As filed with the Securities and Exchange Commission on August 17,November 16, 2007

Registration No. 333-            333-145552

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Insys Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

10220 South 51st Street, Suite 2

Phoenix, AZ 85044-5231

(602) 910-2617

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

Jon W. McGarity

President and Chief Executive Officer

Insys Therapeutics, Inc.

10220 South 51st Street, Suite 2

Phoenix, AZ 85044-5231

(602) 910-2617

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

Approximate date of commencement of proposed sale to the public:

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

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

The information in this preliminary prospectus is not complete and may be changed. We may not sell or accept an offer to buy the securities under this preliminary prospectus 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 an offer to buy these securities in any state where such offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST 17,Subject to Completion, Dated November 16, 2007

Prospectus

                     Shares

Insys Therapeutics, Inc.

Common Stock

Insys Therapeutics, Inc. is offering              shares of common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $             and $             per share. After the offering, the market price for our shares may be outside this range.

We have applied to list our common stock on the Nasdaq Global Market under the symbol “INRX.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8.

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

We have granted to the underwriters an option to purchase up to              additional shares of common stock on the same terms and conditions as set forth above if the underwriters sell more than              shares of common stock in this offering. The underwriters can exercise this right at any time and from time to time, in whole or in part, within 30 days after the offering. The underwriters expect to deliver the shares of common stock to investors on or about                     , 2007.

UBS Investment Bank

                    , 2007

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

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RISK FACTORSRisk factors

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our BusinessRISKS RELATED TO OUR BUSINESS

We have a limited operation history and have not generated any revenues from our product candidates and may never become profitable.

We are a development-stage company with a limited operating history. We have incurred substantial net operating losses since our inception. We have financed our operations through loans from a trust controlled by our chairman, John N. Kapoor, and have incurred losses in each year since our inception in October 2002. For the sixnine months ended JuneSeptember 30, 2007 and the year ended December 31, 2006, we had net losses of approximately $5.8$10.7 million and $7.0 million, respectively. As of JuneSeptember 30, 2007, we had an accumulated deficit of approximately $17.6$22.5 million. These losses, combined with expected future losses, have had and will continue to have a material and adverse effect on our stockholders’ equity and working capital. Our ability to become profitable depends upon our ability to generate significant continuing revenues. To obtain significant continuing revenues, we must succeed, either alone or with others, in developing, obtaining regulatory approval for and manufacturing, selling and marketing, our Dronabinol HG capsule and other dronabinol product candidates, our Fentanyl SL spray product candidate and our other product candidates. We expect to continue to incur significant operating expenses for the next few years as we pursue the pre-clinical and clinical development, regulatory approval and potential market launch of our dronabinol product candidates, build an internal sales force and marketing infrastructure to market and sell our products, and increase general and administrative expenses to comply with public company reporting requirements.

To date, our product candidates have not generated any revenues, and we do not know when, or if, we will generate any revenue. Our ability to generate revenue depends on a number of factors, including, but not limited to:

Because of the numerous risks and uncertainties associated with our development efforts and other factors, we are unable to predict when we will generate revenues become profitable, if ever. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

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Risk factors

If our competitors develop treatments for pain management or nausea and vomiting, especially other synthetic cannabinoid derivatives or specialized opioid delivery systems, that are approved more quickly, marketed more effectively or demonstrated to be safer or more effective than our product candidates, our commercial opportunities will be reduced or eliminated.

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources, including pharmaceutical and biotechnology enterprises, academic institutions, government agencies and private and public research institutions, many of which have significantly greater financial and other resources than us. In addition, the generic pharmaceutical industry in which we operate is competitive in part because the products that are sold do not benefit from patent protection. If any of our product candidates receive the requisite regulatory approval and classification and are marketed, the competition which we will encounter will have an effect on our product prices, market share, revenues and profitability. We may not be able to differentiate any products that we are able to market from those of our competitors, successfully develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors.

