sv1za

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared 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, 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, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such 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 we are not soliciting offers to buy these securities in any state where the offer is not permitted.

Barrier Therapeutics, Inc. is offering 2,000,000 shares, and the selling stockholders are offering 2,000,000 shares. None of our executive officers is a selling stockholder.

Our common stock is listed on the NASDAQ National Market under the symbol “BTRX.” On January 31, 2005, the reported last sale price of our common stock on the NASDAQ National Market was $19.98 per share.

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

We have granted the underwriters the right to purchase up to an additional 600,000 shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2005.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from the information contained in this prospectus. We and the selling stockholders are offering to sell shares of common stock, and seeking offers to buy shares of common stock, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or when any sale of our common stock occurs.

For investors outside the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock.

We are a pharmaceutical company focused on the discovery, development and commercialization of pharmaceutical products in the field of dermatology. Our goal is to develop a portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders. We currently have multiple product candidates in clinical development based on intellectual property that we have licensed from third parties. We believe that there exists significant commercial opportunity for a company focused specifically on the treatment of dermatological diseases, given the relatively fragmented nature of the dermatology market and the clinical limitations of currently approved treatments. We plan to build our own sales force to market our product candidates that receive marketing approval directly to dermatologists and other target physicians in the United States and Canada and to rely on third-party arrangements for the commercialization of our approved product candidates outside the United States and Canada.

Our product pipeline includes eight product candidates in various stages of clinical development. We also have product candidates in preclinical development, as well as two product candidates that are marketed by third parties in some countries outside the United States and Europe. In addition, we have access to the classes of compounds claimed in the patents licensed to us under our license agreements with affiliates of Johnson & Johnson. We are currently conducting a screening program to search for new product candidates in the field of dermatology. The United States Food and Drug Administration, or FDA, has not approved any of our product candidates.

Zimycan. Zimycan is a topical ointment for the treatment of infants with diaper dermatitis complicated by candidiasis, an inflammatory disease characterized by diaper rash complicated with an infection by a fungus called Candida. In the United States, there currently is no prescription drug specifically approved to treat diaper dermatitis complicated by candidiasis. On the basis of the positive Phase 3 pivotal clinical trial results that we announced in August 2004, we filed an amendment to a pending new drug application, or NDA, for Zimycan in the United States in November 2004. We expect to receive a first action letter from the FDA relating to the potential approval of Zimycan in the United States during the first half of 2005. Zimycan has received marketing approval from the Belgian Health Authorities and is the subject of a mutual recognition procedure for approval in major markets in Europe.

Sebazole. Sebazole is a topical formulation of 2.0% ketoconazole, an antifungal agent, in a waterless gel that we are developing for the once daily treatment of seborrheic dermatitis, a type of eczema characterized by inflammation and scaling of the skin, principally of the scalp, face and chest. The condition ofter recurs, thereby requiring treatment over time. We have designed Sebazole to deliver the benefits of ketoconazole with the advantages of our waterless gel. In December 2004, we announced positive results from a Phase 3 pivotal clinical trial for Sebazole. We expect to file an NDA for Sebazole in the United States in the third quarter of 2005.

Hyphanox. Hyphanox is an oral formulation of itraconazole, an antifungal agent, that we are developing for the treatment of fungal infections, including vaginal candidiasis, commonly known as vaginal yeast infection, and onychomycosis, commonly known as nail fungus. In the first quarter of 2004, we commenced a Phase 3 pivotal clinical trial in the United States for the use of a single day, single dose treatment of two 200 mg tablets of Hyphanox in the treatment of vaginal candidiasis. If this clinical trial is successful, we

expect to file an NDA with the FDA in the second half of 2005 seeking marketing approval for Hyphanox for the treatment of vaginal candidiasis. In the first half of 2005, we plan to initiate two Phase 3 pivotal clinical trials of Hyphanox for the treatment of onychomycosis. Janssen Pharmaceutica Products, L.P. and a number of other Johnson & Johnson companies currently market different formulations of itraconazole, under Sporanox and other brand names, in various countries. A generic form of itraconazole has also been approved in the United States. A 100 mg capsule is the maximum strength in which oral Sporanox is currently available. We believe that our 200 mg formulation will allow for more convenient once daily dosing and provide for less interpatient variability. Janssen has an exclusive option to acquire the right to commercialize Hyphanox on a region-by-region basis.

Liarozole. Liarozole is our first product candidate based on a class of molecules known as retinoic acid metabolism blocking agents, or RAMBAs. We are developing Liarozole as an oral therapeutic for the treatment of congenital ichthyosis. Congenital ichthyosis is a rare genetic disease affecting one in 6,000 people in the United States, characterized by dryness and scaling of the skin. There is no prescription drug currently approved in the United States that is indicated for the treatment of congenital ichthyosis. Both the FDA and the Commission for the European Community have granted Liarozole orphan drug status for the treatment of congenital ichthyosis. We expect to commence a Phase 2/3 clinical trial for Liarozole for the treatment of congenital ichthyosis during 2005.

Our product development pipeline includes four product candidates that are in earlier stages of clinical development — oral Rambazole, topical Rambazole, Azoline and Hivenyl. All of these product candidates are based on intellectual property licensed by us under our principal license agreements. We are developing these product candidates as treatments for a wide range of dermatological diseases and disorders, including acne, psoriasis and fungal infections.

Rambazole. Rambazole is our second product candidate based on the RAMBA class of molecules. We believe that Rambazole may address some of the limitations of existing therapies, such as toxicity, or the degree to which existing therapies are harmful at certain levels of treatment, and immune suppression, or the tendency of some existing therapies to compromise a patient’s immune system. Studies conducted prior to our acquisition of rights to this product candidate suggested that Rambazole is more selective and more active than first generation RAMBA-based product candidates. We are currently developing oral and topical formulations of Rambazole.


	Oral. We are developing an oral formulation of Rambazole for the treatment of psoriasis and severe acne. An oral formulation of Rambazole was tested in two Phase 1 clinical trials. One of these clinical trials was a single dose escalation study, and the other was a multiple dose escalation study. In the multiple dose escalation study, increased doses of Rambazole resulted in increased manifestation of skin effects typical for retinoid therapy, including dry lips and skin. We are currently conducting two Phase 2a clinical studies in Europe using oral Rambazole, one in moderate to severe psoriasis and the other in moderate to severe nodular acne. Based on our review of initial data from the psoriasis trial, we plan to submit an investigational new drug application, or IND, to the FDA and commence Phase 2b clinical trials in the United States of oral Rambazole for psoriasis during the first half of 2005.

	Topical. We are developing a topical formulation of Rambazole for dermatological indications, including common forms of acne and mild to moderate psoriasis. Animal studies conducted with RAMBAs indicate that topical RAMBA treatment may produce the same therapeutic results as retinoic acid treatments but with less irritation. A Phase 2 clinical trial for acne compared 13 subjects treated with a topical formulation of Rambazole to 13 subjects treated with a placebo. Subjects were treated for 12 weeks. In this trial, subjects receiving topical Rambazole showed a greater percentage reduction of acne lesions than those receiving the placebo. In addition, topical Rambazole was well tolerated, with no serious drug-related adverse events reported. In 2005, we plan to initiate a Phase 2a clinical trial in Europe to evaluate the effectiveness of topical Rambazole in mild to moderate acne.

Azoline. Azoline is an antifungal agent that we are developing as an oral treatment for skin and mucosal fungal infections. Preclinical testing has shown Azoline to be more potent than itraconazole against

dermatological fungal infections and less interactive than itraconazole with the metabolism of other drugs. We have completed a one week Phase 1 clinical trial for Azoline in two different dose strengths. The results of this trial indicate that at the doses tested, Azoline has a half-life in the body of approximately 81 hours, which is nearly three times longer than that of itraconazole. Based on data from this trial and data from recent Phase 2a clinical trials, we believe that Azoline may be an effective short course oral treatment for fungal infections. In these trials, Azoline was well tolerated, with no serious drug-related adverse events reported. We plan to submit an IND to the FDA and commence Phase 2b clinical trials of Azoline in the United States during 2005.

Hivenyl. Hivenyl is an antihistamine that we are developing as an oral treatment for allergic reactions of the skin, such as the types of reactions associated with hives and those associated with poison ivy, which may not cause sedation typically associated with antihistamines. Patients experience sedation when an antihistamine crosses the blood-brain barrier. In preclinical studies in animal models, Hivenyl did not cross the blood-brain barrier. In addition, the results of two dose escalation Phase 1 clinical trials of Hivenyl suggest that Hivenyl inhibits allergic reactions, has a fast onset of action and does not cause sedation. In these trials, no cardiovascular side effects or sedation were experienced at doses of five to 15 times those that elicited an antihistamine response. We are currently conducting a Phase 2a clinical trial in Europe for Hivenyl.

The preliminary observations of efficacy from any of our preclinical or clinical trials for our earlier stage product candidates are not necessarily indicative of the results that may be demonstrated in future clinical trials. We will need to conduct significant additional preclinical or clinical trials prior to seeking marketing approval for our earlier stage product candidates.

On February 5, 2005, we acquired the United States and Canadian rights to SOLAGÉ, a product commonly used for depigmenting lesions, from Moreland Enterprises Limited. In the United States, SOLAGÉ is indicated for the treatment of solar lentigines, commonly known as age spots, while the Canadian indication also includes use for related hyperpigmented lesions. Under the terms of the agreement, we made an initial cash payment to Moreland of $3 million and may make future payments totaling up to an additional $2 million, depending upon future sales of the product. In addition, the agreement provides that in the event Moreland proposes to grant rights to a third party to distribute, license or otherwise divest its rights to the product outside the United States and Canada, subject to the terms of the agreement, we have a right of first refusal to acquire such rights. The agreement also provides for the assignment to us of all SOLAGÉ United States and Canadian marketing authorizations, patents, patent applications and trademarks and the purchase by us of all existing inventory. The patent rights include United States and Canadian patents and patent applications covering SOLAGÉ’s pharmaceutical composition and methods of use until at least 2010. We have also entered into a distribution agreement with Galderma Laboratories under which Galderma will provide us with distribution services and logistical support for SOLAGÉ through December 2005.

Our strategy is to develop a portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders in order to become a global leader in the discovery, development and commercialization of prescription pharmaceutical products to treat these diseases and disorders. To achieve our goal, we intend to:


	•	aggressively pursue the development and regulatory approval of our product candidates;

	•	commercialize our products directly through our own sales organization in the United States and Canada and through collaborations with third parties outside the United States and Canada;

	•	maintain a diverse portfolio of product candidates; and

	•	expand our product portfolio through a combination of internal development efforts and selective acquisitions of additional compounds and marketed products.

We were founded in 2001 by Geert Cauwenbergh, Ph.D., our Chief Executive Officer, who identified a portfolio of dermatological product candidates and intellectual property within the Johnson & Johnson family of companies that he believed could form the basis for an independent pharmaceutical company focused on dermatology. In May 2002, we acquired these assets through licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson company, in exchange for an equity interest in us. In September 2004, we amended these two intellectual property transfer and license agreements to principally provide for additional semi-exclusive territories.

We have a limited operating history, have not completed the development of any of our product candidates and have not yet received marketing authorization for any of our product candidates, except for Zimycan in Belgium. We have not been profitable in any quarter since inception. For the year ended December 31, 2003, our net loss was $20.2 million and, as of that date, we had a deficit accumulated during the development stage of $61.9 million. For the nine months ended September 30, 2004, our net loss was $26.4 million and, as of that date, our deficit accumulated during the development stage was $92.9 million. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient sales revenue to achieve and then maintain profitability. We expect to incur operating losses for the foreseeable future.

We were incorporated under the laws of the State of Delaware in September 2001 as “Barrier Health Technologies, Inc.” We changed our name to “Barrier Therapeutics, Inc.” in April 2002. Our principal executive offices are located at 600 College Road East, Suite 3200, Princeton, New Jersey 08540. Our telephone number is (609) 945-1200. Our website address is www.barriertherapeutics.com. The information on our website is not a part of this prospectus. We have included our website address in this document as an inactive textual reference only.

We are seeking United States trademark registrations for our proposed trademarks Barrier Therapeutics^TM, Zimycan^TM, Sebazole^TM, Hyphanox^TM, Rambazole^TM and Hivenyl^TM. Liarozole, Azoline and Atopik are temporary designations. We are developing commercial names for our Liarozole, Azoline and Atopik product candidates. In connection with our acquisition of the SOLAGÉ® product, we acquired the rights to the United States and Canadian trademark registrations for SOLAGÉ® Topical Solution.

In this prospectus, the information attributed to IMS Health is based on our independent analysis of the data provided to us from IMS Health. In addition, our citations in this prospectus to “Fitzpatrick’s” refer to Fitzpatrick’s Dermatology in General Medicine (Sixth Edition), a widely used reference book in the field of dermatology.

In this prospectus, unless otherwise stated or the context otherwise requires, references to “Barrier,” “we,” “us,” “our” and similar references refer to Barrier Therapeutics, Inc.

The number of shares of our common stock that will be outstanding after this offering is based on 21,894,830 shares of common stock outstanding as of December 31, 2004. This amount excludes:


	•	1,438,937 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 2004 at a weighted average exercise price of $4.52 per share, of which, options to purchase 383,586 shares were exercisable; and

	•	381,181 shares of common stock available for future grant under our 2004 stock incentive plan as of December 31, 2004 and 195,950 shares of common stock available for purchase under our employee stock purchase plan.

On January 1, 2005, pursuant to the terms of our 2004 stock incentive plan and our employee stock purchase plan, an additional 1,000,000 shares of common stock became available for future grant under our 2004 stock incentive plan and an additional 109,474 shares of common stock became available for purchase under our employee stock purchase plan.

Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option and no exercise of stock options after December 31, 2004.

The following tables summarize our consolidated financial data. You should read the summary consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information included in this prospectus.

The as adjusted balance sheet data reflect our sale of 2,000,000 shares of common stock in this offering at an assumed public offering price of $19.98 per share, after deducting estimated underwriting discounts and commissions and offering expenses.

An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below and all other information contained in this prospectus before you decide whether to purchase our common stock.

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

Since our inception in September 2001, we have incurred significant operating losses and, as of September 30, 2004, we had a deficit accumulated during the development stage of $92.9 million. We have not yet completed the development of any of our product candidates, and none are ready for commercialization, except for Zimycan in Belgium. As a result, to date, we have generated no revenues from the sale of our products. We expect to continue to incur significant operating expenses and anticipate that our expenses may increase substantially in the foreseeable future as we:


	•	conduct clinical trials;

	•	conduct research and development on existing and new product candidates;

	•	seek regulatory approvals for our product candidates;

	•	commercialize our product candidates, if approved;

	•	hire additional clinical, scientific, sales and marketing and management personnel;

	•	add operational, financial and management information systems; and

	•	identify and in-license additional compounds or product candidates.

We need to generate significant revenue to achieve profitability. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient sales revenue to achieve and then maintain profitability. We expect to incur operating losses for the foreseeable future.

We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

As of September 30, 2004, we had cash, cash equivalents and marketable securities of $100.6 million. We believe that the net proceeds to us from this offering, together with our existing cash resources and our interest on the aggregate of these funds, will be sufficient to meet our projected operating requirements through the end of 2006. We currently have no additional commitments or arrangements for any additional financing to fund the research and development and commercial launch of our product candidates. We will require additional funding in order to continue our research and development programs, including preclinical studies and clinical trials of our product candidates, pursue regulatory approvals for our product candidates, pursue the commercial launch of our product candidates and for general corporate purposes. Our future capital requirements will depend on many factors, including:


	•	the success of our development and commercialization of our product candidates;

	•	the scope and results of our clinical trials;

	•	advancement of other product candidates into clinical development;

	•	potential acquisition or in-licensing of other products or technologies;

	•	the timing of, and the costs involved in, obtaining regulatory approvals;


	•	the costs of manufacturing activities;

	•	the costs of commercialization activities, including product marketing, sales and distribution and related working capital needs;

	•	the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property-related costs, including any possible litigation costs; and

	•	our ability to establish and maintain collaborative and other strategic arrangements.

Adequate financing may not be available on terms acceptable to us, if at all. We may continue to seek additional capital through public or private equity offerings, debt financings or collaborative arrangements and licensing agreements.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing that we raise or additional equity we may sell may contain terms that are not favorable to us or our common stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it will be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us.

Lack of funding could adversely affect our ability to pursue our business. For example, if adequate funds are not available, we may be required to curtail significantly or eliminate one or more of our product development programs.


	We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or if our clinical trials do not demonstrate safety and efficacy in humans.

We are currently not authorized to market any of our product candidates in any jurisdiction except for Zimycan in Belgium. We intend to market our products in the United States and in various other countries, and as a result, we will need to obtain separate regulatory approvals in most jurisdictions. Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of our product candidates. Preclinical studies and clinical trials are expensive, can take many years and have uncertain outcomes. In addition, the regulatory approval procedures vary among countries and additional testing may be required in some jurisdictions. Our success will depend on the success of our currently ongoing clinical trials and subsequent clinical trials that have not yet begun. It may take several years to complete the clinical trials of a product, and a failure of one or more of our clinical trials can occur at any stage of testing. We believe that the development of each of our product candidates involves significant risks at each stage of testing. If clinical trial difficulties and failures arise, our product candidates may never be approved for sale or become commercially viable. We do not believe that any of our product candidates have alternative uses if our current development activities are unsuccessful.

There are a number of difficulties and risks associated with clinical trials. These difficulties and risks may result in the failure to receive regulatory approval to sell our product candidates or the inability to commercialize any of our product candidates. The possibility exists that:


	•	we may discover that a product candidate does not exhibit the expected therapeutic results in humans, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved;

	•	the results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials;

	•	institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including


		noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

	•	subjects may drop out of our clinical trials;

	•	our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials; and

	•	the cost of our clinical trials may be greater than we currently anticipate.

For example, in November 2003, we completed two Phase 3 clinical trials that were designed primarily to analyze the use of one of our proposed product candidates, Seboride, for the treatment of seborrheic dermatitis. We decided not to seek regulatory approval for Seboride because the results of these clinical trials did not exhibit the expected therapeutic results for that product candidate. Similarly, because our preclinical studies of Ecalcidene did not replicate the results of earlier third-party studies, the development of Ecalcidene may be delayed or discontinued. Furthermore, the costs of our Phase 3 clinical trial for Hyphanox in the treatment of vaginal candidiasis were higher than expected principally because of the need to recruit additional patients, to add additional sites and to hire an additional contract research organization to assist in the management of the trial.

