to 2002,

Mr. Sly established and directed new business development and marketing efforts for Yamanouchi Pharma Technologies, Inc., a pharmaceutical drug delivery system company. From 1990 to 1995, Mr. Sly served as vice president, business development for another emerging company, ReSeal Pharmaceutical Systems, directing technological development, business development and marketing of controlled-delivery systems for pharmaceuticals, health care and personal care products. Mr. Sly received a B.A. in biology from Pomona College in Claremont, California.

Colin E. Rowlings, Ph.D. has served as our senior vice president, pharmaceutical research and development since August 2003. From August 2001 to August 2003, Dr. Rowlings served as our vice president, pharmaceutical research and development. Dr. Rowlings has 14 years of pharmaceutical industry experience including 12 years in dosage form development of new chemical entities. Prior to joining us in 2001, Dr. Rowlings served as group director of pharmaceutical research and development at the San Diego site of the Pfizer Global R&D organization (previously Agouron Pharmaceuticals Inc.). From 1997 to 2001, Dr. Rowlings was director of pharmaceutical development in Agouron and managed formulation development, clinical manufacturing, process scale-up, clinical supply release testing, stability and documentation functions. Prior to that, Dr. Rowlings worked in formulation development at Rhone-Poulenc Rorer (now Aventis) and Eli Lilly. Dr. Rowlings has a bachelor of pharmacy degree from the University of Queensland, Australia and received a Ph.D. in pharmaceutics from the University of Iowa.

Robert J. Guttendorf, Ph.D. joined us as vice president, preclinical research in September 2002. Dr. Guttendorf has over 15 years of experience in the pharmaceutical industry applying his pharmacokinetic, pharmacodynamic and drug metabolism expertise in all phases of drug discovery and development, and across a broad range of therapeutic areas. From 2001 to 2002, Dr. Guttendorf was scientific strategy advisor at Pfizer Global R&D in Ann Arbor, Michigan (formerly Parke-Davis Pharmaceutical Research). Prior to that, he held various scientific and managerial positions with increasing responsibilities within Pfizer/ Parke-Davis, including director of PK/DM discovery and preclinical development. Dr. Guttendorf received a B.S. in pharmacy from West Virginia University and is a registered pharmacist. He received a Ph.D. in pharmaceutical sciences from the University of Kentucky.

Sandra E. Wassink has served as our vice president, pharmaceutical technology since August 2003. Ms. Wassink joined us as senior director, pharmaceutical development in May 2000. Ms. Wassink has over 20 years of industry experience in formulation and development of advanced drug products. From 1992 to 2000, Ms. Wassink managed the pharmaceutical technology department at Shire Laboratories, Inc. She was involved in development, scale up, validation and introduction into production of oral solid dose products. Prior to that, Ms. Wassink was involved in formulation development at Schering-Plough Corporation. Ms. Wassink received a bachelor’s degree in biology from Florida State University.

Beth A. Burnside, Ph.D. has served as our vice president, formulation development since August 2003. Dr. Burnside joined us in August 2002 as senior director, formulation development. From 1993 to 2002, Dr. Burnside was employed by Shire Laboratories Inc. While at Shire she held management positions with increasing responsibilities in the pharmaceutics, pharmaceutical development and the advanced drug delivery organizations. As vice president of the advanced drug delivery division, Dr. Burnside assisted in the development of the division’s specialized controlled release and enhanced bioavailability oral delivery formulation and product strategy. Prior to working at Shire, Dr. Burnside gained additional experience at Johnson & Johnson from 1991 to 1992 and at Schering-Plough Research from 1989 to 1991. She received a B.S. in chemistry/ mathematics from Muhlenberg College in Allentown, Pennsylvania and an M.S. in organic chemistry and a Ph.D. in physical-organic chemistry from Drexel University.

Darren W. Buchwald joined us in September 2003 as vice president, pharmaceutical marketing. Mr. Buchwald has over 13 years of experience in development and commercialization of biologies and pharmaceuticals. From 1998 to September 2003, Mr. Buchwald established and managed strategic marketing at Human Genome Sciences where he directed the development and execution of the commercialization strategies supporting the oncology products portfolio. From 1996 to 1998, Mr. Buchwald was a consultant with Parexel International, a pharmaceutical services company, where he directed international commercial strategy engagements. Prior to joining Parexel, he was responsible for Blue

Cross Blue Shield of Maryland’s (now CareFirst) prescription drug and managed health benefit products. From 1991 to 1995, he held positions of increasing responsibility with Forest Laboratories as product manager of their narcotic analgesic franchise. Mr. Buchwald has a Bachelor of Arts degree from the University of Maryland.