The indications for which we are developing products have a number of established therapies and products already commercially available as well as a number under development by other companies with which our product candidates will compete. In the treatment of nausea and vomiting associated with cancer chemotherapy, physicians typically offer a conventional antinausea agent prior to initiating chemotherapy, such as substance P antagonists, fenatonin receptor antagonists, corticosteriods and phenothiazines. If we receive regulatory approvals for our dronabinol product candidates, they will compete against these agents, as well as Solvay Pharmaceutical, Inc.’s Marinol and Valeant Pharmaceutical Inc.’s Cesamet. In addition, although there are no generic versions of Marinol which have been approved by the U.S. Food and Drug Administration, or FDA, to date, we believe that other companies, which likely have significantly more resources than us, are pursuing regulatory approval for generic dronabinol products, and we cannot give any assurance that any such other companies will not obtain regulatory approval or commercialize their generic dronabinol products on a more rapid timeline or more comprehensively or successfully than us. Moreover, as generic versions of drug products enter the market, the price for such drugs declines rapidly and substantially. Even if we are the first to obtain FDA approval of a generic dronabinol product, approval of subsequent generics will immediately and adversely affect the price we are able to charge and the profitability of our product will decline. Moreover, we will compete with non-synthetic cannabinoid drugs and therapies such as GW Pharmaceuticals plc’s Sativex^®, especially in many countries outside of the United States where non-synthetic cannabinoids are legal. We also cannot assess the extent to which patients utilize natural cannabis (marijuana) to alleviate cancer chemotherapy nausea and vomiting, instead of using prescribed therapies such as our dronabinol products. The label we are seeking for Dronabinol HG capsule is for use in treating nausea and vomiting associated with cancer chemotherapy when conventional treatments fail and we expect our dronabinol product candidates to be used primarily as second-line treatments prescribed only after earlier treatment alternatives fail. In the breakthrough cancer pain market, physicians typically treat breakthrough cancer pain with a variety of short-acting opioid medications, including morphine, morphine and codeine derivatives, and fentanyl. If we receive regulatory approvals for our Fentanyl SL spray product candidate, it will likely compete against numerous products already in the market and in developments such as Cephalon Inc.’s Fentora, Actiq and its generic alternatives from Barr Pharmaceuticals, Inc. and Watson Pharmaceuticals, Inc. In addition, we are aware of numerous companies developing other treatments and technologies for rapid delivery of opioids to treat breakthrough pain, including transmucosal, transdermal, nasal spray, inhaled delivery systems and

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sublingual delivery systems, among others. For instance, BioDelivery Sciences International recently submitted an NDA for transmucosal fentanyl for the treatment of breakthrough cancer pain. If these technologies are successfully developed and approved over the next few years, they could represent significant competition for our Fentanyl SL spray product candidate, if approved.

New developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical and life sciences industries at a rapid pace. These developments may render our product candidates obsolete or noncompetitive. Compared to us, many of our potential competitors have substantially greater:

As a result of these and other factors, our competitors may obtain FDA approval or DEA classification of their products more rapidly than us or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop products for the treatment of pain management, nausea and vomiting or other indications we pursue that are more effective, better tolerated, subject to fewer or less severe side effects, more useful, more widely prescribed or accepted, or less costly than ours. Our competitors may succeed in obtaining approvals or classifications from the FDA, the DEA and foreign regulatory authorities for their product candidates sooner than we do for ours or in a manner that is more favorable than ours, and may also be more successful in manufacturing and marketing their products. If we receive regulatory approvals for our products, manufacturing and sales and marketing efficiency are likely to be significant competitive factors. Our plan is to develop a targeted internal sales force and marketing infrastructure without using third party sale or marketing channels in the United States, and there can be no assurance that we can develop these capabilities in a manner that will be competitive with the sales and marketing efforts of our competitors, especially since some or all of those competitors will expend greater economic resources than we and/or employ third party sales and marketing channels.

We will also face competition from third parties in obtaining allotments of dronabinol and fentanyl under applicable DEA quotas, recruiting and retaining qualified personnel, establishing clinical trial sites and subject enrollment for clinical trials, and in identifying and in-licensing new products and product candidates.

Our short operating history and the recent additions to our management team of many of our officers make it difficult to evaluate our business and prospects.

We were incorporated in October 2002 and commenced our product development activities in 2002. Our operations to date have been limited to organizing and staffing our company and conducting product development activities for our product candidates. We have not yet demonstrated an ability to obtain regulatory approval for or commercialize a product candidate. In addition, most members of our management, including our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Medical Officer, Chief Scientific Officer, Vice President of Business Development and Strategic Alliances and Director of Regulatory Affairs, only joined us in 2007. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successful development and commercialization of pharmaceutical products or if our management team had been with us for a longer period of time.

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Risk factors

We will need to increase the size of our organization and we may experience difficulties in managing growth.