With respect to a number of our product candidates, we expect to rely on the results of clinical trials that were performed by or on behalf of Janssen Pharmaceutica Products, L.P. and its affiliates prior to our acquisition of these product candidates. It is possible that these trial results may not be predictive of the results of the clinical trials that we conduct for our product candidates. In addition, the results of these prior clinical trials may not be acceptable to the FDA or similar foreign regulatory authorities because the data may be incomplete, outdated or not otherwise acceptable for inclusion in our submissions for regulatory approval. For example, although our product candidates ketanserin and oxatomide are marketed by other companies in some countries outside the United States and Europe, the data used to support the current regulatory approvals for these products do not meet current regulatory guidelines in the United States and Europe. As a result, we must repeat most of the clinical work already completed prior to filing for marketing approval in the United States and Europe for these product candidates.

If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we would not be able to generate any initial revenues or grow revenues in future periods, which would result in significant harm to our financial position and adversely impact our stock price.


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

Planned clinical trials may not begin on time or may need to be restructured after they have begun. Clinical trials can be delayed for a variety of reasons, including delays related to:


	•	obtaining an effective investigational new drug application, or IND, or regulatory approval to commence a clinical trial;

	•	negotiating acceptable clinical trial agreement terms with prospective trial sites;

	•	obtaining institutional review board approval to conduct a clinical trial at a prospective site;

	•	recruiting qualified subjects to participate in clinical trials;

	•	competition in recruiting clinical investigators;

	•	shortage or lack of availability of supplies of drugs for clinical trials;

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

	•	the placement of a clinical hold on a study;


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

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

For example, we completed enrollment of our Phase 3 clinical trial for Zimycan later than expected due to difficulties enrolling infants with proven diaper dermatitis complicated by candidiasis. In addition, in January 2005, the FDA informed us that we should submit the six-month data from our ongoing long-term safety study of our Sebazole product candidate at the time of the initial filing of the NDA. We expect that the request from the FDA to include this data will delay the filing of our Sebazole NDA until the third quarter of 2005 due to the time we expect it will take us to analyze data from the required number of patients. In January 2005, the FDA also asked us to perform a study for Sebazole known as a percutaneous absorbtion study, which measures the amount of a drug’s absorbtion, if any, into the bloodstream through the skin. The FDA requested that we submit data from this study at the time of the initial filing of the NDA. If satisfying either the long-term safety data or percutaneous absorbtion data requirements takes longer than we currently expect, the initial filing of our NDA for Sebazole could be delayed.

We believe that our product candidates have significant milestones to reach, including, other than Zimycan, the successful completion of clinical trials, before commercialization. If we have significant delays in or termination of clinical trials, our financial results and the commercial prospects for our product candidates or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to generate revenue could be impaired.


	If we are wrong in our assessment of the stages of clinical development of our initial product candidates, we may need to perform preclinical studies or clinical trials that we did not anticipate, which would result in additional product development costs for us and delays in filing for regulatory approval for our product candidates.

We acquired the rights to our initial product candidates from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson company. Prior to this acquisition, they had conducted preclinical studies and clinical trials on several of our product candidates. For our product candidates for which we are not currently conducting a clinical trial, we have made an assessment as to whether the next clinical trial that we will perform will be a Phase 1, Phase 2 or Phase 3 clinical trial based on the results of these preclinical studies and clinical trials. We may be wrong in our assessment of the stages of clinical development of our initial product candidates for several reasons, including that the data we obtained from the previous trials may be outdated or otherwise no longer acceptable for our purposes or to the FDA or similar regulatory authorities in connection with applications that we may file for regulatory approval. If our current assessments prove to be inaccurate, we will likely have to perform additional preclinical studies or clinical trials, which will require us to expend additional resources and may delay filing for regulatory approval for that product.


	*We may acquire additional products or product candidates in the future and any difficulties from integrating such acquisitions could damage our ability to attain profitability.*

We have acquired our entire current product pipeline by licensing intellectual property from third parties, and we may acquire additional products or product candidates that complement or augment our existing product development pipeline. However, because we acquired substantially all of our existing product candidates in the same transaction, we have limited experience integrating products or product candidates into our existing operations. Integrating any newly acquired product or product candidate could be expensive and time-consuming. We may not be able to integrate any acquired product or product candidate successfully. For example, we recently acquired the United States and Canadian rights to SOLAGÉ. SOLAGÉ is our first marketed product. As a result, we may have difficulty integrating it with our existing product candidates as we expand our resources dedicated to marketing. In addition, we have no experience with a commercial product and cannot assure you that our marketing efforts we will be successful. Moreover, we may need to raise additional funds through public or private debt or equity financing to make these acquisitions, which may result in dilution for stockholders and the incurrence of indebtedness.

Risks Related to Our Dependence on Third Parties for Manufacturing, Research and Development and Marketing and Distribution Activities


	Because we have no manufacturing capabilities, we will contract with third-party contract manufacturers whose performance may be substandard or not in compliance with regulatory requirements, which could increase the risk that we will not have adequate supplies of our product candidates and harm our ability to commercialize our product candidates.

We do not have any manufacturing experience or facilities. We rely on third-party contract manufacturers to produce the product candidates that we use in our clinical trials. We expect to continue to rely on third parties to manufacture any products that we commercialize. If we are unable to retain our current, or engage additional, contract manufacturers, we will not be able to conduct our clinical trials or sell any products for which we receive regulatory approval. The risks associated with our reliance on contract manufacturers include the following:


	•	Contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance and also may experience shortages in qualified personnel. As a result, our contract manufacturers might not be able to meet our clinical development schedules or adequately manufacture our products in commercial quantities when required.

	•	Changing manufacturers may be difficult because the number of potential manufacturers for some of our product candidates may be limited and, in one case, there is only a single source of supply. Specifically, the intermediate for our product candidate Hyphanox is manufactured using a process that is proprietary to our contract manufacturer. We do not have a license to the technology used by our contract manufacturer to make the intermediate needed for the Hyphanox tablets. If this manufacturer cannot provide adequate supplies of the intermediate for Hyphanox, we cannot sublicense this technology to a third party to act as our supplier. As a result, it may be difficult or impossible for us to find a qualified replacement manufacturer quickly or on terms acceptable to us, the FDA and corresponding foreign regulatory agencies, or at all.

	•	With the exception of Hyphanox, each of our product candidates can be produced by multiple manufacturers. However, if we need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve these manufacturers in advance. This would involve testing and pre-approval inspections to ensure compliance with FDA and foreign regulations and standards. For instance, for Zimycan, we have used one contract manufacturer in connection with the marketing authorization application that we filed in Europe and we intend to use a separate contract manufacturer for commercial supply of the product in the United States. If we decide to have our United States manufacturer supply us with Zimycan for sale in Europe, it is likely that many of the applicable foreign regulatory agencies will need to approve our United States manufacturer prior to making that transition.

	•	Our contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with current Good Manufacturing Practices, or cGMPs, and other governmental regulations and corresponding foreign standards. Other than through contract, we do not have control over compliance by our contract manufacturers with these regulations and standards. Our present or future contract manufacturers may not be able to comply with cGMPs and other FDA requirements or similar regulatory requirements outside the United States. Failure of our contract manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.


	•	Our contract manufacturers may breach our manufacturing agreements because of factors beyond our control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient for us.

We may compete with other drug developers for access to manufacturing facilities for our current and future product candidates. If we are not able to obtain adequate supplies of our product candidates, it will be more difficult for us to develop our product candidates and compete effectively. Dependence upon third parties for the manufacture of our product candidates may reduce our profit margins, if any, and may limit our ability to develop and deliver products on a timely and competitive basis.


	*If third parties on whom we rely do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.*

We depend on independent clinical investigators and contract research organizations to conduct our clinical trials. Contract research organizations also assist us in the collection and analysis of trial data. We also depend on third parties to perform services related to our adverse event reporting requirements. The investigators, contract research organizations and other contractors are not our employees, and we cannot control, other than by contract, the amount of resources, including time, that they devote to our product candidates. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial that have been approved by regulatory agencies and for ensuring that we report product-related adverse events in accordance with applicable regulations. Furthermore, the FDA and European regulatory authorities require us to comply with standards, commonly referred to as good clinical practice, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected.

In connection with our reliance on our independent clinical investigators and contract research organizations, our clinical trials may be extended, delayed, suspended or terminated, including as a result of:


	•	the failure of these investigators and research organizations to comply with good clinical practice or to meet their contractual duties;

	•	the failure of our independent investigators to devote sufficient resources to the development of our product candidates or to perform their responsibilities at a sufficiently high level;

	•	our need to replace these third parties for any reason, including for performance reasons or if these third parties go out of business; or

	•	the existence of problems in the quality or accuracy of the data they obtain due to the failure to adhere to clinical protocols or regulatory requirements or for other reasons.

Extensions, delays, suspensions or terminations of our clinical trials as a result of the performance of our independent clinical investigators and contract research organizations will delay, and make more costly, regulatory approval for any product candidates that we may develop.

In addition, although we have used a number of contract research organizations to conduct our clinical trials, there are many other qualified contract research organizations available. Any change in a contract research organization during an ongoing clinical trial could seriously delay that trial and potentially compromise the results of the trial.


	We are dependent upon distribution arrangements and marketing alliances to commercialize our product candidates outside the United States and Canada. These distribution arrangements and marketing alliances place the marketing and sale of our product candidates in these regions outside our control.

We have entered into distribution arrangements and marketing alliances relating to the commercialization of some of our product candidates. Dependence on these arrangements and alliances subjects us to a number of risks, including:


	•	we may not be able to control the amount and timing of resources that our distributors may devote to the commercialization of our product candidates;

	•	our distributors may experience financial difficulties;

	•	business combinations or significant changes in a distributor’s business strategy may also adversely affect a distributor’s willingness or ability to complete its obligations under any arrangement; and

	•	these arrangements are often terminated or allowed to expire, which could interrupt the marketing and sales of a product and decrease our revenue.

We may not be successful in entering into additional distribution arrangements and marketing alliances with third parties for our earlier stage products. Our failure to enter into these arrangements on favorable terms could delay or impair our ability to commercialize our product candidates outside the United States and Canada and could increase our costs of commercialization. In addition, we may be at a competitive disadvantage in negotiating these agreements with third parties because under our license agreements, Johnson & Johnson, through any of its affiliates, has a right of first negotiation for the commercialization of our product candidates that are based on the licensed intellectual property. Because this first right of negotiation may only be triggered after Phase 2 clinical trials and could extend for up to 180 days, it may hinder our ability to enter into distribution agreements and marketing alliances. It may also delay our receipt of any milestone payments or reimbursement of development costs.


	There are limitations on our patent rights relating to our product candidates that may affect our ability to exclude third parties from competing against us if we receive approval to market these product candidates.

The patent rights that we own or have licensed relating to our product candidates are limited in ways that may affect our ability to exclude third parties from competing against us if we receive regulatory approval to market these product candidates. In particular:


	•	We do not hold composition of matter patents covering the active pharmaceutical ingredients of three of our later stage product candidates. Composition of matter patents on active pharmaceutical ingredients are the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use or other type of limitation. The active ingredients of most of these product candidates are off patent. As a result, competitors who obtain the requisite regulatory approval can offer products with the same active ingredients as our products so long as the competitors do not infringe any method of use or formulation patents that we may hold. Examples include Sebazole, Zimycan and Hyphanox, for which the active pharmaceutical ingredients, ketoconazole, miconazole and itraconazole, are all off patent. The United States patent covering the active ingredient in Liarozole expires in 2006.

	•	We do not hold composition of matter patents covering the formulations of some of our later stage product candidates. Composition of matter patents on formulations can provide protection for pharmaceutical products to the extent that the specifically covered formulations are important. For our product candidates for which we do not hold composition of matter patents covering the formulation, competitors who obtain the requisite regulatory approval can offer products with the same formulations as our products so long as the competitors do not infringe any active pharmaceutical ingredient or method of use patents that we may hold. The United States patent covering the formulation of miconazole and zinc oxide in Zimycan expires in 2007.


	•	For some of our product candidates, the principal patent protection that covers, or that we expect will cover, our product candidate is a method of use patent. This type of patent only protects the product when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical to our product for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive identical product for off-label indications that are covered by the applicable patents. Although such off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

	•	Our patent licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. are limited to the field of dermatology. As a result, with some exceptions, Johnson & Johnson, its affiliates or its licensees could manufacture and market products similar to our products outside of this field. This also could result in off-label use of these competitive products for dermatological indications.

These limitations on our patent rights may result in competitors taking product sales away from us, which would reduce our revenues and harm our business.


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

All of our eight current product candidates in clinical development are based on intellectual property that we have licensed from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. We depend, and will continue to depend, on these license agreements. The terms of these licenses are set out in two license agreements. These license agreements may be terminated on a product-by-product basis, if, by dates specified in the license agreements, we are not conducting active clinical development of the particular product or if we do not obtain regulatory approval for that product. Either of the license agreements may also be terminated if we breach that license agreement and do not cure the breach within 90 days or in the event of our bankruptcy or liquidation.

We are a party to one other license agreement and expect to enter into additional licenses in the future. This other license agreement imposes various obligations on us, including milestone payment requirements and royalties. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license.

Disputes may arise with respect to our licensing agreements regarding manufacturing, development and commercialization of any products relating to this intellectual property. These disputes could lead to delays in or termination of the development, manufacture and commercialization of our product candidates or to litigation.

Under our principal license agreements, neither Johnson & Johnson nor any of its affiliates is restricted from developing or acquiring products that may address similar indications as our products or otherwise compete with our products. We have the sole right to commercialize any product candidate based on intellectual property licensed to us under these agreements that we elect to commercialize ourselves or with the assistance of a contract sales organization. In other circumstances, however, Johnson & Johnson and any of its affiliates has a right of first negotiation for the commercialization of our product candidates based on such intellectual property. The rights of first negotiation for the commercialization of our product candidates can be exercised on a territory-by-territory basis. This negotiation may extend for up to 180 days, which may delay our commercialization efforts or hinder our ability to enter into distribution agreements.

Under the license agreements, Janssen has an exclusive option to acquire the right to commercialize Hyphanox on a geographic region-by-region basis. Janssen has 90 days to exercise this option from the date that we provide notice that we are able to manufacture Hyphanox batches that are reproducible and bioequivalent to Janssen’s Sporanox product or a similar itraconazole product previously developed by

Janssen. We also must provide this notice if we can demonstrate clinical efficacy in a Phase 3 clinical trial performed by us. We expect Janssen’s right to exercise this option will be triggered if the results of our ongoing Phase 3 clinical trial of Hyphanox in vaginal candidiasis are positive. Depending on whether or not Janssen exercises its option and the regions for which it chooses to exercise its option, our business may be either favorably or adversely affected.

The license agreements also permit each of Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., to abandon its maintenance of any patents or the prosecution of any patent applications included in the licensed intellectual property for any reason. If any of these companies abandon these activities, we have the option to undertake their maintenance and prosecution if we decide to prevent their abandonment. To date, we have assumed the maintenance and prosecution for all of the patents and patent applications relating to our Sebazole and Zimycan product candidates. If we are required to undertake these activities for any additional product candidates, our operating costs will increase.

In addition, our license agreements limit our use of our product candidates to the specific field of dermatology as defined in the license agreements. As so defined, dermatology consists of applications for the treatment or prevention of diseases of human skin, hair, nails and oral and genital mucosa, but excludes treatments for skin cancer. We have not been granted the right to sell oxatomide in Japan, Italy, Mexico and much of Central America or to sell ketanserin in Mexico, Central America and the Caribbean. Our right to sell the following products in the following countries is semi-exclusive with the Johnson & Johnson companies:


	•	Zimycan in Argentina, Australia, Belgium, Denmark, Germany, Indonesia, Luxembourg, Mexico, New Zealand, Peru and Venezuela; and

	•	ketanserin in South America.

These field of use and geographic restrictions limit our ability to market our products worldwide and, therefore, limit the potential market size for our products.


	If we are unable to obtain and maintain patent protection for our intellectual property, our competitors could develop and market products similar or identical to ours, which may reduce demand for our product candidates.

Our success will depend in part on our ability to obtain and maintain patent protection for our proprietary technologies and product candidates and our ability to prevent third parties from infringing our proprietary rights. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on patent protection for new technologies, products and processes. Accordingly, we expect to seek patent protection for our new proprietary technologies and some of our product candidates. The risk exists, however, that new patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection for our proprietary technologies or product candidates.

Although we own or otherwise have rights to a number of patents, these patents may not effectively exclude competitors, the issuance of a patent is not conclusive as to its validity or enforceability and third parties may challenge the validity or enforceability of our patents. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in our issued United States patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in the foreign patents or patent applications.

It is possible that a competitor may successfully challenge our patents or that challenges will result in the elimination or narrowing of patent claims and, therefore, reduce our patent protection.

Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement lawsuits, which are expensive and time-consuming. In addition, because of the size of our patent portfolio, we may not be able to prevent infringement or unauthorized use of all of our patents due to the associated expense and time commitment of monitoring these activities. If there is an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, may narrow our patent claims or may refuse to stop the other party from using the technology at issue on the ground that our patents do not cover its technology. Interference proceedings brought in the United States Patent and Trademark Office may be necessary to determine whether our patent applications or those of our collaborators are entitled to priority of invention relative to third parties. Litigation, interference or opposition proceedings may result in adverse rulings and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our respective proprietary rights, particularly in countries where the laws may not protect our rights as fully as in the United States.


	*If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology may be adversely affected.*

In addition to patent protection, we rely upon trade secrets relating to unpatented know-how and technological innovations to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and consultants. We also have confidentiality and invention or patent assignment agreements with our employees and our consultants. If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our trade secrets may otherwise become known to or be independently developed by our competitors.


	If the development of our product candidates infringes the intellectual property of our competitors or other third parties, we may be required to pay license fees or cease our development activities and pay damages, which could significantly harm our business.