Juan N. Walterspiel, M.D. joined us in September 2003 as vice president, clinical research. From 2002 to Sep


Delaware	2834	52-2208264
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to Advancis (before expenses)	$	$


			PULSYS Targeted	Product
Advancis Product	Key Indication(s)	Standard Therapy	Added Value	Opportunity

PHASE I/ II PULSYS PRODUCT CANDIDATES
Pulsatile Amoxicillin	Upper respiratory tract infections (URTI), urinary tract infections	10-14 days, two or three times daily	Once daily, lower dose, shorter duration (5-7 days)	Alone and in combination with other drugs
Pulsatile Clarithromycin	URTI, acute exacerbation of chronic bronchitis (AECB), sinusitis	7-14 days, twice daily	Once daily, lower dose, shorter duration (5-7 days)	Alone or in combination with other drugs
Pulsatile Metronidazole	Trichomoniasis, amebiasis	1-10 days, one to three times daily	Single dose therapy	Alone and in combination with other drugs
Amoxicillin/clavulanate combination	AECB, sinusitis	10-14 days, two or three times daily	Once daily, lower dose, shorter duration (5-7 days)	As a combination
NON-PULSATILE GENERIC PRODUCT CANDIDATE (ANDA to be filed)
Clarithromycin extended release	URTI, AECB, sinusitis	7-14 days, once daily	N/ A	Alone


Common stock offered		6,000,000 shares (6,900,000 shares if the underwriters’ over-allotment option is exercised in full)
Common stock outstanding after this offering		22,749,218 shares (23,649,218 shares if the underwriters’ over-allotment option is exercised in full)
Use of proceeds		We intend to use the net proceeds from this offering as follows: research and development including preclinical development and clinical trials, purchase of capital equipment, licensing activities and general corporate purposes. See “Use of Proceeds.”
Nasdaq National Market symbol		AVNC



		Year Ended December 31,									Six Months Ended June 30,

		2000			2001			2002			2002			2003


											(Unaudited)
Revenue		$	—		$	—		$	—		$	—		$	—

Cost and expenses
	Research and development		1,133,014			5,295,308			10,855,130			4,660,989			5,537,966
	General and administrative		751,962			1,958,602			3,323,879			1,523,214			1,853,342

Total expenses			1,884,976			7,253,910			14,179,009			6,184,203			7,391,308

Loss from operations			(1,884,976	)		(7,253,910	)		(14,179,009	)		(6,184,203	)		(7,391,308	)
Interest income (expense), net			66,713			69,334			102,629			84,162			(98,155	)
Other expense			—			—			(47,615	)		—			—

Net loss			(1,818,263	)		(7,184,576	)		(14,123,995	)		(6,100,041	)		(7,489,463	)
Accretion of issuance costs of mandatorily redeemable convertible preferred stock			(11,887	)		(37,594	)		(73,925	)		(35,945	)		(37,361	)

Net loss applicable to common stockholders		$	(1,830,150	)	$	(7,222,170	)	$	(14,197,920	)	$	(6,135,986	)	$	(7,526,824	)

Net loss per share, basic and diluted		$	(4.38	)	$	(12.59	)	$	(16.37	)	$	(7.66	)	$	(7.37	)

Pro forma net loss per share, basic and diluted								$	(0.89	)				$	(0.47	)

Shares used in computing net loss per share, basic and diluted			417,857			573,699			867,239			800,672			1,021,418

Shares used in computing pro forma net loss per share, basic and diluted									15,929,725						16,083,904


Jeffrey A. Baumel, Esq. Daniel J. Malooly, Esq. McCarter & English, LLP 4 Gateway Center 100 Mulberry Street Newark, New Jersey 07102 (973) 622-4444		R.W. Smith, Jr., Esq. Howard S. Schwartz, Esq. Piper Rudnick LLP 6225 Smith Avenue Baltimore, Maryland 21209 (410) 580-3000		Jeffrey E. Cohen, Esq. Carol B. Stubblefield, Esq. Coudert Brothers LLP 1114 Avenue of the Americas New York, New York 10036 (212) 626-4400