Our management and personnel, systems and facilities currently in place may not be adequate to support our business plan and future growth. As of AugustSeptember 2007, we had 1718 full-time employees. In addition, we have engaged part-time consultants to assist us with regulatory submissions, statistical analysis, clinical research site review and protocol design. We have been building our management team largely in the past several months while transitioning from our Illinois facility to our new Phoenix, AZ headquarters facility. Most members of

management only joined us in 2007. Moreover, in August 2007, we expanded our board of directors to include four independent directors, for a total of seven board members. We will need to further expand our managerial, operational, financial and other resources, and build a sales force and marketing infrastructure, in order to manage and fund our operations and clinical trials, continue our research and development activities, and commercialize our product candidates.

Our need to effectively manage our operations, growth and various projects requires that we:

To date,In addition, historically, we have utilized the services of part-time outside vendorsconsultants to perform a wide range of tasks for us, including tasks related to accounting and finance, clinical trial management, statistics and analysis, regulatory affairs, formulation development, stability analysis and other drug development functions. With the hiring of additional employees which has allowed us to handle many of those tasks internally, we currently engage a limited number of such consultants to assist with various discrete projects. For example, in addition to the advice given by our scientific advisory board, consultants are utilized for tasks such as statistician services, pharmacokinetic data analysis and many accounting, book-keeping and administerial services. Our growth strategy may also entail expanding our group of contractors or consultants to implement these and other tasks going forward. Because we rely on a substantial number of consultants effectively outsourcing many keyfor certain functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is or has been compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may be unable to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.

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Risk factors

If we fail to attract and keep management and other key personnel, we may be unable to successfully develop or commercialize our product candidates.

Our success depends on our continued ability to attract, retain and motivate highly qualified management and key clinical development, regulatory, sales and marketing and other personnel. We are highly dependent on the development, regulatory, commercial and financial expertise of our executive officers, most of whom joined us in 2007. The loss of the services of any of our executive officers could delay or prevent the commercialization of our product candidates. If we lose any members of our senior management team, we may not be able to find suitable replacements on a timely basis or at all, and our business may be harmed as a result. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ all of our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and without notice.

We may not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the Phoenix, AZ area where we are in the process of relocating our primary operations. Our industry has experienced a high rate of turnover of management personnel in recent years. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts. If we are not able to attract and retain the

necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any of our executive officers, we may not be able to find suitable replacements and our business may be harmed as a result.

We have scientific and clinical advisors who assist us in formulating our development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

If we fail to successfully develop, identify and acquire or in-license additional products or product candidates, we may have limited growth opportunities.

In addition to our dronabinol, Fentanyl SL spray and other existing product candidates, as resources allow and opportunities present themselves, we intend to develop a pipeline of new products or product candidates through acquisition or in-licensing. The success of this strategy will depend upon our ability to identify, select and acquire or in-license pharmaceutical products or product candidates.

The process of proposing, negotiating and implementing the acquisition or in-license of a product or product candidate is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for these products or product candidates. We have limited resources to identify and execute acquisition or in-licensing transactions. Even if we acquire or in-license additional products or product candidates, we have limited resources to integrate the acquired or licensed assets into our current infrastructure. In addition, we may devote resources to potential acquisition or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts after expenditure of considerable time and resources. We may not be able to acquire the rights to additional products or product candidates on terms that we find acceptable, or at all.

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Risk factors

Future acquisition and in-licensing transactions may entail numerous operational and financial risks including:

Product candidates that we acquire or in-license will likely require additional development efforts prior to commercial sale, including product development, extensive clinical testing and approval by the FDA and other applicable regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe or effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products or product candidates that we acquire or in-license will be manufactured profitably or achieve market acceptance.

We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. Additional potential transactions we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships,

joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial results.

We may incur substantial liabilities from any product liability claims if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability exposure related to the testing, manufacturing and marketing of our product candidates in human clinical trials, and will face an even greater risk if we sell our product candidates commercially. Common adverse events for dronabinol products include: abdominal pain, nausea, vomiting, dizziness, euphoria, paranoid reaction, somnolence, abnormal thought patterns, or difficulty with concentration/attention. Common adverse events for fentanyl products include: nausea, dizziness, somnolence, vomiting, asthenia or lack of energy and strength and anxiety. An individual may bring a liability claim against us if one of our product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

Risk factors

We have obtained product liability insurance coverage for our clinical trials with a $3,000,000 per occurrence and $3,000,000 aggregate limit. Our insurance coverage 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, in sufficient amounts or upon adequate coverage terms to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if regulatory approval is obtained for any of our product candidates. However, we may be unable to obtain this product liability insurance on commercially reasonable terms or with insurance coverage that will be adequate to satisfy any liability that may arise. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects, including side effects which are less severe than those of our product candidates. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

Currency exchange rate fluctuations may increase our costs.