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

Third parties may assert patent or other intellectual property infringement claims against us, or our collaborators, with respect to technologies used in potential product candidates. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. In addition, any patent claims brought against our collaborators could affect their ability to carry out their obligations to us.

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


	*We may not receive regulatory approvals for our product candidates or approvals may be delayed, either of which could materially harm our business.*

Government authorities in the United States and foreign countries extensively regulate the development, testing, manufacture, distribution, marketing and sale of our product candidates and our ongoing research and development activities. All of our product candidates are in various stages of development, and we are currently not authorized to market any of our product candidates. We believe that our product candidates have significant milestones to reach, including the receipt of regulatory approvals, before commercialization.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. According to the FDA, a Phase 1 clinical trial typically takes several months to complete, a Phase 2 clinical trial typically takes several months to two years to complete and a Phase 3 clinical trial typically takes one to four years to complete. Industry sources report that the preparation and submission of new drug applications, or NDAs, which are required for regulatory approval, generally take six months to one year to complete after completion of a pivotal clinical trial. Industry sources also report that approximately 10 to 15% of all NDAs accepted for filing by the FDA are rejected and that FDA approval, if granted, usually takes approximately one year after submission, although it may take longer if additional information is required by the FDA. Accordingly, we cannot assure you that the FDA will approve any NDA that we may file, including our recently filed Zimycan NDA amendment and our Sebazole NDA that we expect to file during the third quarter of 2005. In addition, the Pharmaceutical Research and Manufacturers of America reports that only one out of five product candidates that enter clinical trials will ultimately be approved by the FDA for commercial sale.

In particular, human therapeutic products are subject to rigorous preclinical studies, clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. For example, the FDA has previously issued three not approvable letters for Zimycan in 1986, 1999 and 2000. Changes in the FDA approval process during the development period or changes in regulatory review for each submitted product application may also cause delays in the approval or result in rejection of an application. In addition, recent withdrawals of approved products by major pharmaceutical companies, may result in a renewed focus on safety at the FDA which may result in delays in the approval process. The FDA has substantial discretion in the approval process and may reject our data or disagree with our interpretations of our clinical trial data, which also could cause delays of an approval or the rejection of an application. The approval process may take many years to complete and may involve ongoing requirements for post-marketing studies. For example, in January 2005, the FDA informed us that we should submit the six-month data from our ongoing long-term safety study of our Sebazole product candidate at the time of the initial filing of the NDA. We expect that the FDA’s request to include this data will delay the filing of our Sebazole NDA until the third quarter of 2005.

Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn, including for failure to comply with regulatory requirements or if clinical or manufacturing problems follow initial marketing. If our product candidates are marketed abroad, they will also be subject to extensive regulation by foreign governments.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates would severely harm our business. The process of obtaining these approvals and the subsequent compliance with appropriate domestic and foreign statutes and regulations require spending substantial time and financial resources. If we fail to obtain or maintain, or encounter delays in obtaining or maintaining, regulatory

approvals, it could adversely affect the marketing of any product candidate we develop, our ability to receive product or royalty revenues and our liquidity and capital resources.

We may not be able to obtain or maintain orphan drug exclusivity for our product candidates for the treatment of rare dermatological diseases, and our competitors may obtain orphan drug exclusivity prior to us, which could significantly harm our business.

Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The Commission for the European Community and the FDA have granted Liarozole orphan drug status for its use in the treatment of congenital ichthyosis. Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and specific tax credits in the United States. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to ten years in Europe and for a period of seven years in the United States. Obtaining orphan drug designations and orphan drug exclusivity for our product candidates for the treatment of rare dermatological diseases may be critical to the success of these product candidates. Our competitors may obtain orphan drug exclusivity for products competitive with our product candidates before we do, in which case we would be excluded from that market. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it. For example, if a competitive product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product.

If we fail to comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.

Any products for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, will be subject to continual requirements and review by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to continual review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, cGMP regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements. The cGMP regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. If we engage contract manufacturers, we will rely on their compliance with cGMP regulations and other regulatory requirements relating to the manufacture of products, if any. We also will be subject to state laws and registration requirements covering the distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements. Because many of our products contain ingredients that also are marketed in over-the-counter drug products, there is a risk that the FDA or an outside third party at some point would propose that our products be distributed over-the-counter rather than by prescription potentially affecting third-party and government reimbursement for our products.

Later discovery of previously unknown problems with our products, manufacturing processes or failure to comply with regulatory requirements, may result in any of the following:


	•	restrictions on our products or manufacturing processes;

	•	warning letters;


	•	withdrawal of the products from the market;

	•	voluntary or mandatory recall;

	•	fines;

	•	suspension or withdrawal of regulatory approvals;

	•	suspension or termination of any of our ongoing clinical trials;

	•	refusal to permit the import or export of our products;

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

	•	product seizure; and

	•	injunctions or the imposition of civil or criminal penalties.

We have only limited experience in regulatory affairs, which may affect our ability or the time we require to obtain necessary regulatory approvals.

We have only limited experience in filing the applications necessary to gain regulatory approvals. Moreover, some of the products that are likely to result from our product development, licensing and acquisition programs may be based on new technologies that have not been extensively tested in humans. The regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals of any products that we develop, license or acquire.

If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to market our products abroad, and the growth of our revenues, if any, would be limited.

We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and reimbursement of them by third-party payors, including government payors. Safety, efficacy, convenience and cost-effectiveness, particularly as compared to competitive products, are the primary factors that affect market acceptance. Even if a potential product displays a favorable efficacy and safety profile in clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

If we are unable to establish a domestic sales and marketing infrastructure or enter into agreements with third parties to perform these functions in territories outside the United States and Canada, we will not be able to commercialize our product candidates.

We currently have only limited internal sales, distribution and marketing capabilities. In order to commercialize any of our product candidates, we must either acquire or internally develop sales, marketing and distribution capabilities, or make arrangements with third parties to perform these services for us.

In the United States and Canada, we plan to build our own sales force to market our products directly to dermatologists and other target physicians. The acquisition or development of a sales and distribution infrastructure for our domestic operations will require substantial resources, which may divert the attention of our management and key personnel and negatively impact our product development efforts. Moreover, we may not be able to hire a sales force that is sufficient in size or adequate in expertise.

If we are not able to retain our current senior management team or attract and retain qualified scientific, technical and business personnel, our business will suffer.

We are dependent on the members of our senior management team, in particular, our Chief Executive Officer, Dr. Geert Cauwenbergh, our Chief Operating Officer, Charles Nomides, our Chief Commercial Officer, Alfred Altomari, and our Chief Scientific Officer, Dr. Marcel Borgers, for our business success. Dr. Cauwenbergh, Mr. Nomides and Dr. Borgers have a long history and association with our current product candidates and intellectual property. Our employment agreements with these and our other executive officers are terminable on short notice or no notice. The loss of any one of these individuals would result in a significant loss in the knowledge and experience that we, as an organization, possess and could cause significant delays, or outright failure, in the development and approval of our product candidates. We do not carry key man life insurance on the lives of any of our personnel.

We will need to hire additional employees as we grow. Any inability to manage future growth could harm our ability to commercialize our product candidates, increase our costs and adversely impact our ability to compete effectively.

Our growth will require us to hire a significant number of qualified scientific, commercial and administrative personnel. There is intense competition for human resources, including management in the technical fields in which we operate, and we may not be able to attract and retain qualified personnel necessary for the successful development and commercialization of our product candidates. The inability to attract new employees when needed and retain existing employees as we grow could severely harm our business.

Future growth will impose significant added responsibilities on members of our management, including the need to identify, recruit, retain and integrate additional employees. Our future financial performance and our ability to commercialize our product candidates and compete effectively will depend, in part, on our ability to manage any future growth effectively.

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

Our revenues and profits depend heavily upon the availability of reimbursement for the use of our product candidates that are approved for marketing from third-party health care and government payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:


	•	safe, effective and medically necessary;

	•	appropriate for the specific patient;

Since reimbursement approval for a product is required from each third-party and government payor individually, seeking this approval is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement for the use of any drug product incorporating new technology. In addition, as a result of actions by these third-party payors, the health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products.

New federal legislation will increase the pressure to reduce the price of pharmaceutical products paid for by Medicare, which will adversely affect our revenues, if any.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. The legislation expands Medicare coverage for drug purchases by the elderly and eventually will introduce a new reimbursement methodology based on average sales prices for drugs. In addition, the new legislation provides authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of the new legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These costs initiatives and other provisions of this legislation could decrease the coverage and price that we receive for our products and could seriously harm our business.

Foreign governments tend to impose strict price controls, which may adversely affect our revenues, if any.

In some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, our business could be materially harmed.

We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability for a product and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we may incur substantial losses or expenses, be required to limit the commercialization of our product candidates and face adverse publicity. We have obtained limited product liability insurance coverage for our clinical trials with a $10 million annual aggregate coverage limit, and our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash.

If our competitors develop and market products faster than we do or if the products of our competitors are considered more desirable than ours, revenues for any of our product candidates that are approved for marketing will not develop or grow.

The pharmaceutical industry, and the dermatology segment in particular, is highly competitive and includes a number of established, large and mid-sized pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on our target markets and areas of expertise. We face and will continue to face competition in the discovery, in-licensing, development and commercialization of our product candidates, which could severely impact our ability to generate revenue or achieve significant market acceptance of our product candidates. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.

Compared to us, many of our competitors and potential competitors have substantially greater:


	•	capital resources;

	•	research and development resources, including personnel and technology;

	•	regulatory experience;

	•	preclinical study and clinical trial experience; and

	•	manufacturing, distribution and sales and marketing experience.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than us. Our competitors may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates or technologies. Our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than us in manufacturing and marketing their products.

If approved, each of our product candidates will compete for a share of the existing market with numerous products that have become standard treatments recommended or prescribed by physicians. For example, we believe the primary competition for our product candidates are:


	•	For Zimycan, in the treatment of diaper dermatitis complicated by candidiasis, ointments and creams containing nystatin, Mycolog II from Bristol-Myers Squibb Company, clotrimazole containing creams from Bayer AG and from generic manufacturers and topical miconazole creams.

	•	For Sebazole, in the treatment of seborrheic dermatitis, Nizoral from Janssen, ketoconazole creams from generic manufacturers, Desowen from Galderma S.A. and Loprox from Medicis Pharmaceutical Corporation.

	•	For Hyphanox, in the treatment of vaginal candidiasis, Diflucan from Pfizer Inc., generic fluconazole tablets, Sporanox from Janssen and generic itraconazole capsules. For Hyphanox, in the treatment of onychomycosis, Sporanox from Janssen, Lamisil from Novartis AG and Penlac from Dermik Laboraties.

	•	For Liarozole, in the treatment of congenital ichthyosis, Soriatane from Hoffmann-La Roche Inc. and Connetics and over-the-counter topical moisturizers and emollients.

	•	For oral Rambazole, in the treatment of acne, Accutane from Hoffman-La Roche and generic manufacturers. For oral Rambazole, in the treatment of psoriasis, Soriatane from Hoffman-La Roche and Connetics, biologic agents such as Amevive from Biogen Idec Inc. and Raptiva from Genentech, Inc. and methotrexate from generic manufacturers.

We also believe that many of the competitive products for our later stage product candidates and Rambazole will similarly compete with our earlier stage product candidates because of the indications for which we are developing these product candidates.

As a result of prior sales of our equity securities at prices lower than the price in this offering, you will incur immediate and substantial dilution of your investment.

The assumed public offering price is substantially higher than the net tangible book value of $4.42 per share of our common stock as of September 30, 2004. Purchasers of our common stock in this offering will pay a price per share that substantially exceeds the per share value of our tangible assets after subtracting our liabilities and the per share price paid by our existing stockholders and by persons who exercise currently outstanding options to acquire our common stock. Accordingly, based on the assumed public offering price of $19.98 per share, you will experience immediate and substantial dilution of approximately $14.39 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the public offering price.

Our stock price is volatile, and the market price of our common stock after this offering may drop below the price you pay.

Market prices for securities of biopharmaceutical and specialty pharmaceutical companies have been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:


	•	results of our clinical trials or those of our competitors;

	•	the regulatory status of our product candidates;

	•	whether or not Janssen exercises its option to commercialize Hyphanox;

	•	failure of any of our product candidates, if approved, to achieve commercial success;

	•	developments concerning our competitors and their products;

	•	success of competitive products and technologies;

	•	regulatory developments in the United States and foreign countries;

	•	developments or disputes concerning our patents or other proprietary rights;

	•	our ability to manufacture any products to commercial standards;

	•	public concern over our drugs;

	•	litigation involving our company or our general industry or both;

	•	future sales of our common stock;

	•	changes in the structure of health care payment systems, including developments in price control legislation;

	•	departure of key personnel;

	•	period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;

	•	changes in estimates of our financial results or recommendations by securities analysts;

	•	investors’ general perception of us; and

	•	general economic, industry and market conditions.

If any of these risks occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

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

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


	•	a classified board of directors;

	•	limitations on the removal of directors;

	•	advance notice requirements for stockholder proposals and nominations;

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

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

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

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

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

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 23,894,830 shares of common stock based on the number of shares outstanding as of December 31, 2004, of which approximately 13.8 million shares will be restricted as a result of securities laws. The holders of approximately 11.2 million of these shares have entered into 90-day lock-up agreements with the underwriters. Subject to the provisions of the lock-up agreements, these restricted shares are eligible for resale under Rule 144, most of which are subject to volume and manner of sale limitations.

Holders of approximately 13.1 million shares of our common stock after this offering will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also registered all shares of common stock that we may issue under our employee benefit plans. These shares when sold also could reduce the market price of our common stock.

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future, about which we cannot be certain. Many factors affect our ability to achieve our objectives and to successfully develop and commercialize our product candidates including our ability to:


	•	obtain substantial additional funds;

	•	obtain and maintain all necessary patents or licenses;

	•	demonstrate the safety and efficacy of product candidates at each stage of development;

	•	meet applicable regulatory standards and file for or receive required regulatory approvals;

	•	meet obligations and required milestones under our license and other agreements; and

	•	produce drug candidates in commercial quantities at reasonable costs and compete successfully against other products and companies.

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

You should read this prospectus completely. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. We may not update these forward-looking statements, even though our situation may change in the future.

We qualify all the forward-looking statements contained in this prospectus by the foregoing cautionary statements.

We estimate that the net proceeds to us from our sale of 2,000,000 shares of our common stock in this offering will be approximately $36.9 million, or approximately $48.1 million if the underwriters exercise their over-allotment option to purchase an additional 600,000 shares from us in full, assuming a public offering price of $19.98 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

We will not receive any of the proceeds from the sale of the 2,000,000 shares by the selling stockholders.


	•	50% to advance our product candidates through preclinical studies and clinical trials;

	•	30% to commercialize our product candidates if and when approved; and

	•	20% for general corporate purposes, including working capital needs and potential acquisitions as described below.

Our potential use of net proceeds for acquisitions may include the acquisition or licensing of marketed dermatological products or rights to potential new products or product candidates. Although we periodically evaluate acquisition and in-licensing opportunities, other than our recent acquisition of SOLAGÉ, we currently have no commitments or agreements with respect to any specific acquisition or license.

Pending the uses described above, we intend to invest the net proceeds of this offering in short- to medium-term investment grade, interest-bearing securities.

Our common stock began trading on the NASDAQ National Market under the symbol “BTRX” on April 29, 2004. Prior to that time there was no public market for our common stock. The following table sets forth the high and low sale prices per share of our common stock, as reported on the NASDAQ National Market, for the periods indicated.

The last reported sale price of our common stock on the NASDAQ National Market on January 31, 2005 was $19.98 per share. As of January 31, 2005, we had 38 holders of record of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion and restrictions imposed by lenders, if any.


	•	on an actual basis; and

	•	on an as adjusted basis to give effect to our sale of 2,000,000 shares of common stock in this offering at an assumed public offering price of $19.98 per share, after deducting estimated underwriting discounts and commissions and offering expenses.

You should read this capitalization table together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information included in this prospectus.


	•	1,447,459 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2004 at a weighted average exercise price of $4.02 per share, of which, options to purchase 374,856 shares were exercisable; and

	•	441,781 shares of common stock available for future grant under our 2004 stock incentive plan as of September 30, 2004.

Our net tangible book value as of September 30, 2004 was approximately $96.4 million, or $4.42 per share of common stock. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities by the actual number of outstanding shares of our common stock. After giving effect to our issuance of 2,000,000 shares of common stock at the assumed public offering price of $19.98 per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our net tangible book value as of September 30, 2004 would have been $133.3 million or $5.59 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $1.17 per share to our existing stockholders and an immediate dilution of $14.39 per share to new investors in this offering. The following table illustrates this per share dilution:

Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed public offering price per share paid by a new investor. If any shares are issued in connection with outstanding options or the underwriters’ over-allotment option, you will experience further dilution. As of September 30, 2004, there were:


	•	1,447,459 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.02 per share, of which, options to purchase 374,856 shares were exercisable; and

	•	441,781 shares of common stock available for future grant under our 2004 stock incentive plan.

You should read the following selected financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial data included in this prospectus.

We have derived the statement of operations information for the period from our inception to December 31, 2001 and for the years ended December 31, 2002 and 2003, and the balance sheet information as of December 31, 2002 and 2003 from our audited consolidated financial statements which are included in this prospectus. We have derived the balance sheet information as of December 31, 2001 from our audited consolidated financial statements which are not included in this prospectus. We have derived the statement of operations information for the nine months ended September 30, 2003 and 2004 and for the period from our inception to September 30, 2004, and the balance sheet data as of September 30, 2004 from our unaudited consolidated financial statements which are included in this prospectus. Our unaudited consolidated financial statements include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of those statements. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for any future period.

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


	•	Zimycan: an ointment for the treatment of infants with diaper dermatitis complicated by candidiasis, an inflammatory disease characterized by diaper rash complicated with an infection by a fungus called Candida.

	•	Sebazole: a gel for the treatment of seborrheic dermatitis, a type of eczema characterized by inflammation and scaling of the skin, principally of the scalp, face and chest.

	•	Hyphanox: an oral therapeutic for the treatment of fungal infections, including vaginal candidiasis, commonly known as vaginal yeast infection, and onychomycosis, commonly known as nail fungus.

	•	Liarozole: an oral therapeutic for the treatment of congenital ichthyosis, a rare genetic disease characterized by dryness and scaling of the skin.