	Page

Prospectus Summary		1
Risk Factors		7
Special Note Regarding Forward-Looking Statements		19
Use of Proceeds		20
Dividend Policy		20
Capitalization		21
Dilution		22
Selected Financial Data		23
Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Business		36
Management		52
Certain Relationships and Related Transactions		64
Principal Stockholders		66
Description of Capital Stock		69
Shares Eligible for Future Sale		73
Underwriting		75
Notice to Canadian Investors		77
United Kingdom Notice		79
Legal Matters		80
Experts		80
Where You Can Find More Information		80
Index to Financial Statements		F-1



	June 30, 2003
	(unaudited)

							Pro Forma
	Actual			Pro Forma			As Adjusted

Cash and cash equivalents	$	244,582		$	21,152,221		$	92,492,221
Total assets		11,029,756			31,937,395			103,277,395
Total liabilities		11,979,852			6,888,463			6,888,463
Total mandatorily redeemable convertible preferred stock		28,476,656			54,475,684			—
Deficit accumulated during the development stage		(30,616,297	)		(30,616,297	)		(30,616,297	)
Total stockholders’ equity (deficit)		(29,426,752	)		(29,426,752	)		96,388,932


	*We expect to incur losses for the foreseeable future and may never become profitable.*


	*Substantially all of our product candidates are based on a finding that could ultimately prove to be incorrect, or could have limited applicability.*


	*Our delivery technology may not be effective, which would prevent us from commercializing products that are more effective than those of our competitors.*


	*If a competitor produces and commercializes an antibiotic that is superior to our pulsatile antibiotics, the market for our potential products would be reduced or eliminated.*


	We have not commissioned an extensive third party patent infringement, invalidity and enforceability investigation on pulsatile dosing and we are aware of one issued patent covering pulsatile delivery.


	*Our generic clarithromycin product may face intellectual property challenge.*


	*We have not sought patent protection for certain aspects of our technology.*


	*If we are unable to develop and successfully commercialize our product candidates, we may never achieve profitability.*


	*If we do not successfully attract and retain collaborative partners, or our partners do not satisfy their obligations, we will be unable to develop our partnered product candidates.*


	*If we cannot enter into new licensing arrangements, our ability to develop a diverse product portfolio could be limited.*


	*Our executive officers and other key personnel are critical to our business and our future success depends on our ability to retain them.*


	*Our ability to complete clinical trials and ultimately, commercialize products will be delayed if we are unable to obtain sufficient APIs from certain suppliers.*


	*Clinical trials for our product candidates may be delayed due to our dependence on third parties for the conduct of such trials.*


	*If clinical trials for our products are unsuccessful or delayed, we will be unable to meet our anticipated development and commercialization timelines.*


	*We may need additional capital in the future. If additional capital is not available, we may be forced to delay or curtail the development of our product candidates.*


	*We could be forced to pay substantial damage awards if product liability claims that may be brought against us are successful.*


	*If our products are not accepted by the market, our revenues and profitability will suffer.*


	Our ability to conduct clinical trials will be impaired if we fail to build our clinical supply manufacturing facility and we are unable to maintain relationships with current clinical supply manufacturers or enter into relationships with new manufacturers.


	*If we fail to establish marketing, sales and distribution capabilities, or fail to enter into arrangements with third parties, we will not be able to commercialize our products.*


	*Any inability to protect our intellectual property could harm our competitive position.*


	If we do not compete successfully in the development and commercialization of products and keep pace with rapid technological change, we will be unable to capture and sustain a meaningful market position.


	*If we experience delays in obtaining regulatory approvals, or are unable to obtain or maintain regulatory approvals, we may be unable to commercialize any products.*


	*The manufacture and storage of pharmaceutical and chemical products is subject to environmental regulation and risk.*


	*Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payors.*


	*Future sales of our common stock, or the perception that these sales may occur, could depress our stock price.*


	Our certificate of incorporation and provisions of Delaware law could discourage a takeover you may consider favorable or could cause current management to become entrenched and difficult to replace.


	*We will have broad discretion in how we use the proceeds of this offering.*