The exchange rate between the U.S. dollar and non-U.S. currencies in which we conduct our business have and will likely fluctuate in the future. Any appreciation in the value of these non-U.S. currencies would result in higher expenses for our company. We do not have any hedging arrangements to protect against such exchange rate exposures.

Import/export regulations and tariffs may change and increase our costs.

We are subject to risks associated with the regulations relating to the import and export of products and materials. In particular, for dronabinol, we and our dronabinol supplier, Austin Pharma, obtain the two chemicals that are used as starting materials for its production from suppliers in India. We cannot predict whether the import and/or export of our products will be adversely affected by changes in, or enactment of new quotas, duties, taxes or other charges or restrictions imposed by India or any other country in the future. Any of these factors could have a material adverse effect on our operating costs.

Risks RelatedSince the two starting materials we utilize to Development, Testingmanufacture dronabinol are sourced out of India, we are exposed to a number of risks and Commercializationuncertainties associated with that geographic region.

The suppliers of Our Productsthe two starting materials we utilize to manufacture dronabinol are located in India. This exposes us to a number of risks and uncertainties outside our control. India has suffered political instability in the past due to various factors including the failure of any party to win an absolute majority in the Indian Parliament for several years. There have also been armed conflicts between India and neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Western interests. In addition, India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries such as Pakistan, targeting of our interests by extremist attacks, and earthquakes or other natural disasters in India could harm our operations and impede our ability to produce dronabinol and complete our clinical trials on our anticipated timeline, or at all.

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RISKS RELATED TO DEVELOPMENT, TESTING AND COMMERCIALIZATION OF OUR PRODUCTS

We are highly dependent on the success of our dronabinol and Fentanyl SL spray product candidates, and we cannot give any assurance that any of these product candidates will receive regulatory approval or be successfully commercialized.

We are a development stage biopharmaceutical company and do not have internal new drug discovery capabilities. To date, we have not successfully developed any marketable products, and have focused on improved formulations and delivery methods for existing FDA approved products, particularly dronabinol and fentanyl. We are highly dependent on the success of our dronabinol and Fentanyl SL spray product candidates, and we cannot give you any assurance that we will obtain regulatory approval for any of these product candidates or that any of these product candidates will be successfully commercialized.

In particular, we are highly dependent on Dronabinol HG capsule, which we intend to be a generic formulation of Marinol. We submitted an ANDA, for Dronabinol HG capsule to the FDA in September 2006. To date, the FDA has not approved a generic version of Marinol, the composition of matter patent for which has expired. Synthetic dronabinol in any form other than the specific sesame oil soft gelatin capsule dosage form of Marinol as approved by the FDA is a Schedule I controlled substance, and thus may not be commercially marketed. Therefore, we have petitioned the DEA to classify Dronabinol HG capsule, if approved by the FDA, as a Schedule III substance to be consistent with the Schedule III classification for Marinol. On September 24, 2007, the DEA published a proposed rule which would classify certain capsule and tablet formulations of natural (derived from plant material) or synthetic dronabinol in Schedule III if such products are subject to an approved ANDA. By definition, this proposed rule would include our Dronabinol HG capsules and Dronabinol RT capsules. Although we believe that there would be no basis for the DEA to schedule our Dronabinol HG capsules or Dronabinol RT capsules differently than Marinol and this proposed rule may provide insight regarding the DEA evaluation of these product candidates, the DEA may reach a different conclusion.ultimate conclusion when classifying them. We cannot assure you that the FDA will approve our ANDA for Dronabinol HG capsules or that the DEA will classify our Dronabinol HG capsules and Dronabinol RT capsules will be classified as a Schedule III substance,substances, in the timeline that we currently anticipate, or at all.

We are also highly dependent on the success of our other dronabinol product candidates, including Dronabinol RT capsule, Dronabinol RT syrup and Dronabinol RT nebulizer, and our Fentanyl SL spray product candidate. In addition to FDA approval for each of these other product candidates, the DEA will be required to schedule each dronabinol product before it may be commercially marketed. If we are successful in having the DEA classify Dronabinol HG capsule as a Schedule III substance, we believe that the same classification would likely be applied to Dronabinol RT capsule. We plan to petition the DEA to classify each of our dronabinol products as Schedule III substances. However, because our Dronabinol RT syrup and Dronabinol RT nebulizer will, if approved, represent new delivery methods for dronabinol, the DEA may determine that the stricter controls of Schedule II are appropriate for those products. All currently approved fentanyl products are classified as Schedule II substance and we expect our fentanyl products will be classified as a Schedule II substance as well.