We were incorporated in September 2001 and commenced active operations in May 2002. To date, we have not generated any product revenues. We have financed our operations and internal growth almost entirely through proceeds from private placements of preferred stock and our initial public offering in the second quarter of 2004. We are a development stage enterprise and have incurred significant losses since our inception in 2001, as we have devoted substantially all of our efforts to research and development activities, including clinical trials. As of September 30, 2004, we had a deficit accumulated during the development stage of $92.9 million. Our deficit accumulated during the development stage has resulted primarily from our acquisition of the rights to our product candidates, our research and development activities and preferred stock accretion. We expect our operating losses to continue to increase as we do not expect to generate significant revenues in the near future, we expect to continue to increase our research and development costs, our costs of commercial operations are expected to increase, and we will continue to incur the costs of being a public company.

We expect to continue to spend significant amounts, including clinical trial costs, on the development of our product candidates. We plan to seek marketing approvals for our products in various countries throughout the world, particularly in the United States, Canada and Europe. We expect our costs to increase significantly as we continue to develop and ultimately commercialize our product candidates. While we will be focusing on the clinical development of our later stage product candidates in the near term, we expect to increase our spending on earlier stage clinical candidates as well. We also plan to identify and develop, either internally or through collaborative agreements, additional product candidates that address major needs in dermatology through acquisitions or licenses of marketed dermatological products or rights to potential new products and product candidates that would fit within our growth strategy. Accordingly, we will need to generate significant revenues to achieve, and then maintain, profitability.

Drug development in the United States and most countries throughout the world is a process that includes several steps defined by the FDA and similar regulatory authorities in foreign countries. In the United States, the FDA approval process for a new drug involves completion of preclinical studies and the submission of the results of these studies to the FDA, together with proposed clinical protocols, manufacturing information, analytical data and other information in an investigational new drug application, which must become effective before human clinical trials may begin. Clinical development typically involves three phases of study: Phase 1, 2 and 3. The most significant expenses associated with clinical development are the Phase 3 clinical trials as they tend to be the longest and largest studies conducted during the drug development process. After completion of clinical trials, a new drug application, or NDA, may be submitted to the FDA. In responding to an NDA, the FDA may refuse to file the application, or if accepted for filing, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. In order to commence clinical trials or marketing of a product outside the United States, we must obtain approval of the applicable foreign regulatory authorities. Although governed by the laws and regulations of the applicable country, clinical trials conducted outside the United States typically are administered with a similar three-phase sequential process.

The successful development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:


	•	the scope, rate of progress and expense of our clinical trials and other research and development activities;

	•	future clinical trial results;

	•	the expense of clinical trials for additional indications;

	•	the terms and timing of any collaborative, licensing and other arrangements that we may establish;

	•	the expense and timing of regulatory approvals;

	•	the expense of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

	•	the effect of competing technological and market developments; and

	•	the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Research and development expenses and purchased in-process research and development expense, in the aggregate, represented approximately 72% of our total operating expense for the nine months ended September 30, 2004, 83% of our total operating expenses for the nine months ended September 30, 2003, 82% of our total operating expenses for the year ended December 31, 2003 and 95% of our total operating expenses for the year ended December 31, 2002. Research and development expenses consist primarily of costs incurred for the conduct of our clinical trials, manufacturing development costs related to our clinical product candidates, personnel and related costs related to our research and product development activities and outside professional fees related to clinical development and regulatory matters.

Purchased in-process research and development expense represents costs incurred for the acquisition of our product candidates. During 2002, we expensed $25.0 million for in-process research and development solely as a result of our entering into our principal license agreements. Pursuant to these agreements, we obtained exclusive licenses to a portfolio of patents and non-exclusive licenses to related know-how, to make, use and sell our initial product candidates in the field of dermatology in many countries throughout the world. This transaction was accounted for as an acquisition of assets and consisted of several projects at various stages of development as well as access to the classes of compounds claimed in the patents licensed to us, which we can screen in our search for new product candidates in the field of dermatology. We acquired these assets

under licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., in exchange for the issuance of 8,333,333 shares of our series A convertible preferred stock, which were converted into 4,166,666 shares of our common stock in connection with our initial public offering.

If we receive marketing authorization and approval to market our products in territories where we have marketing rights, we will begin to incur significant sales and marketing expenses. We have begun to incur sales and marketing expenses in 2004 as we started to prepare for the launch of our first product, subject to obtaining requisite marketing approvals. Sales and marketing costs represented approximately 10% of our total operating expenses for the nine months ended September 30, 2004. We had no sales and marketing expenses in 2003. We expect these costs to increase as we launch products, subject to receiving regulatory approval. We expect these costs to include marketing expenses to prepare for the launch of our products, expenses related to a sales organization for those regions in which we decide to market our products ourselves and costs for marketing efforts to support third parties with whom we may collaborate in the future in regions where we do not market directly.

General and administrative expenses consist primarily of salaries and related expenses and costs of general corporate activities, including legal and accounting fees and consulting costs. General and administrative costs represented approximately 18% of our operating expenses for the nine months ended September 30, 2004, 17% of our total operating expenses for the nine months ended September 30, 2003, 18% of our total operating expenses for the year ended December 31, 2003 and 5% of our total operating expenses for the year ended December 31, 2002.

We expect to continue to incur net losses over the next several years as we continue our clinical development, apply for regulatory approvals, enter into arrangements with third parties for manufacturing and distribution services and, if approved, market our products. We have a limited history of operations and anticipate that our quarterly results of operations will fluctuate for several reasons, including:


	•	the timing and extent of our research and development efforts;

	•	the timing and extent of our adding new employees and infrastructure;

	•	the timing of any milestone, license fee or royalty payments that we may receive or be required to make; and

	•	the timing and outcome of our applications for regulatory approvals.

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing at the end of this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results.

Contract revenues include license fees and milestone payments associated with our collaborations with third parties. Revenue from non-refundable, upfront license fees where we have continuing involvement is

recognized ratably over the performance period. Royalties from licensees are based on third-party sales of licensed products and will be recorded in accordance with contract terms when third-party results are reliably measurable and collectibility is reasonably assured.

The amount of any in-process research and development expense is generally determined based on an analysis using risk-adjusted cash flows expected to be generated by products that may result from in-process technologies that have been acquired. We review the project rights that we acquire to determine the stage of their development, the probability of demonstrating in clinical trials sufficient safety and efficacy for FDA approval and product risk factors inherent in the drug development process. The product specific risk factors include the type of drug under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, preclinical safety and efficacy data, target product profile and development plans. The valuation used to estimate in-process research and development expense requires us to use significant estimates and assumptions that, if changed, may result in a different valuation for in-process technology.

In connection with our license agreements with Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson company, we reviewed the project rights that we acquired to determine the stage of their development, the probability of demonstrating in our clinical trials sufficient safety and efficacy for FDA approval and the technical milestones needed to be reached before commercialization is possible. We determined as of the acquisition date that for each project there was significant risk that our clinical trials may not demonstrate the levels of safety and efficacy needed for FDA approval and that each project had significant milestones to reach before commercialization. We also determined that all of the projects had no alternative future uses if they were not successful. Accordingly, we classified each product as in-process research and development and expensed their acquisition costs immediately.

We valued the assets acquired based on the value of the consideration that Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc. received in the transaction. Concurrent with the transaction, we issued for cash 15,333,336 shares of our series B convertible preferred stock, with similar characteristics to our series A convertible preferred stock, to investors not related to us or these companies. Based on the value of our series B convertible preferred stock, we valued the in-process research and development at $25.0 million.

Stock-based compensation charges represent the difference between the exercise price of options granted to employees and the fair value of our common stock on the date of grant for financial statement purposes in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. We recognize this compensation charge over the vesting periods of the shares purchasable upon exercise of options. Should our assumptions of fair value change, the amount recorded as intrinsic value may increase or decrease in the future.

We recorded deferred stock-based compensation of $3.0 million and related amortization of approximately $1.7 million during the nine months ended September 30, 2004. We amortized approximately $423,000 during the three months ended September 30, 2004. To date, we have recorded stock-based compensation of approximately $3.7 million and related amortization expense of approximately $1.9 million. We are applying a graded vesting amortization policy for our deferred compensation. This accelerated vesting method provides for vesting of portions of the overall award at interim dates and results in higher compensation expense in earlier years than straight-line amortization. Had we chosen to apply the straight line method of amortization of deferred compensation, our stock compensation charge would have been $190,000 lower for the three months ended September 30, 2004 and $957,000 lower for the nine months ended September 30, 2004.

Stock-based compensation charges also represent the periodic revaluation of stock options that we have granted to non-employees, in accordance with the provisions of Statement of Financial Accounting Standards No. 123 and Emerging Issues Task Force No. 96-18. Pursuant to this accounting literature, equity instruments, such as options, are required to be recorded at the fair value of the consideration received, or the fair value of the equity instrument issued, whichever may be more readily measured. For grants to our non-employees, the fair value of the equity instrument issued is more readily measured and we assign value to the options using a Black-Scholes methodology. As required, we revalue these options over the period when earned in accordance with their respective terms. Should our input assumptions change, for example, fair value of common stock at the measurement date, the fair value of our non-employee consultant compensation will change.

We recorded stock-based compensation expense totaling $584,000 for the nine months ended September 30, 2004, $107,000 for the year ended December 31, 2003 and $17,000 for the year ended December 31, 2002 in connection with the grant of stock options to our non-employees.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004) Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes Accounting Principal Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows. Generally, the approach to accounting in Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as based on their fair values. Currently we account for these payments under the intrinsic value provisions of APB No. 25. Statement 123(R) is effective for us beginning July 1, 2005. The Statement offers several alternatives for implementation. At this time, our management has not made a decision as to the alternative it may select. We are in the process of determining how the new method of valuing stock-based compensation as prescribed by Statement 123(R) will be applied to valuing stock-based awards granted after the effective date and the impact the recognition of additional non-cash compensation expense related to such awards will have on our financial statements.

Revenue. To date, our revenue has consisted primarily of grant revenue. This represents income that we received under a grant from a Belgian governmental agency promoting technology in the Flemish region of Belgium through research grants. Pursuant to the terms of the grant, we will receive €1.8 million, or approximately $2.0 million, over a three-year period, to fund research on early-stage, preclinical programs and compound screening. We are recognizing revenue as we perform qualifying work under this grant.

Revenue may be derived from license fees and milestone payments from our collaborative partners and licensees. Revenue received in advance of performance obligations or in cases where we have a continuing obligation to perform services, is deferred and amortized over the performance period. Contract revenues are recorded as the services are performed. License revenues are typically not consistent or recurring in nature. We expect that our revenue will fluctuate from year-to-year and quarter-to-quarter.

We recognized grant revenue of $557,000 for the nine months ended September 30, 2004 and $203,000 for the nine months ended September 30, 2003. Additionally, during the nine months ended September 30, 2004, we recognized $25,000 from a collaboration agreement which is being ratably recognized over the performance period.

Research and Development Expenses. Below is a summary of our research and development expenses for the nine months ended September 30, 2003 and 2004.

In the preceding table, research and development expenses are set forth in the following seven categories:


	•	Sebazole—third-party direct project expenses relating to the development of Sebazole and our former product candidate, Seboride.

	•	Hyphanox—third-party direct project expenses relating to the development of Hyphanox.

	•	Zimycan—third-party direct project expenses relating to the development of Zimycan.

	•	Liarozole—third-party direct project expenses relating to the development of Liarozole.

	•	Other clinical stage products—direct project expenses relating to the development of our other clinical stage product candidates and products in reformulation.

	•	Research and preclinical development costs—direct expenses relating to the development of our research and preclinical product candidates and the screening of molecules to identify new product candidates.

	•	Internal costs—costs related primarily to personnel, as well as consulting, overhead and other expenses related to our research and development activities. We do not allocate these costs to specific projects as these costs relate to all research and development activities.

Total research and development expenses for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 increased $8.6 million. During the nine months ended September 30, 2004 our research and development costs related to Sebazole were comparatively flat with the two Phase 3 clinical trials in the United States and Europe in 2003, compared with costs related to a confirmatory Phase 3 clinical trial for Sebazole, which commenced in the second quarter of 2004 and our long-term safety study which commenced in the third quarter of 2004. Our costs for Hyphanox in the nine months ended September 30, 2004 are related to a Phase 3 pivotal clinical trial for the treatment of vaginal candidiasis, which commenced in January 2004. Our costs in the nine months ended September 30, 2003 for Hyphanox were primarily for the purchase of raw materials and related manufacturing, as well as the costs of conducting a pilot bioequivalence study. Our costs related to Zimycan in the first nine months of 2004 increased slightly due to the cost of our Phase 3 pivotal clinical trial, which began enrolling patients in the first half of 2003 and was completed during the third quarter of 2004. Our costs for Liarozole for the nine months of 2004 are related to the cost of clinical supplies and the manufacturing scale-up for the active ingredient, and in 2003 for the manufacturing of the drug substance.

Internal costs in the nine months ended September 30, 2004 increased $3.3 million compared to the nine months ended September 30, 2003. Personnel and related costs totaled $4.6 million for the nine months ended September 30, 2004, an increase of $2.6 million over the corresponding period in 2003. This increase includes amortization of deferred compensation of $606,000, which was $26,000 at September 30, 2003. Additionally,

headcount grew to 32 employees at September 30, 2004 from 24 employees at September 30, 2003. Other costs, which include consultants, overhead and other expenses, totaled $1,422,000, an increase of $697,000 compared to the corresponding period in 2003.

We anticipate that research and development expenses will continue to increase as we further advance our late stage product candidates through clinical development, including the higher cost of Phase 3 clinical trials, and including long-term safety trials. In addition, we will begin to incur additional expenses for our mid-stage pipeline as we move toward larger Phase 2 trials and to devote additional resources to our earlier stage research and preclinical projects. We also expect our personnel and related expenses for research and development to increase.

Sales and Marketing Expenses. Sales and marketing expenses totaled $2.7 million for the nine months ended September 30, 2004. We recorded no sales and marketing expenses in 2003. These costs include personnel and related expenses of $1.2 million and marketing and market research expense of $917,000 for the nine months ended September 30, 2004. We expect these costs to continue to increase as we prepare for the possible launch of our product candidates, subject to obtaining the requisite marketing approvals.

General and Administrative Expenses. General and administrative expenses totaled $5.1 million for the nine months ended September 30, 2004, an increase of $2.8 million over the corresponding period in 2003. Personnel and related costs totaled $2.6 million for the nine months ended September 30, 2004, an increase of $1.6 million over the corresponding period in 2003. This includes amortization of deferred compensation expense of $802,000, which was $37,000 for the nine months ended September 30, 2003. Additionally, headcount grew to 17 employees at September 30, 2004 from nine employees at September 30, 2003. General and administrative costs also increased due to increased stock-based compensation expense related to non-employees of $584,000, an increase of $551,000 over the corresponding period in 2003, and due to the costs related to our status as a public company.

We expect general and administrative costs to continue to increase as we add more personnel and expand our infrastructure. The costs associated with being a public company will also increase our general and administrative expenses.

Interest income, net of interest expense. Interest income, net of expense totaled $911,000 for the nine months ended September 30, 2004, an increase of $643,000 as compared to the corresponding period in 2003. The increase was primarily due to our higher balances of cash and cash equivalents and marketable securities in 2004 compared to 2003 and slightly higher interest rates.

Years Ended December 31, 2003 and 2002 and Period From Inception Through December 31, 2001

We began operations in May 2002 following the closing of our sale of our series A and series B convertible preferred stock. This comparison of results of operations for the years ended December 31, 2003 and December 31, 2002, is therefore a comparison of a full year of operations for 2003 to the initial eight-month period of our operations in 2002 and to no operations in 2001.

Revenue. We did not recognize any revenue in 2002. We recognized grant revenue of $0.4 million in 2003. This represents income that we received under our grant from a Belgian governmental agency promoting technology in the Flemish region of Belgium through research grants.

Research and Development Expenses. Below is a summary of our research and development expenses for 2002 and 2003. There were no research and development expenses in 2001.

In the preceding table, research and development expenses are set forth in the following six categories:


	•	Sebazole—third-party direct project expenses relating to the development of Sebazole and Seboride.

	•	Hyphanox—third-party direct project expenses relating to the development of Hyphanox.

	•	Zimycan—third-party direct project expenses relating to the development of Zimycan.

	•	Other clinical stage products—direct project expenses relating to the development of our other clinical stage product candidates, the products in reformulation and the screening of molecules to identify new product candidates.

	•	Research and preclinical development costs—direct expenses relating to the development of our research and preclinical product candidates.

	•	Internal costs—costs related primarily to personnel, as well as consulting, overhead and other expenses related to our research and development activities. We do not allocate these costs to specific projects as these costs relate to all research and development activities.

Total research and development expenses in 2003 increased primarily from the conduct and completion of our two Phase 3 clinical trials for Seboride, which clinical program is now focused on Sebazole, the process development, scale-up, manufacturing and bioequivalence testing of Hyphanox, which began in the third quarter of 2002 and continued throughout 2003, and the costs related to our Zimycan Phase 3 clinical trial, which was partially enrolled as of December 31, 2003. We incurred initial direct program expenses in 2003 on our other clinical stage product candidates, which include Liarozole, Azoline, Rambazole and Atopik.

Included in research and internal costs are expenses incurred in connection with our research grant and other discovery activities, which increased $0.7 million in 2003. Internal costs include personnel, consultant, overhead and other expenses. Personnel costs increased $2.3 million in 2003 as we added ten people to our research and development staff in 2003, and we incurred a full year of payroll and related costs. Other costs which include consultants, overhead and other expenses increased $0.7 million during 2003.

In-process Research and Development Expense. During 2002, we expensed $25.0 million for in-process research and development solely as a result of our entering into our principal license agreements.

General and Administrative Expenses. General and administrative expenses increased from $1.5 million in 2002 to $3.7 million in 2003. General and administrative expenses were $20,000 in 2001. The increase in 2002 resulted primarily from the commencement of operations and the costs related to doing so, including adding personnel and incurring professional fees and occupancy and other facility costs. The increase in 2003 resulted primarily from increased personnel and related expenses of $1.1 million, due to incurring a full year of expense during 2003 and an increase in the number of our employees. In 2003, we hired nine additional administrative employees in areas such as finance, business development and information technology. The increase also reflects increased occupancy costs of $0.3 million and professional fees of $0.2 million necessary for the expansion of our operations.