Our business strategy is to generate revenue from the sale of Dronabinol HG capsules to offset the development costs of our other product candidates, submit and obtain FDA regulatory approvals and the appropriate DEA classification for our other product candidates, develop an internal sales force and marketing infrastructure to sell any products that we successfully develop and expand the market for the medical use of dronabinol. If we are unable to develop, receive approval and the appropriate classification for, develop sales and marketing capabilities for, successfully commercialize these product candidates, or successfully expand the market for the medical use of dronabinol, in the sequence and on the timeline we anticipate, we will not be able to execute our business strategy effectively and our ability to generate revenues will be limited.

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We may experience delays in the commencement of our pre-clinical studies and clinical trials, which could result in increased costs to us and delay or limit our ability to pursue regulatory approval.

Delays in the commencement of pre-clinical and clinical testing of our product candidates could significantly impact our product development costs and business plan. We do not know whether our anticipated pre-clinical studies or clinical trials of Dronabinol RT syrup, Dronabinol RT nebulizer or Fentanyl SL spray, or any of our other pre-clinical studies or clinical trials, will begin or be conducted on our anticipated timeline, or at all. The commencement of clinical trials in particular can be delayed for many different reasons, including delays:

Any delays in the commencement of our pre-clinical studies or clinical trials will delay our ability to pursue regulatory approval for our product candidates and adversely affect our ability to execute on our business plan and anticipated product development timeline. In addition, many of the factors that cause, or lead to, a delay in the commencement of clinical trials may also ultimately prevent regulatory approval of a product candidate.

Clinical trials for our product candidates are expensive, time consuming, uncertain and susceptible to change, delay or termination.

Clinical trials are very expensive, time consuming and difficult to design and implement. Even if the results of our clinical trials are favorable, we estimate that the clinical trials of our most advanced product candidates will continue for several years and may take significantly longer than expected to complete. In addition, we, the FDA, an IRB or other regulatory authorities may suspend, delay or terminate our clinical trials at any time, or the DEA could suspend or terminate the registrations and quota allotments we require in order to procure and handle controlled substances, for various reasons, including:

Risk factors

There is typically a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in our clinical trials similar to a number of other companies in the pharmaceutical and biotechnology industries that have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If we abandon or are delayed in our clinical development efforts related to our dronabinol, Fentanyl SL spray or any other product candidate, we may not be able to generate sufficient revenues or obtain financing to continue our operations or become profitable, we may not be able to execute on our business plan effectively, our reputation in the industry and in the investment community would likely be significantly damaged and our stock price would likely decrease significantly.

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Risk factors

The results of pre-clinical studies and clinical trials are not necessarily predictive of future results, and our current product candidates may not have favorable results in later studies or trials.

Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. Favorable results in our early studies or trials may not be repeated in later studies or trials, including continuing pre-clinical studies and large-scale clinical trials, and our product candidates in

later stage trials may fail to show desired safety and efficacy despite having progressed through earlier trials. In particular, pre-clinical data and the limited clinical results that we have obtained for Dronabinol RT syrup and Fentanyl SL spray may differ from results from studies in larger numbers of subjects drawn from more diverse populations treated for longer periods of time. They also may not predict the ability of the product candidates to achieve or sustain the desired effects in the intended population or to do so safely. Unfavorable results from ongoing pre-clinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials. In addition, we may report top-line data from time to time, which is based on a preliminary analysis of key efficacy and safety data, and is subject to change following a more comprehensive review of the data related to the applicable clinical trial. Any of our planned later stage clinical trials may not be successful for a variety of reasons, including the clinical trial designs, the failure to recruit or enroll a sufficient number of suitable subjects, undesirable side effects and other safety concerns, and the inability to demonstrate efficacy or safety.

Many of our research and development programs are in early stages of development and may not result in the commencement of clinical trials.