Sales and Marketing Expenses. We had not incurred any sales and marketing expenses through 2003.

Interest Income. Interest income increased from $0.3 million in 2002 to $0.4 million in 2003. We had no interest income in 2001. The increase was due to our higher balances of cash and cash equivalents in 2003 compared to 2002, resulting from the $22.4 million in net cash proceeds that we received from our issuance of series B convertible preferred stock in May 2002, the $23.0 million in net cash proceeds that we received from our issuance of series B convertible preferred stock in May 2003 and the $31.9 million in net cash proceeds that we received from our issuance of series C convertible preferred stock in October 2003.

We have funded our operations principally from issuances of our convertible preferred stock and convertible promissory notes and the proceeds from our initial public offering. Since our inception, we raised $67.9 million from our initial public offering in May 2004, net of expenses, and we have issued preferred stock for aggregate net cash proceeds of approximately $77.3 million, $31.9 million of which was raised through our sale of series C convertible preferred stock in October 2003, $23.0 million of which was raised through our sale of series B convertible preferred stock in May 2003 and $22.4 million of which was raised through our sale of series B convertible preferred stock in May 2002. Issuances of convertible promissory notes resulted in proceeds of $100,000 in 2001 and $50,000 in 2002. These notes were subsequently converted into shares of our series B convertible preferred stock in accordance with their terms. All of the preferred stock that we issued converted to common stock in connection with our initial public offering.

In September 2003, we obtained a $750,000 secured line of credit to fund the purchase of office furniture, computer equipment and software. The original note for approximately $267,000 had an interest rate of 6.4% plus a fluctuating mark-up based on market rates that is set at the time of funding. The fixed portion was reduced to 6.15% in August 2004 in connection with a new note for approximately $407,000. We expect to enter into additional promissory notes to fund most of our fixed asset purchases.

At September 30, 2004, we had cash, cash equivalents and marketable securities totaling $100.6 million and working capital of $95.8 million.

We used cash in operations for the nine months ended September 30, 2004 of $20.8 million. Cash used in operations for the nine months ended September 30, 2003 was $12.8 million. The increase was attributable to the increased working capital requirements to fund our operations, including our operating losses. We used cash in operations for the year ended December 31, 2003 of $18.7 million. Cash used in operations for the year ended December 31, 2002 was $4.1 million. The increase in 2003 was attributable to the increased funding requirements of our operations, which began in May 2002. During 2003, we received a total of $0.8 million from a license agreement and from a research grant.

Cash used in investing activities for the nine months ended September 30, 2004 was $36.8 million. For the nine months ended September 30, 2003, cash used in investing activities was $7.0 million. This increase is primarily due to the purchases of marketable securities. We used cash in investing activities for the year ended December 31, 2003 of $31.0 million and $12.4 million for the year ended December 31, 2002. Our investing activities reflect investments in marketable securities and purchases of fixed assets necessary for operations. We plan to utilize third parties to manufacture our products and to conduct laboratory-based research. Therefore, we do not expect to make any significant capital expenditures in 2005.

Net cash provided by financing activities was $68.2 million during the nine months ended September 30, 2004, compared to $23.1 million during the nine months ended September 30, 2003. The source of cash provided by financing activities during the nine months ended September 30, 2004 was related primarily to proceeds from the sale of common stock in our initial public offering. The source of cash provided by financing activities for the nine months ended September 30, 2003 was related primarily to the issuance of preferred stock. Net cash provided by financing activities for the year ended December 31, 2003 was $55.2 million, primarily from our receipt of $23.0 million in May 2003 upon the second closing of the series B convertible preferred stock financing and $31.9 million in October 2003 upon the closing of the series C convertible preferred stock financing. Cash provided by financing activities for the year ended December 31, 2002 was

$22.4 million, primarily from the receipt of net cash proceeds of $22.4 million in May 2002 through our first issuance of series B convertible preferred stock. Cash provided by financing activities for the year ended December 31, 2001 was $100,000 as a result of the sale of convertible promissory notes in the fourth quarter of 2001.

We expect that our existing cash at September 30, 2004, together with the proceeds to us from this offering, will be sufficient to fund our anticipated operating expenses, debt obligations and capital requirements through the end of 2006. Our future capital requirements will depend on many factors, including:


	•	the success of our development and commercialization of our product candidates;

	•	the scope and results of our clinical trials;

	•	advancement of other product candidates into clinical development;

	•	potential acquisition or in-licensing of other products or technologies;

	•	the timing of, and the costs involved in, obtaining regulatory approvals;

	•	the costs of manufacturing activities;

	•	the costs of commercialization activities, including product marketing, sales and distribution and related working capital needs;

	•	the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property-related costs, including any possible litigation costs; and

	•	our ability to establish and maintain collaborative and other strategic arrangements.

Our capital requirements are likely to increase. As a result, we may require additional funds and may attempt to raise additional funds through public or private equity offerings or debt financings, collaborative agreements with corporate partners or from other sources.

The following table summarizes our material contractual commitments as of September 30, 2004:

The other contractual obligations reflected in the table include obligations to purchase product candidate materials contingent on the delivery of the materials and to fund various clinical trials contingent on the performance of services. These obligations also include long-term obligations, including milestone payments that may arise under agreements that we may terminate prior to the milestone payments being due. The table excludes contingent royalty payments that we may be obligated to pay in the future.

We incurred net operating losses for the period from inception to December 31, 2001 and the years ended December 31, 2002 and 2003, and consequently did not pay federal, state or foreign income taxes. As of December 31, 2003, we had federal net operating loss carryforwards of approximately $25.0 million. Pursuant to Section 382 of the Internal Revenue Code of 1986, the annual utilization of a company’s net operating loss carryforwards may be limited if the company experiences a change in ownership of more than 50% within a three-year period. As a result of this offering and our previous equity offerings, we may experience such an ownership change. However, we have not performed a detailed analysis of any ownership change. Accordingly, our net operating loss carryforwards available to offset future federal taxable income arising before such

ownership changes may be limited. For financial reporting purposes, we have recorded a valuation allowance to fully offset the deferred tax asset related to these carryforwards because realization of the benefit was uncertain.

We received cash of $217,000 in December 2003 in connection with our sale of a portion of our New Jersey net operating loss carryforwards.

Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, corporate debt securities and United States treasury notes, with the effective duration of the portfolio less than one year, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

Most of our transactions are conducted in United States dollars, although we do have some agreements with vendors located outside the United States. Transactions under some of these agreements are conducted in United States dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under other of these agreements are conducted in the local foreign currency. We have a wholly-owned subsidiary, Barrier Therapeutics, N.V., which is located in Geel, Belgium. Except for funding being received under our grant from a Belgian governmental agency, which is denominated in Euros and locally earned interest income, all research costs incurred by Barrier Therapeutics, N.V. are funded under a service agreement with Barrier Therapeutics, Inc. from investments denominated in dollars. Therefore, we are subject to currency fluctuations and exchange rate gains and losses on these transactions. If the exchange rate undergoes a change of 10%, we do not believe that it would have a material impact on our results of operations or cash flows.

We are a pharmaceutical company focused on the discovery, development and commercialization of pharmaceutical products in the field of dermatology. Our goal is to develop a portfolio of innovative products that address major medical needs in the treatment of dermatological diseases and disorders. Our product pipeline includes eight product candidates in various stages of clinical development. Although our four most advanced product candidates have all been through various clinical trials, no assessment of the efficacy or safety of any product candidate can be considered definitive until all clinical trials needed to support a submission for marketing approval are complete. Success in earlier clinical trials does not mean that subsequent trials will confirm the earlier findings.


	•	Zimycan: an ointment for the treatment of infants with diaper dermatitis complicated by candidiasis, an inflammatory disease characterized by diaper rash complicated with an infection by a fungus called Candida. On the basis of the positive Phase 3 pivotal clinical trial results that we announced in August 2004, we filed an amendment to a pending new drug application, or NDA, for Zimycan in the United States in November 2004. We expect to receive a first action letter from the FDA relating to the potential approval of Zimycan in the United States during the first half of 2005. Zimycan has received marketing approval from the Belgian Health Authorities and is the subject of a mutual recognition procedure for approval in the major markets in Europe.

	•	Sebazole: a gel for the treatment of seborrheic dermatitis, a type of eczema characterized by inflammation and scaling of the skin, principally of the scalp, face and chest. In December 2004, we announced positive results from a Phase 3 pivotal clinical trial for Sebazole. We expect to file an NDA for Sebazole in the United States during the third quarter of 2005.

	•	Hyphanox: an oral therapeutic for the treatment of fungal infections, including vaginal candidiasis, commonly known as vaginal yeast infection, and onychomycosis, commonly known as nail fungus. We are currently conducting a Phase 3 pivotal clinical trial for Hyphanox for the treatment of vaginal candidiasis to support applications for marketing approval in the United States and Europe. We expect to complete these trials during the second quarter of 2005. We expect to commence two Phase 3 clinical trials for Hyphanox for the treatment of onychomycosis during the second quarter of 2005.

	•	Liarozole: an oral therapeutic for the treatment of congenital ichthyosis, a rare genetic disease characterized by dryness and scaling of the skin. We expect to commence a Phase 2/3 clinical trial for Liarozole for the treatment of congenital ichthyosis during 2005. Both the FDA and the Commission for the European Community have granted Liarozole orphan drug status for the treatment of congenital ichthyosis.

have also entered into a distribution agreement with Galderma Laboratories under which Galderma will provide us with distribution services and logistical support for SOLAGÉ through December 2005.

We have four other product candidates in earlier stages of clinical development for the treatment of a range of dermatological conditions, including acne, psoriasis and fungal infections. Our product pipeline also includes product candidates in preclinical development, as well as two other products candidates that are marketed by third parties in some countries outside the United States and Europe, which we would reformulate prior to initiating clinical trials. In addition, we have access to the classes of compounds claimed in the patents licensed to us under our license agreements with affiliates of Johnson & Johnson. We are currently conducting a screening program to search for new product candidates in the field of dermatology.

Our management team consists of a number of experienced pharmaceutical industry executives and recognized experts in dermatological drug discovery, development and commercialization. We were founded in 2001 by Geert Cauwenbergh, Ph.D., our Chief Executive Officer, who identified a portfolio of dermatological product candidates and intellectual property within the Johnson & Johnson family of companies that he believed could form the basis for an independent pharmaceutical company focused on dermatology. In May 2002, we acquired these assets through licenses from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., each a Johnson & Johnson company, in exchange for an equity interest in us. In this prospectus, we refer to Janssen Pharmaceutica Products, L.P. and its affiliates as Janssen.

Dermatology is the field of medicine concerned with the study and treatment of disorders and diseases of the skin. Skin is a vital organ of the human body. Skin functions as a barrier, protecting organs and tissues in the body from injury and invasion by foreign organisms that may cause infections or other damage. It helps regulate body temperature and sense external stimuli. The condition of one’s skin also has a significant impact on an individual’s overall health and appearance.


	•	the epidermis is a protective layer and contains melanin, which is the pigment that gives skin its color and protects it against the harmful effects of the sun;

	•	the dermis contains nerves, blood vessels, hair follicles and many of the functional glands of the skin, including sweat glands and oil producing glands, known as sebaceous glands; and

	•	the subcutaneous tissue is a layer of fat that helps insulate the body from heat and cold.

Dermatological diseases and disorders may result from a number of factors, including aging, sun damage, immunological diseases, genetic background, viral, fungal or bacterial infections, allergic reactions and emotional or seasonal factors. These diseases and disorders can have a significant impact on an individual’s physical and mental health and his or her social acceptance.

According to IMS Health, or IMS, in 2002, the worldwide market for prescription dermatological products, measured in terms of direct and indirect sales from manufacturers to wholesalers, was approximately $12 billion. Using IMS data to include three major oral antifungal drugs that are used to treat onychomycosis and vaginal candidiasis, the worldwide market in 2002 for prescription dermatological products exceeded $14 billion, with approximately $6 billion in the United States. Treatments for fungal infections, acne, dermatitis, psoriasis and wound healing comprised the largest portions of this worldwide market.

Despite the significant sales of prescription products for treatment of diseases of the skin, we believe that many serious limitations remain in the treatment of these diseases. Existing treatments are often inadequate for reasons of efficacy, toxicity or patient noncompliance. Many of the drugs currently used to treat dermatological diseases originally were developed to treat diseases of other parts of the body. For example, many of the oral antifungal drugs used today to treat dermatological infections first were developed as treatments for fungal infections of other parts of the anatomy. We believe that our focus on understanding the

Aggressively pursue the development and regulatory approval of our product candidates. We are committing substantial resources towards completing development of, and obtaining regulatory approvals for, our product candidates in the United States and in other markets worldwide.

Commercialize our products directly through our own sales organization in the United States and Canada and through collaborations with third parties outside the United States and Canada. We plan to build our own sales force to market our products directly to dermatologists and other target physicians in the United States and Canada. To accelerate global market penetration of our products, we have entered into, and will continue to seek, collaborations with third parties outside the United States and Canada.

Maintain a diverse portfolio of product candidates. We are developing a product portfolio that includes product candidates at various stages of preclinical and clinical development and is not based on a single technology. We believe that the diversity in our product development pipeline increases the probability of our long-term commercial success.

Expand our product portfolio through a combination of internal development efforts and selective acquisitions of additional compounds and marketed products. We intend to continue expanding our product development pipeline by screening compounds to which we have access under our principal license agreements. We plan to supplement these efforts by licensing or otherwise acquiring additional compounds that we believe to be potentially superior to currently marketed products and by seeking to selectively acquire marketed dermatological products that complement our development and commercialization strategy.

We have eight product candidates in various stages of clinical development. In addition, we have rights to other products, including two products that are marketed by third parties in some countries outside the United States and Europe which we would reformulate prior to initiating clinical trials. The FDA has not approved any of our product candidates.

We have based our assessment of the stage of development of our product candidates on our ongoing development efforts, for certain products, and on the clinical trials that were performed by or on behalf of Janssen Pharmaceutica Products, L.P. and its affiliates prior to our acquisition of these product candidates in May 2002. Depending upon the scope and adequacy of the data from these trials, directions or feedback we receive from regulatory agencies and our product development strategy, we may need to perform additional preclinical studies and clinical trials before proceeding to the next stage of clinical development or seeking regulatory approval. Many of the previously performed clinical trials and our currently ongoing Phase 2a trials were and are being conducted in Europe, where an investigational new drug application, or IND, or its foreign equivalent, was not a prerequisite to performing pilot studies or early stage clinical trials. In the United States, an IND must be filed with the FDA prior to performing clinical trials for each drug candidate and for each indication.

The following table summarizes our product candidates in clinical development, all of which we plan to develop as prescription drugs.

Zimycan. Zimycan is a topical ointment with an active ingredient of 0.25% miconazole, an antifungal agent, in a zinc oxide and petrolatum base. We are developing Zimycan for use in the treatment of infants with diaper dermatitis complicated by candidiasis, which is an inflammatory disease in which an infant’s diaper rash is complicated with an infection by a fungus called Candida. Candida thrive in the warm, moist conditions typically found in an infant’s diaper. Miconazole is an antifungal agent that treats fungal infections such as those caused by Candida. In the United States, there currently is no prescription drug specifically approved to treat diaper dermatitis complicated by candidiasis.

Market Opportunity. Diaper dermatitis, commonly known as diaper rash, is one of the most common skin conditions in infants. Based on U.S. census bureau data, we estimate that there are approximately 8.0 million infants under two years of age in the United States. According to Fitzpatrick’s, diaper dermatitis is observed in approximately one million pediatric outpatient visits each year, and, based on several published reports, we believe that more than 40% of all diaper dermatitis involves Candida. The risk of developing a Candida infection increases with the clinical severity of diaper dermatitis. A Candida infection often develops when diaper dermatitis persists for more than three days.

Over-the-counter conventional diaper rash creams, such as Desitin, are often used to treat diaper dermatitis complicated by candidiasis. Many of these over-the-counter treatments contain zinc oxide and petrolatum, which form the base of Zimycan, but none contains an antifungal agent. These diaper rash creams are palliative treatments. Palliative treatments are treatments that soothe symptoms but do not effect a cure. Typically, these rashes persist if not treated with an antifungal agent such as miconazole that is intended to cure the Candida fungal infection.

There is no FDA approved prescription treatment specifically for diaper dermatitis complicated by candidiasis, and no over-the-counter drugs are indicated specifically for this use. However, physicians often prescribe prescription drugs on an off-label basis and recommend over-the-counter drugs to treat this condition. These drugs include topical steroids, such as hydrocortisone, topical antifungals, such as ointments and creams containing nystatin, and antifungal and steroid combinations, such as Mycolog II. Based on IMS data, approximately 24% of all products currently being prescribed for diaper dermatitis contain a steroid. The

use of steroids in infants is generally avoided due to potential side effects. Moreover, when used without an antifungal agent, a steroid-based treatment may aggravate bacterial and fungal infections.

We believe that Zimycan, if approved following the FDA’s review of our NDA amendment, would have the following favorable features for the treatment of diaper dermatitis complicated by candidiasis:


	•	specific design for Candida-associated diaper dermatitis complicated by candidiasis;

	•	non-steroidal, thereby eliminating the risk of steroid-associated side effects; and

	•	one-eighth the concentration of other miconazole-based topical formulations, such as Monistat Derm, that are sometimes used to treat this condition.

In addition, a study conducted in human subjects suggests that Zimycan may minimize the loss of fluids through the skin, which may further reduce the inflammation associated with Candida-associated diaper dermatitis complicated by candidiasis.

Product Background. Affiliates of Johnson & Johnson Consumer Companies, Inc. have received regulatory approval for this product for the treatment of diaper dermatitis and market it under the brand names Daktozin and Bebektin in some countries outside the United States.

In August 1998, an NDA for marketing approval of Zimycan for the broad indication of diaper dermatitis, without the restriction to diaper dermatitis complicated by candidiasis, was filed with the FDA. In connection with its review, the FDA issued not approvable letters for the broad indication of diaper dermatitis and requested an additional clinical trial focused specifically on infants with diaper dermatitis complicated by candidiasis. We have completed the additional Phase 3 clinical trial requested by the FDA and, based on the positive results described below, we filed an amendment to this NDA in November 2004.