Many of our research and development programs are in the early stages of development. For example, we are in the process of designing pre-clinical studies for our Dronabinol RT nebulizer. We are also developing additional product candidates for which we have not designed or commenced pre-clinical studies or clinical trials, including other dronabinol line extensions, dronabinol combination products, fentanyl line extensions and derivatives of morphine-6-O sulfate and buprenorphine microspheres. The process of developing product candidates requires the commitment of a substantial amount of our technical, financial and personnel resources and is unpredictable. We may not discover additional product candidates with therapeutic potential and any of the product candidates for which we are conducting pre-clinical studies may not result in the commencement of clinical trials. We cannot be certain that results sufficiently favorable to justify commencement of Phase 1 studies will be obtained in pre-clinical investigations. If we are unable to identify and develop new product candidates and advance them to clinical trials, we may not be able to maintain a clinical development pipeline or generate revenues from a clinical development pipeline.

We have never sponsored or conducted a pivotal clinical trial, including a Phase 3 clinical trial, and our planned pivotal clinical trial protocols and designs for our product candidates, including our anticipated pivotal clinical trials of Dronabinol RT syrup and Fentanyl SL spray, may not be sufficient to obtain FDA approval.

We have never conducted a pivotal clinical trial, including Phase 3 clinical trials, which, in general are significantly more complex and time-consuming and involve more patients than the earlier stage clinical trials that we have conducted to date. The clinical trial protocols and designs of our anticipated pivotal clinical trials of Dronabinol RT syrup and Fentanyl SL spray may prove to be insufficient for product approval, and we do not plan to conduct Phase 2 trials for these product candidates.Moreover, we have not yet sought FDA agreement on our planned primary endpoints or the statistical plans under which the results of our anticipated pivotal clinical trials will be analyzed. We conducted a pre-investigational new drug, or IND, meeting with the FDA in August 2005 at which we received preliminary guidance from the

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FDA on, among other things, a draft Phase 3 protocol synopsis and our clinical development approach for Fentanyl SL spray. Although we believe that we have planned for and designed all necessary clinical and non-clinical studies in accordance with the FDA’s guidance at the meeting, the FDA may not agree with the specific manner in which we have interpreted and sought to implement its guidance. Moreover, there can be no assurance that when our New Drug Application, or NDA, is submitted, the FDA will continue to adhere to the guidance provided at the pre-IND meeting, or that no new or modified FDA policies or requirements will have been adopted that could require new or additional studies in support of product approval. It is possible that the FDA could determine that it is not satisfied with our plan or the details of our pivotal clinical trial protocols and designs. Moreover, even if we achieve positive results on the endpoints for a trial, the results may not be sufficient to demonstrate efficacy at the level required by the FDA for product approval. It is possible that we may make modifications to the clinical trial protocols or the designs of

one or more of our pivotal clinical trials that delay the enrollment or completion of our clinical trials or delay our pursuit of regulatory approval of these product candidates.

We are conducting a clinical trial in the United Kingdom and may choose to conduct one or more of our other clinical trials outside the United States.States and the FDA may not accept data from any such trial.

We may choose to conduct one or more of our clinical trials outside the United States in the future. In addition, though we are not conducting this trial, we are currently conductingproviding the drug substance for and paying a small amount of monitoring fees in connection with an ongoing Phase 3 clinical trial for the use of dronabinol in the treatment of multiple sclerosis in the United Kingdom, and we may choose to conduct one or more of our other clinical trials outside the United States in the future.Kingdom. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example, the study must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. The FDA has advised us that the patient population in which our clinical studies are conducted should be representative of the population in which we intend to use the product. In addition, such studies would be subject to the applicable local laws and FDA acceptance of the data would be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations.

Our stock price could decline significantly based on the results of clinical trials and pre-clinical studies of, and decisions affecting, our product candidates.

Results of clinical trials and pre-clinical studies of our product candidates, including our anticipated clinical trials of Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray and our anticipated pre-clinical studies of Dronabinol RT nebulizer, may not be viewed favorably by us or third parties, including investors, analysts and potential collaborators. The same may be true of how we design the clinical trials and pre-clinical studies of our lead product candidates (which may change significantly and be more expensive than currently anticipated) and regulatory decisions affecting those clinical trials and pre-clinical studies. Moreover, we may not be successful in completing these clinical trials or pre-clinical studies on our projected timeline, if at all. In particular, if we do not obtain regulatory approval for our Dronabinol HG capsule product as anticipated, then our planned application for the approval of Dronabinol RT capsule, our planned clinical trials for Dronabinol RT syrup and Dronabinol RT nebulizer and our planned pre-clinical studies for Dronabinol RT nebulizer may be delayed or suspended indefinitely. Biotechnology and pharmaceutical company stock prices have declined significantly when such results and decisions were unfavorable or perceived negatively or when a product candidate did not otherwise meet expectations.