Clinical Development. In August 2004, we announced results of a Phase 3 pivotal clinical trial in the United States and Latin America for the use of Zimycan in the treatment of infants with proven diaper dermatitis complicated by candidiasis.

The double-blind, vehicle-controlled study, which was conducted at 20 sites in the United States and Latin America, included 236 children under the age of three years who were diagnosed with diaper dermatitis that was complicated by the presence of Candida. These children were treated for seven days with either the placebo vehicle, consisting of zinc oxide plus petrolatum, or with Zimycan. The vehicle used in this study is generally recognized as the standard of care for uncomplicated diaper dermatitis. The measurement used to assess the success of these trials, known as the primary efficacy endpoint, was overall cure at day 14, one week after the end of treatment. Overall cure was defined as eradication of the fungus and complete clearing of all signs and symptoms of the disease.

In the study, Zimycan achieved statistical significance compared to vehicle for all primary and secondary endpoints. A clinical trial result is statistically significant if it is unlikely to have occurred by chance. The statistical significance of clinical trial results is determined by a widely used statistical method that establishes the p-value of the results. A p-value of 0.05 or less for clinical trial results is generally considered by regulatory authorities as indicating statistically significant results for evidence of effectiveness.

As indicated in the table, the results of the study were statistically significant with a p-value of 0.005. More than twice the percentage of patients treated with Zimycan reached the primary endpoint as compared with patients treated with the vehicle. We also performed a subanalysis on the data from this trial that showed

that at the end of the seven-day treatment period, the average reduction in the signs and symptoms score was 72% in infants treated with Zimycan compared to 25% in infants treated with the vehicle ointment.

In the study, both Zimycan and the vehicle were well tolerated. There were no serious adverse events in either group nor were there adverse events related to treatment in either group. The non-serious adverse events were evenly distributed between the groups and were considered typical of this patient population.

Regulatory Strategy. In November 2004, we filed with the FDA an amendment to the Zimycan NDA seeking marketing approval for Zimycan for the treatment of diaper dermatitis complicated by candidiasis in infants. We expect to receive a first action letter from the FDA relating to the approval of Zimycan during the first half of 2005.

Zimycan has received marketing approval from the Belgian Health Authorities and is the subject of a mutual recognition procedure for approval in 14 countries in Europe, including the United Kingdom, Germany and Spain.

Proprietary Rights. We have an exclusive, royalty-free license in the field of dermatology to an issued United States patent covering the formulation of the combination of miconazole and zinc oxide contained in Zimycan and methods of treating diaper dermatitis. The United States patent expires in 2007. We also have a license to corresponding patents in Europe, Japan and other foreign countries. The issued patents and any additional patents issuing from the patent applications in Europe, Japan and other foreign countries will expire in 2005. The active ingredient of Zimycan, miconazole, is off patent.

Sebazole. Sebazole is a topical formulation of 2.0% ketoconazole, an antifungal agent, in a waterless gel that we are developing as a once daily treatment for seborrheic dermatitis. Seborrheic dermatitis is a type of eczema that is characterized by a red, scaly, itchy rash primarily occurring on the face, scalp, behind the ears and in the middle of the chest. The condition often recurs, thereby requiring retreatment over time. Ketoconazole has potent pharmacological effects against the fungus known as P. ovale, which, when overcolonized on the skin, is considered to be one of the main causes of seborrheic dermatitis. Ketoconazole quickly suppresses this type of fungus and also exhibits anti-inflammatory effects that help to reduce redness in affected areas. We have designed Sebazole to deliver the benefits of ketoconazole with the advantages of our waterless gel.

Market Opportunity. According to Fitzpatrick’s, seborrheic dermatitis affects approximately 3% to 5% of the United States population. Based on U.S. census bureau data, we estimate this to be approximately 8.5 to 14.3 million people in the United States. In 2002, the IMS diagnosis value of drug sales to treat seborrheic dermatitis was approximately $231 million worldwide, with approximately $83 million in the United States. The diagnosis value of drug sales for a specific indication is derived by IMS from physician prescribing patterns. This IMS information generally does not include prescriptions written in hospitals or clinics associated with hospitals.

The most commonly used prescription drugs for the treatment of seborrheic dermatitis are antifungal agents and steroids. The most commonly prescribed antifungal products are Nizoral and other ketoconazole creams. These products typically must be used at least twice daily for four to six weeks to be effective in treating seborrheic dermatitis. The most commonly prescribed steroid product is Desowen, which contains the steroid desonide. Steroids generally have a faster onset of action than antifungal agents but are often not recommended for frequent use because of their potential risk of harmful side effects. Steroid therapy side effects include abnormal skin color lightening, skin thinning and complications arising from systemic absorption of steroids in inflamed or broken skin. Frequent use of steroids can also result in tolerance development and may elicit a recurrence of seborrheic dermatitis after stopping therapy.

We believe that Sebazole, if approved following the FDA’s review of our NDA that we expect to file, would have the following favorable features for the treatment of seborrheic dermatitis:


	•	fast onset of action, meaning that patients may experience noticeable reduction in symptoms in as little as three days following the start of treatment;

	•	once daily treatment for two weeks;


	•	less irritation than ketoconazole cream;

	•	lower likelihood of recurrence of symptoms following the end of treatment in comparison with treatment with a steroid such as desonide; and

	•	a gel formulation that may be cosmetically preferred by patients.

Product Background. We are developing Sebazole as part of our program to develop a once daily treatment for seborrheic dermatitis using our waterless gel. The program initially focused primarily on the gel containing a combination of 2.0% ketoconazole and 0.05% of the steroid desonide in addition to Sebazole, which does not contain a steroid.

Clinical Development. In November 2003, we completed two Phase 3 clinical trials which enrolled more than 900 patients in approximately 50 locations in the United States and Europe. Each trial compared the safety and efficacy of Sebazole, the gel containing the combination of 2.0% ketoconazole and 0.05% desonide, the gel containing 0.05% of the steroid desonide and a placebo consisting of our gel with no active ingredients. Patients were treated once daily for a period of two weeks. The primary efficacy endpoint in these trials was the proportion of patients that were effectively treated at day 28, which was 14 days following the end of treatment. Effectively treated for the purpose of these Phase 3 clinical trials means a patient was cleared or almost cleared of seborrheic dermatitis. We initially designed the trials primarily for the product containing both ketoconazole and the steroid and, as a result, we conducted the trials following FDA regulations for combination product development. However, based on the results of these clinical trials, we determined that Sebazole was the stronger product candidate. In both trials, Sebazole achieved the primary efficacy endpoint versus the vehicle gel with statistical significance. We found Sebazole to be comparable to our waterless gel containing desonide and to the combination of ketoconazole with desonide, suggesting that adding a steroid to the topical regimen does not provide additional benefit at 14 days following treatment. In these trials, Sebazole was well tolerated, with no serious drug-related adverse events reported.

Upon review of the results from these trials, the FDA requested that we perform one additional Phase 3 pivotal clinical trial of Sebazole. We completed this trial in December 2004. In this trial, we enrolled 459 patients in 24 locations in the United States. The trial compared the safety and efficacy of Sebazole to a placebo consisting of our gel with no active ingredient. Patients were treated once daily for a period of two weeks. The primary efficacy endpoint was the same as in on our two earlier Phase 3 trials — the proportion of patients that were effectively treated at day 28, which was 14 days following the end of treatment. In this trial, Sebazole was well tolerated, with no serious drug-related adverse events reported.

The results of the primary efficacy endpoint from all three Phase 3 trials of Sebazole are summarized in the table below:

As indicated in the table, the results of each trial were statistically significant. In addition, in our pivotal trial, the results with respect to the secondary efficacy endpoint for mean change from baseline for scaling were statistically significant. The results with respect to the secondary efficacy endpoint for redness and itching were better as compared to vehicle alone but were not statistically significant. We also performed a cumulative irritation patch study in volunteers in which we observed that Sebazole was approximately five times less irritating than a ketoconazole cream.

Additionally, we are currently conducting a clinical study, for which enrollment is complete, to assess the long-term safety of Sebazole for up to one year of intermittent use. In January 2005, the FDA informed us that we should submit data for up to six months of intermittent use from this study at the time of the initial filing of our Sebazole NDA. The FDA also asked us to perform a study for Sebazole known as a percutaneous

absorbtion study, which measures the amount of a drug’s absorbtion, if any, into the bloodstream through the skin. The FDA requested that we submit data from this study at the time of the initial filing of our Sebazole NDA.

Regulatory Strategy. Based on the positive results of these three Phase 3 clinical trials, we expect to file an NDA with the FDA seeking marketing approval for Sebazole for the treatment of seborrheic dermatitis during the third quarter of 2005.

Proprietary Rights. We have an exclusive, royalty-free license in the field of dermatology to a United States patent application claiming specific formulations of ketoconazole in a waterless gel. Any patent issued in the United States from this application would expire in 2018. We also have an exclusive, royalty-free license to corresponding patent applications in Europe, Japan and other foreign countries. Any patents issued from the patent applications in Europe, Japan and other foreign countries would expire in 2019. The active ingredient of Sebazole, ketoconazole, is off patent.

Hyphanox. Hyphanox is an oral formulation of itraconazole, an antifungal agent that we are developing for the treatment of various fungal infections, including vaginal candidiasis, and onychomycosis. Itraconazole is effective in treating these fungal infections. Janssen currently markets different formulations of itraconazole, under Sporanox and other brand names, in various countries. Sporanox is approved in the United States for the treatment of various disorders, including onychomycosis, but not for the treatment of vaginal candidiasis. Sporanox is approved for vaginal candidiasis in Europe. A generic form of itraconazole has also been approved in the United States. A 100 mg capsule is the maximum strength in which oral Sporanox is currently available. We are developing Hyphanox as a 200 mg tablet. We believe this 200 mg formulation will allow for more convenient once daily dosing and provide for less inter-patient variability.

Market Opportunity — Vaginal Candidiasis. According to Fitzpatrick’s, approximately three-quarters of all women will experience an episode of vaginal candidiasis at some point in their lifetime. Fitzpatrick’s also reports that up to 5% of women suffer from recurrent vaginal candidiasis. The prescription drugs typically used to treat vaginal candidiasis include oral antifungal drugs, such as Diflucan and Sporanox, and topical antifungal drugs, such as Terazol. The condition is also commonly treated with over-the-counter antifungal products, such as Monistat.

Diflucan is the most widely prescribed oral treatment for vaginal candidiasis. The active ingredient in Diflucan is the antifungal agent fluconazole. Diflucan is prescribed as a single day, single dose 150 mg pill. Based on IMS data, we believe that Diflucan sales to treat vaginal candidiasis in 2002 were approximately $250 million worldwide, with approximately $156 million in the United States. Sporanox is also approved and sold in most European countries for the treatment of vaginal candidiasis. Generic forms of fluconazole have been approved for use in the United States. Sporanox is prescribed for this indication as either two 100 mg capsules given twice a day for a one-day period or two 100 mg capsules given once a day for a three-day period. In 2002, the IMS diagnosis value of Sporanox sales to treat vaginal candidiasis was approximately $26 million worldwide.

In in vitro studies, itraconazole was shown to be more potent than fluconazole, the active ingredient in Diflucan, against the three most prevalent strains of yeast present in vaginal candidiasis. Furthermore, preclinical data indicate that the proportion of itraconazole in affected tissue, as compared to itraconazole in the blood, after the 24-hour post-treatment period is greater than such proportion for fluconazole. These studies suggest that itraconazole may be a more effective treatment for vaginal candidiasis than fluconazole. However, Diflucan has become the leading oral product for the treatment of this condition, we believe in large part because of its more convenient dosing regimen than Sporanox. We believe that the reformulation of itraconazole into Hyphanox may address this shortcoming of Sporanox in the treatment of vaginal candidiasis.

Market Opportunity — Onychomycosis. According to Fitzpatrick’s, onychomycosis is a very common skin disease, occurring in approximately 2% to 18% of people worldwide, with up to 48% of the population experiencing onychomycosis at least once by age 70. In 2002, the IMS diagnosis value of sales of oral drugs to treat onychomycosis was approximately $777 million worldwide, with approximately $341 million in the United States.

Lamisil and Sporanox are the two leading oral antifungal treatments for the treatment of onychomycosis. Preclinical studies have shown that itraconazole, the antifungal agent in Hyphanox, has a broader spectrum of activity than terbinafine, the antifungal agent in Lamisil. In addition, we believe that Hyphanox may allow users to benefit from pulse therapy in the treatment of onychomycosis, which is not available to users of Lamisil. Pulse therapy is a regimen of treatment in which a patient takes medication for a specified period of time followed by a period of time without treatment, with the cycle often repeated. Pulse therapy allows the patient to remain under treatment for extended periods of time without the need to take medicine on a daily basis during the entire course of therapy, thereby reducing the amount and frequency of systemic exposure to the active ingredient.

Product Background. In an effort to produce a more convenient dosing form of Sporanox, Janssen conducted a program to reformulate itraconazole into 200 mg tablets using a proprietary formulation of itraconazole requiring a manufacturing process known as melt extrusion. Melt extrusion is a manufacturing process that makes it possible to formulate itraconazole into tablets. We obtained the rights to Janssen’s tablet formulation under our license agreements.

In the fourth quarter of 2003, we conducted a bioequivalence study of Hyphanox relative to Sporanox on 52 subjects. Bioequivalence between different formulations of a drug exists when the bioavailability of one formulation relative to the other formulation is within a specified regulatory range. Bioavailability is a measure of the degree to which a drug becomes available to the bloodstream after administration. Based on data from this study, the bioavailability of Hyphanox relative to Sporanox is slightly above the upper limit of the regulatory range to establish bioequivalence.

In addition, in this bioequivalence study, we observed that there was lower inter-patient variability in itraconazole plasma levels in subjects taking Hyphanox compared to subjects taking Sporanox. This may help us to differentiate Hyphanox, if approved, from other itraconazole products such as Sporanox, since decreased variability between subjects could result in greater consistency in the delivery of the active ingredient, itraconazole, in a patient’s body.

Clinical Development. In the first quarter of 2004, we commenced a Phase 3 pivotal clinical trial in the United States for the use of a single day, single dose treatment of two 200 mg tablets of Hyphanox in the treatment of vaginal candidiasis. We expect to enroll approximately 1,200 women in the trial, approximately 800 of whom will be measured for clinical and mycological cure rates 25 days after treatment. In this trial, we will be required to demonstrate that Hyphanox is not clinically inferior to fluconazole, the active ingredient in Diflucan marketed by Pfizer. We established the trial design after discussions with the FDA. In the first half of 2005, we plan to initiate two Phase 3 pivotal clinical trials using pulse therapy designed to test a once daily dosage of two 200 mg tablets of Hyphanox for the treatment of onychomycosis.

Regulatory Strategy. If our ongoing Phase 3 clinical trial of Hyphanox in the treatment of vaginal candidiasis is successful, in the second half of 2005, we expect to file an NDA with the FDA seeking marketing approval for Hyphanox for the treatment of vaginal candidiasis. If our planned Phase 3 clinical trials of Hyphanox in the treatment of onychomycosis are successful, we expect to file an NDA with the FDA seeking marketing approval for Hyphanox for the treatment of onychomycosis.

Proprietary Rights. We have an exclusive license in the field of dermatology to a United States patent claiming the Hyphanox formulation and methods of using this formulation for treatment of fungal infections. The United States patent claiming the formulation and methods of treatment expires in 2017. We also have an exclusive license to corresponding patents and patent applications in Europe, Japan and other foreign countries. The issued patent and any additional patents issuing from the patent applications in Europe, Japan and other foreign countries will expire in 2016 through 2017. The active ingredient of Hyphanox, itraconazole, is off patent.

Janssen Option. Janssen has an exclusive option to acquire the right to commercialize Hyphanox on a region-by-region basis. In order to permit Janssen to exercise this right, we are obligated to notify them if we are able to manufacture Hyphanox batches that are reproducible and bioequivalent to Janssen’s melt extrusion formulation or Sporanox or if we prove clinical efficacy in subsequent Phase 3 clinical trials. Based on the data

from the bioequivalence study described above, the bioavailability of Hyphanox relative to Sporanox is slightly above the upper limit of the regulatory range to establish bioequivalence. Accordingly, our study did not demonstrate bioequivalence between Hyphanox and Sporanox and thus did not trigger the Janssen option. However, this option would be triggered if any subsequent study demonstrates bioequivalence or if our Phase 3 clinical trials for Hyphanox demonstrate clinical efficacy. Please see “—Johnson & Johnson License Agreements—Additional Terms Applicable to Hyphanox” for a further description of Janssen’s option.

Liarozole. Liarozole is our first product candidate based on a class of molecules known as retinoic acid metabolism blocking agents, or RAMBAs. We are developing Liarozole as an oral treatment for congenital ichthyosis. Congenital ichthyosis is a rare genetic disease, affecting one in 6,000 people in the United States. The disease is characterized by severe dryness and scaling of the skin, with the scaling often occurring over large areas of the body. There is no prescription drug currently approved in the United States that is indicated for the treatment of congenital ichthyosis.

Market Opportunity. We believe that there is an unmet medical need for a treatment for congenital ichthyosis. The current treatments for congenital ichthyosis include synthetic retinoid drugs, such as Soriatane, that are prescribed off-label, and palliative therapies, such as topical moisturizers and emollients, that are available over-the-counter. Synthetic retinoids are a man-made form of vitamin A. Synthetic retinoid drugs work by adding synthetic retinoids to the natural retinoic acid already existing in the body. Retinoic acid is produced by the body from natural vitamin A. It is essential for optimal functioning of the skin. It affects a number of processes, including aging, pigmentation and wound healing.

We believe there are limitations to many of these current treatments. The introduction of synthetic retinoids into the body has been associated with adverse side effects, including the long-term risk of birth defects arising from the tissue retention of synthetic retinoids. Although palliative treatments may soothe the symptoms of the disease, they do not effect a cure of the underlying condition. In addition, topical treatments are not particularly effective in treating the large areas of the body often affected by congenital ichthyosis.

In contrast to synthetic retinoid treatments, RAMBAs, such as Liarozole, do not introduce synthetic retinoids into the body. Instead, RAMBAs work by blocking the intracellular metabolism of natural retinoic acid in cells. This blocking results in an increased accumulation of the body’s own retinoic acid in the body’s cells, which we believe may provide the same therapeutic benefits as synthetic retinoid therapy but potentially with less risk of adverse side effects. We believe that one of the potential advantages of Liarozole and other RAMBAs over synthetic retinoids may be the reduction or absence of long-term risk for birth defects. Because of the risk of birth defects arising from the tissue retention of synthetic retinoids, long-term contraception is strongly recommended in women after the use of these agents. Preclinical studies conducted in rats dosed with Liarozole showed no birth defects in pups conceived one week after completion of a one week treatment with Liarozole. In contrast, after treatment is completed with acitretin, the active ingredient in Soriatane, there is a risk of birth defects for several months.

Product Background. Liarozole was originally developed for the treatment of prostate cancer and was tested in clinical trials at various doses of up to 600 mg per day. In these clinical trials, subjects treated with higher levels of Liarozole experienced serious toxic side effects as is often the situation with anti-cancer therapies. However, because subjects in these trials exhibited retinoid-like effects in the skin, a development program was started to explore the therapeutic potential of Liarozole at lower doses in a variety of retinoid-responsive diseases, including congenital ichthyosis.

To date, Liarozole has been the subject of the Phase 2 and Phase 3 clinical trials described below. However, no assessment of the efficacy or safety of a product candidate can be considered definitive until all clinical trials needed to support a submission for marketing approval are complete. Success in earlier clinical trials does not mean that subsequent trials will confirm the earlier findings.

In a Phase 2 clinical trial of Liarozole for the treatment of congenital ichthyosis, that was conducted prior to our acquisition of rights to Liarozole, 11 of 12 subjects that were treated with a twice daily 150 mg dosage of oral Liarozole showed marked improvement. The other subject showed moderate improvement. In addition, in a Phase 3 clinical trial of Liarozole and acitretin, 15 of the 32 subjects with severe ichthyosis were treated with

Clinical Development. We performed a retrospective review of the side effects observed in people treated with Liarozole at doses of up to 600 mg per day. The results of this review suggest that the serious side effects seen at higher doses are less likely to be encountered at our proposed 150 mg per day dose for dermatological use.

Regulatory Strategy. Both the FDA and the Commission for the European Community have granted Liarozole orphan drug status for the treatment of congenital ichthyosis. We have had discussions with the European Medicines Agency for the Evaluation of Medicinal Products, or EMEA, and the FDA concerning clinical requirements for us to obtain marketing approval for Liarozole for the treatment of congenital ichthyosis. In this regard, we plan to conduct a Phase 2/3 clinical trial in the United States to evaluate both the appropriate dose and efficacy of Liarozole. The specific type of congenital ichthyosis to be studied has not been determined. We expect to begin this trial in 2005. We continue to discuss with the EMEA whether clinical trials are necessary prior to seeking marketing approval in Europe in addition to the trial that we plan to conduct in the United States. Because of its orphan drug status, if Liarozole is the first product candidate to receive FDA approval for congenital ichthyosis, it will be entitled to orphan drug exclusivity. This means that the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity.

Proprietary Rights. We have an exclusive, royalty-free license in the field of dermatology to United States patents claiming the chemical compound Liarozole, pharmaceutical formulations containing Liarozole and methods of treatment with Liarozole. The United States patents claiming the chemical compound Liarozole and pharmaceutical formulations containing Liarozole expire in 2006. The United States patent claiming methods of treatment for congenital ichthyosis using Liarozole as a RAMBA expires in 2009. We also have an exclusive, royalty-free license to corresponding patents and patent applications in Europe, Japan and other foreign countries. The issued patent and any additional patents issuing from the patent applications in Europe, Japan and other foreign countries will expire in 2007 through 2009.

Our product development pipeline includes four product candidates that are in earlier stages of clinical development. All of these product candidates are based on intellectual property licensed by us under our principal license agreements. We are developing these product candidates as treatments for a wide range of dermatological diseases and disorders, including acne, psoriasis and fungal infections. We plan to advance the clinical development of these product candidates based on our assessment of their market potential, the results of pilot studies and Phase 1 clinical trials and our available resources. The preliminary observations of efficacy from any of our preclinical or clinical trials for our earlier stage product candidates are not necessarily indicative of the results that may be demonstrated in future clinical trials. We will need to conduct significant additional preclinical or clinical trials prior to seeking marketing approval for our earlier stage product candidates.

Rambazole. Rambazole is our second product candidate based on the RAMBA class of molecules. We are developing an oral formulation of Rambazole for the treatment of psoriasis and severe acne and a topical formulation for dermatological indications, including common forms of acne and mild to moderate psoriasis. We believe that Rambazole may address some of the limitations of existing therapies, such as toxicity, or the degree to which existing therapies are harmful at certain levels of treatment, and immune suppression, or the tendency of some existing therapies to compromise a patient’s immune system.

Market Opportunity. Acne is an inflammatory disease of the skin that results in lesions occurring most frequently on the face, chest and back. Severe acne involves the worst form of acne lesions, which can result in painful infections and permanent scarring and require treatment by a physician. IMS does not specifically report on the severe acne market. We believe that Accutane is the most widely prescribed oral agent to treat

Psoriasis is an auto-immune disease meaning that the body’s immune system, which normally protects the body, affects the body’s own skin cells in an abnormal, uncontrolled manner. The disease is characterized by inflammation and scaling of the skin. In 2002, the IMS diagnosis value of drug sales to treat psoriasis was approximately $451 million worldwide, with approximately $220 million in the United States. Prescription drugs currently used to treat psoriasis include vitamin D₃-based products such as Dovonex, selective immune suppressive agents, such as Enbrel, synthetic retinoids, such as Soriatane, cytostatic agents, such as methotrexate, and steroids.

Product Background — Oral Rambazole. Various preclinical and clinical studies were conducted on Rambazole prior to our acquisition of rights to this product candidate. In preclinical in vitro and animal studies, oral Rambazole demonstrated potential effectiveness in the treatment of psoriasis and acne. These studies also suggested that Rambazole is more selective and more active than first generation RAMBA-based product candidates, such as Liarozole. An oral formulation of Rambazole was tested in two Phase 1 clinical trials. One of these clinical trials was a single dose escalation study, and the other was a multiple dose escalation study. In the multiple dose escalation study, increased doses of Rambazole resulted in increased manifestation of skin effects typical for retinoid therapy, including dry lips and skin.

Product Background — Topical Rambazole. In preclinical in vitro and animal studies, topical Rambazole demonstrated potential effectiveness in the treatment of psoriasis, acne and photo-damage. In addition, animal studies conducted with RAMBAs indicate that topical RAMBA treatment may produce the same therapeutic results as retinoic acid treatments but with less irritation. A Phase 2 clinical trial for acne compared 13 subjects treated with a topical formulation of Rambazole to 13 subjects treated with a placebo. Subjects were treated for 12 weeks. In this trial, subjects receiving topical Rambazole showed a greater percentage reduction of acne lesions than those receiving the placebo. In addition, topical Rambazole was well tolerated, with no serious drug-related adverse events reported.

Clinical Development. We are currently conducting two Phase 2a clinical trials in Europe using oral Rambazole, one in moderate to severe psoriasis and the other in moderate to severe nodular acne. Each study will enroll approximately 17 subjects. The goal of these studies is to determine safety and preliminary indications of effectiveness of oral Rambazole in the treatment of both psoriasis and severe or nodular acne. A review of initial Phase 2a trial data from 10 patients with moderate to severe psoriasis demonstrated a reduction in the psoriasis area severity index, commonly known as PASI score, by an average of 50% in patients treated with 1mg once daily for eight consecutive weeks. These PASI scores were measured at week 10, two weeks after stopping the treatment. There were no serious treatment-related adverse effects reported, while non-serious side effects experienced by this limited patient group included dryness of skin and lips.

Regulatory Strategy. Based on these data, we plan to submit an IND to the FDA and commence Phase 2b clinical trials of oral Rambazole for psoriasis in the United States during the first half of 2005. In addition, in 2005, we plan to initiate a Phase 2a clinical trial in Europe to evaluate the effectiveness of topical Rambazole in mild to moderate acne.

Azoline. Azoline is an antifungal agent that we are developing as an oral treatment for skin and mucosal fungal infections. Preclinical testing has shown Azoline to be more potent than itraconazole against dermatological fungal infections and less interactive than itraconazole with the metabolism of other drugs. We have completed a one week Phase 1 clinical trial for Azoline in two different dose strengths. The results of this trial indicate that at the doses tested, Azoline has a half-life in the body of approximately 81 hours, which is nearly three times longer than that of itraconazole. As a result, we believe that Azoline may be an effective short course oral treatment for fungal infections. In this trial, Azoline was well tolerated, with no serious drug-related adverse events reported.

We recently conducted a Phase 2a clinical trial involving 67 patients with various fungal infections of the skin. These patients were treated with 200 mg of Azoline once daily for one, three or five days. The product candidate was studied in tinea pedis, commonly known as athlete’s foot, tinea corporis, commonly known as

ring worm, tinea cruris, commonly known as jock itch, tinea versicolor and seborrheic dermatitis. In this trial, at day 28, more than three weeks after treatment, patients treated for one day demonstrated response rates of 60% and patients treated for three or five days demonstrated response rates of between 78% and 100%, depending on the skin condition treated. There were no serious treatment-related adverse effects reported. Based on this data, we plan to submit an IND to the FDA and commence Phase 2b clinical trials of Azoline in the United States during 2005.

Hivenyl. Hivenyl is an antihistamine that we are developing as an oral treatment for allergic reactions of the skin, such as the types of reactions associated with hives and those associated with poison ivy, which may not cause sedation typically associated with antihistamines. Patients experience sedation when an antihistamine crosses the blood-brain barrier. In preclinical studies in animal models, Hivenyl did not cross the blood-brain barrier. In addition, the results of two dose escalation Phase 1 clinical trials of Hivenyl suggest that Hivenyl inhibits allergic reactions, has a fast onset of action and does not cause sedation. In these trials, no cardiovascular side effects or sedation was experienced at doses of five to 15 times those that elicited an antihistamine response. We are currently conducting a Phase 2a clinical trial in Europe for Hivenyl.

Under our principal license agreements we have access to the classes of compounds claimed in the patents licensed to us in the field of dermatology. We are screening these compounds to determine if they are suitable product development candidates. Members of our management team have worked extensively with these compounds prior to the formation of our company. We also work with academic institutions and third-party laboratories to perform the screening on selected compounds.

We plan to supplement these efforts by licensing or otherwise acquiring additional compounds that we believe to be potentially superior to currently marketed products. In October 2002, we entered into an agreement with a third party to obtain an exclusive, worldwide license, with the right to grant sublicenses, under the patents and know-how related to Ecalcidene to research, develop and commercialize products containing Ecalcidene.

Ecalcidene. Ecalcidene is an orally available vitamin D₃ derivative that we are developing for the treatment of psoriasis. Based on preclinical studies conducted by third parties, we believed that Ecalcidene is active at doses that do not cause the toxic effect of hypercalcemia, which is normally seen with previous vitamin D₃ compounds. Hypercalcemia is a condition that results from an excess of calcium in the blood resulting in muscle weakness, depression, nausea, constipation and renal failure. Based on those preclinical studies, we believed that Ecalcidene may offer benefits over natural vitamin D₃ in the treatment of psoriasis and has demonstrated potential to be the first vitamin D₃ derivative that can be taken orally on a routine basis. In recent preclinical studies that we conducted, we were not able to replicate some of the results previously seen with Ecalcidene. We are currently evaluating the data from our preclinical studies in order to determine whether or not to continue the development of Ecalcidene.

One of our clinical product candidates, Atopik, is currently undergoing reformulation and will require additional preclinical evaluation. In addition, we have rights to two other products, ketanserin and oxatomide, that are marketed by third parties in some countries outside the United States and Europe which we would reformulate prior to initiating clinical trials.

Atopik. Atopik is a PDE4 inhibitor meaning that it helps prevent the body’s production of an enzyme known as PDE4 that is associated with some types of skin reactions. We are developing Atopik as a topical treatment for eczema, which is an inflammatory skin condition. In a pilot clinical study, Atopik reduced inflammatory response to stimuli that cause dermatitis. A second study conducted by us during 2004 did not show the same results. We are working on an optimized topical formulation of Atopik that seeks to minimize systemic absorption while maintaining effectiveness. We plan to complete this reformulation prior to pursuing further clinical development of this product candidate.

Ketanserin. Ketanserin is a topical serotonin 2 antagonist that an affiliate of Janssen Pharmaceutica Products, L.P. developed and markets in some countries outside the United States and Europe as a wound healing agent for the treatment of chronic skin ulcers. We plan to reformulate ketanserin prior to pursuing further clinical development for the treatment of diabetic and arterial ulcers and serious cracking of the skin. We are currently conducting a placebo-controlled pilot clinical study with ketanserin for the treatment of anal fissures.

Oxatomide. Oxatomide is a topical histamine, serotonin and leukotriene antagonist that an affiliate of Janssen Pharmaceutica Products, L.P. developed and markets in some countries outside of the United States and Europe for the prevention and treatment of allergies. In preclinical studies, a topical formulation of oxatomide demonstrated early indications of effectiveness in the treatment of pain and itch. We plan to reformulate oxatomide as a topical ointment prior to pursuing further clinical development for the treatment of itch associated with various skin conditions. We have completed an open-label pilot clinical study with oxatomide for the treatment of atopic eczema in 2004. Based upon the encouraging results of this study, we are evaluating the next steps to take in the development of this product candidate.

In May 2002, we licensed our initial portfolio of product candidates, other than Ecalcidene, and the patents and other intellectual property and know-how, test data, marketing data and other tangible property associated with those product candidates, from Janssen Pharmaceutica Products, L.P., Johnson & Johnson Consumer Companies, Inc. and Ortho-McNeil Pharmaceutical, Inc., under two similar but separate intellectual property transfer and license agreements. In September 2004, we amended these two intellectual property transfer and license agreements to provide for revised territories and exclusivity terms.

Under these license agreements, we obtained exclusive licenses to a portfolio of patents and non-exclusive licenses to related know-how to make, use and sell our initial product candidates in the field of dermatology. For purposes of the agreements, the field of dermatology includes applications for the treatment or prevention of diseases of human skin, hair, nails and oral and genital mucosa, but excludes treatments for skin cancer. We also have access to classes of compounds claimed in the patents licensed to us under the agreements, which we can screen in our search for new product candidates in the field of dermatology. If we or an affiliate of Johnson & Johnson advance one of these compounds to Phase 1 clinical development, the developing party must give notice to the other party when the developing party has initiated a Phase 1 clinical trial for the particular compound. At that point, the other party must discontinue any development or commercialization of that compound for any indication in any field for so long as the compound continues to be in active clinical development or commercialization by the developing party. In addition, neither Johnson & Johnson nor its affiliates may develop Liarozole, Rambazole, Azoline Hivenyl, Atopik and several specified preclinical candidates in any formulation for any indication in any field. In exchange for these licenses, we issued an aggregate of 8,333,333 shares of our series A convertible preferred stock to Johnson & Johnson Consumer Companies, Inc. and Janssen Pharmaceutica Products, L.P.

The following is a summary of the terms of the license agreements with respect to our existing product candidates and to any products that we may develop from the classes of compounds claimed in the patents licensed to us:

Territories and Exclusivity. The licenses are exclusive throughout most of the world, except that our right to sell the following products in the following territories is semi-exclusive with the Johnson & Johnson companies:


	•	Zimycan in Argentina, Australia, Belgium, Denmark, Germany, Indonesia, Luxembourg, Mexico, New Zealand, Peru and Venezuela; and

	•	ketanserin in South America.

In addition, we have not been granted the right to sell oxatomide in Japan, Italy, Mexico and much of Central America or ketanserin in Mexico, Central America and the Caribbean.

Commercialization and Manufacturing Rights. We have the sole right to commercialize any product candidate covered by intellectual property licensed to us under the license agreements that we elect to commercialize ourselves or with the assistance of a contract sales organization. In other circumstances, however, Johnson & Johnson, through any of its affiliates, has a right of first negotiation for the commercialization of our product candidates based on such intellectual property. The rights of first negotiation for the commercialization of our product candidates can be exercised on a territory-by-territory basis. The material elements of these rights are as follows:


	•	If we intend to commercialize any product through a third party, other than a contract sales organization, in a particular territory, we must provide notice of this intention in accordance with the provisions of the license agreements. Johnson & Johnson has 90 days after the provision of this notice to advise us if it desires to enter into a commercialization agreement for that product in that territory.

	•	If, prior to the expiration of the 90-day offer period we do not receive that notice, we may enter into a commercialization agreement with a third party for that product without further restrictions or obligations under these rights of first negotiation.

	•	If, prior to the expiration of the 90-day offer period we do receive that notice, we must negotiate exclusively for 90 days to execute a commercialization agreement.


	•	If we do not agree on a definitive agreement within the 90-day negotiation period, we may, at any time within a specified period of time after the end of the 90-day negotiation period, enter into a commercialization agreement for that product with a third party so long as the terms are not, taken as a whole, materially less favorable to us than those proposed by the Johnson & Johnson affiliate with which we were negotiating.

	•	If within the specified negotiation period, we intend to enter into a commercialization agreement with a third party with terms materially less favorable to us than those proposed by the Johnson & Johnson affiliate or, if after the specified negotiation period, we intend to enter into a commercialization agreement with a third party on any terms, then Johnson & Johnson, through any of its affiliates, is entitled to an additional 45-day offer period to express an interest in commercializing that product. If, prior to the termination of the additional 45-day offer period, Johnson & Johnson notifies us of its interest in commercializing the product, we must negotiate exclusively for 60 days to execute a commercialization agreement.


	•	If we enter into a commercialization agreement with an affiliate of Johnson & Johnson, it will have the right to negotiate a manufacturing agreement with us relating to that particular product in the territory covered by the commercialization agreement. The terms of the right of first negotiation for a manufacturing agreement are the same as the terms of the right of first negotiation for a commercialization agreement.