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Our product candidates contain controlled substances, the use of which may generate public controversy.

Dronabinol, though synthetic, is a cannabinoid. Moreover, fentanyl is a Schedule II controlled substance narcotic derivative and despite the strict regulations on the marketing, prescribing and dispensing of Schedule II substances, illicit use and abuse of fentanyl products is well-documented. Since our product candidates contain controlled substances, regulatory approval of these product candidates may generate public controversy. Political and social pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of our product candidates. For some or all of our products, the FDA will require us to develop a comprehensive risk management program to reduce the inappropriate use of our product candidates, including restrictions on the manner in which they are marketed and sold, so as to reduce the risk of improper patient selection and diversion or abuse of the product. The DEA could encourage the FDA to take such actions. Developing such a program in consultation with the FDA may be a time-consuming process and could delay approval of any of our product candidates. Such a program or delays of any approval from the FDA could limit market acceptance of the product.

Legalization of marijuana or non-synthetic cannabinoids in the United States could significantly limit the commercial success of any dronabinol product candidate.

Currently, dronabinol is one of a limited number of FDA-approved synthetic cannabinoids in the United States. Therefore in the United States, dronabinol products do not currently have to compete with natural cannabis or non-synthetic cannabinoids such as GW Pharmaceutical’s Sativex^®. However, the DEA’s proposed rule issued on September 24, 2007 would clarify “natural dronabinol” derived from plant material as Schedule III if part of an approved ANDA. Literature has been published arguing the benefits of marijuana over dronabinol. Moreover, irrespective of its potential medical applications, there is some support in the United States for legalization of marijuana. If marijuana or non-synthetic cannabinoids were legalized in the United States, the market for dronabinol product sales would likely be significantly reduced and our ability to generate revenue and our business prospects would be materially adversely affected.

If we are unable to establish sales and marketing capabilities or execute on our sales and marketing strategy, we may not be able to effectively market and sell our products and generate product revenue.

We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products and we must build this organization or make arrangements with third parties to perform these functions in order to commercialize any products we successfully develop and for which we obtain regulatory approvals. We currently intend to establish an internal sales force and marketing infrastructure utilizing a model that has been employed by companies certain of our management have worked with in the past. Under this model, we expect to maintain a smaller sales force than many of our competitors, which could hinder our efforts relative to our competitors to market any products that we are able to commercialize. The establishment and development of an internal sales force and marketing infrastructure will be expensive and time consuming and could delay any product launch. We cannot be certain that we will be able to successfully develop these capabilities. If we are unable to establish our sales and marketing capabilities or any other capabilities necessary to commercialize any products we may develop and for which we obtain regulatory approvals, we will need to contract with third parties to market and sell such products. This would likely result in significantly greater sales and marketing expenses than currently estimated in our business plan. Moreover, we cannot assure that our sales and marketing strategy, which is based on the model used in other companies, will work effectively for our company and the markets for our product candidates. For international sales, we plan to contract with third parties as opposed to building an internal international sales force or marketing infrastructure. We

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currently possess limited resources and may not be successful in establishing our own internal sales force and marketing infrastructure for the United States or in establishing arrangements with third-parties for international sales on acceptable terms, if at all.

If we obtain regulatory approvals for our dronabinol and fentanyl products or any other product candidate and those products do not achieve broad market acceptance among physicians, patients, hospitals, healthcare payors and the medical community, we will generate limited revenues from sales of that product.

Even if our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

Dronabinol and fentanyl treatments can be costly to patients. Accordingly, hospitals and physicians may resist prescribing our products and patients may not purchase our products due to cost. If any of our product candidates are approved but do not achieve an adequate level of acceptance by physicians, patients, hospitals, healthcare payors and the medical community, we may not generate sufficient revenue from these products and we may not become or remain profitable.

Even if we obtain regulatory approval for any of our dronabinol product candidates and they are successfully commercialized, an inability to expand the market for the medical use of dronabinol will have a material adverse affect on our business plan and ability to generate revenue.

Solvay Pharmaceuticals, the company that markets Marinol, a drug that was first commercialized in the United States in 1985, reported Marinol sales of approximately $133 million in 2006. There is no guarantee the market for dronabinol products will expand in the future. Moreover, we have initially

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applied for our Dronabinol HG capsule to be indicated solely for the treatment of nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional treatments. Marinol sales include sales of dronabinol not only to treat this indication but also to treat appetite loss associated with weight loss in people with acquired immunodeficiency syndrome.