We triggered this right of first negotiation with respect to Sebazole, Liarozole and ketanserin by indicating our intention to commercialize these product candidates outside the United States through third-party arrangements. The 90-day offer period for these product candidates in this territory has expired. Therefore, if we receive marketing approvals, we have the exclusive right to commercialize Sebazole, Liarozole and ketanserin outside the United States, either by ourselves or with a third party, in the territories in which we hold these licenses under the license agreements. In addition, because we intend to commercialize these four product candidates in the United States ourselves, the rights of first negotiation do not apply to these product candidates in the United States. If we later decide to commercialize any of these product candidates in the United States through a third party, other than a contract sales organization, we will trigger the right of first negotiation with respect to that product candidate. In addition, we triggered this right of first negotiation with respect to Zimycan by indicating our intention to commercialize this product candidate through third-party arrangements in all territories in which we hold commercialization rights, including the United States. The 90-day offer period for Zimycan has expired. Therefore, if we receive marketing approvals,

Term and Termination. The license agreements expire on a country-by-country basis and product-by-product basis after the later of 10 years from the execution date or the expiration of the last patent included in the license agreement in the particular country. Following expiration of the license agreements with respect to a product, we receive a fully paid, royalty-free license applicable to that product in the particular country. These licenses may be terminated on a product-by-product basis, if, by dates specified in the license agreements, we are not conducting active clinical trials of the particular product or if we do not obtain regulatory approval for that product. Either of the license agreements may be terminated if we breach that agreement and do not cure the breach within 90 days or in the event of our bankruptcy or liquidation.

Royalties. The license is royalty free unless we decide to use a third party to commercialize Hyphanox, in which case we will owe a royalty based on our net sales of Hyphanox. This royalty would also apply to sales by a successor company in the event of a change of control.

Janssen Option. Janssen has an exclusive option to acquire the right to commercialize Hyphanox on a geographic region-by-region basis. We are obligated to notify Janssen if we are able to manufacture Hyphanox batches that are reproducible and bioequivalent with the Janssen melt extrusion formulation or Sporanox or if we prove clinical efficacy in subsequent Phase 3 clinical trials. Janssen has 90 days following its receipt of this notice to inform us if it wishes to exercise its option and, if so, for which territories. If Janssen exercises its option, we will enter into a license agreement in a form that we have already negotiated pursuant to which Janssen will become obligated to:


	•	pay us an up-front license fee and a regulatory milestone payment;

	•	reimburse us for our reasonable development costs related to Hyphanox; and

	•	pay us a royalty on net sales of Hyphanox, including a provision for minimum royalties by territory.

As described elsewhere in this prospectus, because the data from our bioequivalence study of Hyphanox relative to Sporanox indicate that the bioavailability of Hyphanox relative to Sporanox is slightly above the upper limit of the regulatory range for bioequivalence, the study did not demonstrate their bioequivalence. As a result, our bioequivalence study did not trigger this option. However, this option may be triggered if any other study we conduct demonstrates bioequivalence or if our Phase 3 clinical trials for Hyphanox demonstrate clinical efficacy.

We retain the right to commercialize Hyphanox in each of the territories of the world for which Janssen does not exercise its option. If we commercialize Hyphanox through a licensee or sublicense in any country in which we retain commercialization rights, we are obligated to pay Janssen a royalty on our net sales of Hyphanox. If we distribute Hyphanox ourselves or use a contract marketing or sales organization to distribute Hyphanox in any country in which we retain commercialization rights, we are not required to pay Janssen a royalty. If we do not enter into a commercialization agreement with a third party during a specified period following the 90-day period after we provide the notice to Janssen described above, Janssen is entitled to specified rights of first negotiation.

In May 2002, we entered into a development and supply agreement with Abbott GmbH & Co. KG under which Abbott agreed to assist us in developing an itraconazole product using Abbott’s proprietary melt extrusion manufacturing process. Pursuant to the agreement, we are required to pay agreed upon development costs and fees to Abbott. In addition, the agreement provides that as soon as reasonably possible after we submit an NDA for Hyphanox, we will enter into a supply agreement with Abbott under which Abbott will be our sole supplier and

manufacturer of Hyphanox. Under the terms of the supply agreement, Abbott will be required to manufacture the itraconazole melt extrudate used in the manufacture of Hyphanox exclusively for us or our designee.

In November 2004, we entered into a distribution and license agreement with Grupo Ferrer Internacional, S.A. The agreement provides for Grupo Ferrer to be our exclusive marketer and distributor of our Zimycan, Sebazole, Liarozole and ketanserin product candidates in several countries throughout Europe, Latin America and Africa. In addition to marketing and distributing the products, Grupo Ferrer will assist us in obtaining regulatory approvals for the products in the territories.

Under the agreement, we will receive our primary revenues from the sale of finished products to Grupo Ferrer. The agreement also provides for an initial fee of €500,000, or approximately $650,000, and we may receive up to an additional €600,000, or approximately $780,000, based on the achievement of certain regulatory and sales milestones.

The distribution and license agreement expires on a country-by-country basis and product-by-product basis after the later of 10 years from the date of the first commercial sale with respect to a product or the expiration of the last patent covering the product in the particular country. Following the expiration of the agreement with respect to a product in a particular country, Grupo Ferrer’s right to distribute and manufacture the product will become non-exclusive and royalty-free. If, following expiration, Grupo Ferrer desires to continue to utilize any of our trademarks, it could do so for a nominal royalty.

Patent Protection and Intellectual Property; Orphan Drug; Hatch-Waxman Act; Pediatric Treatment Exclusivity

We are pursuing a number of methods to establish and maintain market exclusivity for our product candidates, including seeking patent protection for our product candidates, the use of statutory market exclusivity provisions and otherwise protecting our intellectual property.

Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Our patent portfolio includes patents and patent applications with claims directed to the active ingredients, pharmaceutical formulations, methods of use and methods of manufacturing of a number of our product candidates. We include a discussion of our proprietary rights related to each of our later stage products and the applicable limitations to our rights in the discussion of those products elsewhere in this “Business” section and in the “Risk Factors” section.

United States patents issuing from patent applications filed on or after June 8, 1995 have a term of twenty years from the earliest claimed priority date. For United States patents in force on or after December 8, 1994 that issued from applications filed before June 8, 1995, the term is the greater of twenty years from the earliest claimed priority date or seventeen years from the date of issue.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products

or the length of term of patent protection that we may have for our products. In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The FDA and the Commission for the European Community have granted Liarozole orphan drug status for the treatment of congenital ichthyosis. The FDA grants orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. In the United States, orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Also, competitors may receive approval of different drugs or biologics for the indications for which the orphan product has exclusivity.

Under European Union medicines laws, criteria for designation as an “orphan medicine” are similar but somewhat different from those in the United States. Orphan medicines are entitled to ten years of market exclusivity, except under certain limited circumstances comparable to United States law. During this period of market exclusivity, no “similar” product, whether or not supported by full safety and efficacy data, will be approved unless a second applicant can establish that its product is safer, more effective or otherwise clinically superior. This period may be reduced to six years if the conditions that originally justified orphan designation change or the sponsor makes excessive profits.

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

supplemental NDAs, for example, for new indications, dosages, or strengths of an existing drug, if new clinical investigations are essential to the approval. This three year exclusivity covers only the new changes associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient.

The Hatch-Waxman Act also permits a patent extension term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and it must be applied for prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for patent term extension. We are considering applying for patent term extensions for some of our current patents, to add patent life beyond the expiration date, depending on the expected length of clinical trials and other factors involved in the filing of a new drug application.

The Best Pharmaceuticals for Children Act signed into law January 4, 2002, provides an additional six months of marketing exclusivity for new or marketed drugs for specific pediatric studies conducted at the written request of the FDA. On December 3, 2003, President Bush signed the Pediatric Research Equity Act of 2003, or PREA, into law, authorizing the FDA to require pediatric studies for drugs to ensure the drugs’ safety and efficacy in children. PREA requires that new NDAs or supplements to NDAs contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant deferrals for submission of data, or full or partial waivers from PREA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication with orphan designation.

We have no experience in, and we do not own any facilities for, manufacturing products or our product candidates. We have relied and will continue to rely on third-party contract manufacturers to produce sufficient quantities of our product candidates for use in our preclinical studies and clinical trials. Except as described below, we are not obligated to obtain our product candidates from any particular third-party contract manufacturer, and we believe that we would be able to obtain our product candidates from a number of third-party manufacturers at comparable cost.

If any of our product candidates are approved, we plan to rely on third-party contract manufacturers to produce sufficient quantities for large scale commercialization. Johnson & Johnson and its affiliates has a right of first negotiation for the manufacture of our product candidates in some circumstances, the terms of which are described above under the caption “—Johnson & Johnson License Agreements.” If we do enter into manufacturing arrangements with third parties, these contract manufacturers will be subject to extensive governmental regulation. Regulatory authorities in the markets which we intend to serve require that drugs be manufactured, packaged and labeled in conformity with current Good Manufacturing Practices, or cGMPs. In this regard, we plan to engage only contract manufacturers who have the capability to manufacture drug products in compliance with cGMPs in bulk quantities for commercialization.

Our product candidates include both oral and topical formulations and are produced through a variety of manufacturing processes of varying degrees of difficulty. For example, Zimycan is produced through a fairly common process, which combines miconazole in a zinc oxide and petrolatum base, while Hyphanox is manufactured as a tablet using a proprietary melt extrusion process that is currently only available through our development agreement with a contract manufacturer. The active pharmaceutical ingredients of three of our later stage product candidates are generic and are currently available from a number of suppliers. The active

pharmaceutical ingredient of Liarozole and a number of our earlier stage clinical candidates are proprietary. We are currently in the process of negotiating contracts with third parties to develop and supply us with these active pharmaceutical ingredients as well as finished products on commercial scale.

We currently have no sales or distribution capabilities and limited marketing capabilities. However, we have a Chief Commercial Officer with significant experience in sales and marketing roles at large pharmaceutical companies. We have also hired, and plan to continue to hire, additional experienced, qualified employees to our commercial team. In addition, we contracted with a third party for logistics and distribution services. In order to commercialize any of our product candidates, we must either continue to internally develop or acquire sales, marketing and distribution capabilities, or make arrangements with third parties to perform these services for us.

In the United States and Canada, we plan to build our own sales force to market our product candidates that receive marketing approval directly to dermatologists and other target physicians. The dermatological medical communities in the United States and Canada are relatively small. We believe that we can best serve this discrete target physician market with a focused, specialty sales force. We believe that by developing our own sales force, we can control marketing efforts more effectively and obtain better access to the physicians that we target. We are, however, engaged in discussions with parties who could provide sales and distribution services for us as a contract sales organization until we are able to build our sales force or until we have sufficient products to market in the United States. If we initially use a contract sales organization, we may transition the contract sales organization into a proprietary sales force. In general, should we decide to enter into third-party distribution arrangements and marketing alliances for the marketing and sale of any of our later stage product candidates in the United States, we would first need to trigger the right of first negotiation with respect to any such product as further described under the caption “—Johnson & Johnson License Agreements.” In addition, we have entered into an agreement with a third party to distribute, if approved, our Zimycan product candidate to health care institutions in the United States and Canada.

We intend to market our products globally. We have entered into third-party distribution arrangements and marketing alliances for some of our later stage product candidates with potential collaborators and distributors for the major countries outside the United States and Canada in addition to less significant markets. In addition to the agreement with Grupo Ferrer described above, we have distribution agreements for Zimycan for the United Kingdom, Ireland, Israel, Turkey, the territories administered by the Palestinian Authority and Scandinavia. We plan to enter into similar third-party distribution arrangements and marketing alliances for our other products when and if we determine that these products have progressed to later stages of development.

Government authorities in the United States, at the federal, state, and local level, and foreign countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and export of our proposed products. All of our products will require regulatory approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, safety, labeling, storage and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent substantial compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act and implementing regulations. If we fail to comply with the applicable requirements at any time during the

product development process, approval process, or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of our operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on us.


Delaware	2834	22-3828030
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification Number)


Common stock offered by Barrier		2,000,000 shares

Common stock offered by the selling stockholders		2,000,000 shares

Common stock to be outstanding after this offering		23,894,830 shares

Over-allotment option offered by us		600,000 shares

Use of proceeds		For advancing our product candidates through preclinical studies and clinical trials, the commercialization of our product candidates, if and when approved, and general corporate purposes, including working capital needs and potential product acquisitions or in-licensing opportunities. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

NASDAQ National Market symbol		BTRX


				Period From															Period From
				September 17,															September 17,
				2001									Nine Months Ended						2001
				(inception) to			Year Ended December 31,						September 30,						(inception) to
				December 31,															September 30,
				2001			2002			2003			2003			2004			2004

													(unaudited)			(unaudited)			(unaudited)

				(in thousands, except share and per share data)
Consolidated Statement of Operations Data:
Revenues:
	Contract revenue			$	—		$	—		$	—		$	—		$	25		$	25
	Grant revenue				—			—			367			203			556			923

			Total revenues		—			—			367			203			581			948

	Operating expenses:
		Research and development			—			3,542			17,485			11,439			20,055			41,082
		Sales and marketing			—			—			—			—			2,719			2,719
		General and administrative			20			1,532			3,730			2,373			5,148			10,430
		In-process research and development			—			25,000			—			—			—			25,000

			Total operating expenses		20			30,074			21,215			13,812			27,922			79,231

Loss from operations					(20	)		(30,074	)		(20,848	)		(13,609	)		(27,341	)		(78,283	)
Interest income					—			275			419			267			933			1,627
Interest expense					(1	)		(5	)		(3	)		—			(22	)		(31	)

Loss before income tax benefit					(21	)		(29,804	)		(20,432	)		(13,342	)		(26,430	)		(76,687	)
Income tax benefit					—			—			217			—			—			217

Net loss					(21	)		(29,804	)		(20,215	)		(13,342	)		(26,430	)		(76,470	)
Preferred stock accretion					—			(3,392	)		(8,432	)		(5,376	)		(4,592	)		(16,417	)

Net loss attributable to common stockholders				$	(21	)	$	(33,196	)	$	(28,647	)	$	(18,718	)	$	(31,022	)	$	(92,887	)

Basic and diluted net loss per share							$	(240.75	)	$	(83.95	)	$	(60.90	)	$	(2.51	)

Weighted average shares used in computing basic and diluted net loss per share								137,889			341,256			307,377			12,357,817



	As of
	September 30, 2004

	Actual			As Adjusted


	(unaudited)

	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	100,646		$	137,506
Working capital		95,776			132,636
Total assets		103,991			140,851
Deficit accumulated during the development stage		(92,887	)		(92,887	)
Total stockholders’ equity		96,414			133,274


2004	High		Low

Second quarter (commencing April 29, 2004)	$	15.75	$	10.86
Third quarter	$	15.00	$	8.50
Fourth quarter	$	18.11	$	11.70


Steven M. Cohen, Esq. Joanne R. Soslow, Esq. Morgan, Lewis & Bockius LLP 502 Carnegie Center Princeton, New Jersey 08540 (609) 919-6600		David E. Redlick, Esq. Stuart R. Nayman, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 399 Park Avenue New York, New York 10022 (212) 230-8800


	Page

Prospectus Summary		1
Risk Factors		7
Special Note Regarding Forward-Looking Statements		25
Use of Proceeds		26
Price Range of Common Stock		26
Dividend Policy		26
Capitalization		27
Dilution		28
Selected Financial Data		29
Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Business		41
Management		67
Certain Relationships and Related Party Transactions		82
Principal and Selling Stockholders		85
Description of Capital Stock		89
Underwriters		92
Legal Matters		95
Experts		95
Where You Can Find More Information		95
Index to Consolidated Financial Statements		F-1


	*Various aspects of our Johnson & Johnson license agreements may adversely affect our business.*


	•	cost-effective; and

	•	neither experimental nor investigational.


2005

First quarter (through January 31, 2005)	$	21.25	$	15.65


Assumed public offering price per share				$	19.98
	Net tangible book value per share as of September 30, 2004	$	4.42
	Increase per share attributable to new investors		1.17

Pro forma net tangible book value per share after this offering					5.59

Dilution per share to new investors				$	14.39



	As of									As of
	December 31									September 30,

	2001			2002			2003			2004

										(unaudited)
	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	89		$	18,144		$	53,776		$	100,646
Working capital		62			17,475			51,682			95,776
Total assets		107			19,296			56,971			103,991
Deficit accumulated during the development stage		(21	)		(33,217	)		(61,865	)		(92,887	)
Total stockholders’ (deficit) equity		(20	)		(33,198	)		(61,534	)		96,414


	*Nine Months Ended September 30, 2004 and September 30, 2003*



		Payments Due by Period

						One to		Four to
				Remainder		Three		Five		After Five
Contractual Obligation		Total		of 2004		Years		Years		Years

Lease obligations		$	3,378,000	$	128,000	$	1,658,000	$	1,154,000	$	438,000
Other contractual obligations			14,985,000		5,321,000		8,164,000		1,500,000		—

	Total	$	18,363,000	$	5,449,000	$	9,822,000	$	2,654,000	$	438,000


	Active Ingredients or	Method of			Stage of
Product	Class of Molecule	Administration		Indications	Development

Zimycan	miconazole		Topical	diaper dermatitis complicated by candidasis	NDA filed MRP-Europe-ongoing

Sebazole	ketoconazole		Topical	seborrheic dermatitis	Phase 3-complete

Hyphanox	itraconazole		Oral	vaginal candidiasis onychomycosis	Phase 3-ongoing Phase 3-planned

Liarozole	RAMBA class		Oral	congenital ichthyosis	Phase 2/3-planned

Rambazole	RAMBA class		Oral	psoriasis nodular acne	Phase 2a-ongoing Phase 2a-ongoing

Rambazole	RAMBA class		Topical	dermatological indications	Phase 2a-planned

Azoline	triazole antifungal		Oral	fungal infections	Phase 2a-complete

Hivenyl	H1 antihistamine		Oral	dermatological indications	Phase 2a-ongoing


	Overall Cure Rates at Day 14
	(7 Days after the End of
	Treatment)

Zimycan		23	%
Vehicle		10	%
p-value		.00	5



	Percentage of Patients Effectively Treated at Day 28
	(14 Days after the End of Treatment)

Study (location)	Sebazole			Vehicle			p-value

Pivotal (United States)		26	%		14	%		0.001
Supportive (United States)		28	%		7	%		1/40.001
Supportive (Europe)		37	%		22	%		0.021