Our business plan is highly dependent upon our ability to expand the market for the medical use of dronabinol through commercial introduction of our various dronabinol candidates and maintain or increase a significant overall share of that market. The potential market for dronabinol products may not expand as anticipated or may even decline based on numerous factors, including the introduction of superior alternative products and regulatory action negatively impacting the dronabinol market. In particular, DEA quotas on dronabinol production may place limits on the potential size of the dronabinol market. Moreover, even if we obtain regulatory approval for our dronabinol product candidates and they are successfully commercialized, there is no guarantee that introduction of improved formulations of dronabinol will result in expansion of the dronabinol market or permit us to gain share in that market or maintain or increase any market share we may have already captured. New dronabinol products that we introduce could potentially replace our then currently marketed dronabinol products, thus not impacting the overall size of the market or increasing our overall share of that market. If we are unable to expand the market for the medical use of dronabinol or gain, maintain or increase market share in that market, this failure would have a material adverse affect on our ability to execute on our business plan and ability to generate revenue.

Even if our product candidates receive regulatory approval in the United States, we may never obtain regulatory approval or successfully commercialize our products outside of the United States.

In order to market any products outside of the United States, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales and distribution of our products. Approval procedures vary among countries and can involve additional product testing and additional

administrative review periods, and may be otherwise complicated by our product candidates being controlled substances such as synthetic cannabinoids and fentanyl. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA and DEA approval. The regulatory approval process in other countries may include all of the risks described above regarding FDA and DEA approval in the United States, as well as additional risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.

To date, we have not initiated any discussions with the European Medicines Agency, or EMEA, or other foreign regulatory authorities with respect to seeking regulatory approval for any product in Europe or in any other country outside the United States. As in the United States, the regulatory approval process in Europe and in other countries is a lengthy and challenging process. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA and DEA approval in the United States. Such effects include the risk that our product candidates may not be approved for all indications requested or may be subject to stringent controls on their prescription and distribution by physicians and pharmacies, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing studies, all of which could limit the uses of our product candidates and adversely impact potential product sales and/or collaboration opportunities.

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If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

We are subject to uncertainty relating to healthcare reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.

Our ability to commercialize our product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. As a threshold for coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors are increasingly imposing additional requirements and restrictions on coverage, and limiting reimbursement levels for medical products. These restrictions and limitations influence the purchase of healthcare services and products. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our product candidates or exclusion of our product candidates from coverage and reimbursement programs. The cost containment measures that healthcare payors and providers are instituting and the effect of any healthcare reform could significantly reduce our revenues from the sale of any approved product. We cannot provide any assurances that we will be able to obtain third-party coverage or reimbursement for our product candidates in whole or in part.

In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established a new Medicare Part D prescription drug benefit, which became effective January 1, 2006. It remains difficult to predict the impact that the prescription drug program will have on us and our industry. Under the prescription drug benefit, Medicare beneficiaries can obtain prescription drug coverage from private sector plans that are permitted to limit the number of prescription drugs that are covered in each therapeutic category and class on their formularies. If our products are not widely included on the formularies of these plans, our ability to market our products to the Medicare population could be harmed.

There also have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be

adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare costs to contain or reduce costs of healthcare may adversely affect one or more of the following:

In certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may, in some cases, be unavailable. In the United States, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it

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may result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues. It is also possible that other proposals having a similar effect will be adopted.

Risks Related to Regulatory Approval and Regulation of Our Product CandidatesRISKS RELATED TO REGULATORY APPROVAL AND REGULATION OF OUR PRODUCT CANDIDATES

Although we intend to seek to utilize various regulatory mechanisms which may accelerate drug development and approval for some of our product candidates, there is no guarantee that the FDA will permit us to do so or that these mechanisms would lead to accelerated drug development or approval.

In January 2007, we were advised by the Office of Generic Drugs of the FDA that applications for generic dronabinol capsules are currently being evaluated on an “expedited review” basis, which according to the FDA means that these applications are among the reviewers’ highest priorities in their work queues. However, for generic drugs, there is no official “fast track” or “priority review” designation as there is for non-generic drugs, and our expectation of the FDA’s timeline for reviewing applications for generic versions of Marinol on an “expedited” basis may be different, and possibly materially different, from the FDA’s actual review period. If our ANDA for Dronabinol HG capsule is not reviewed in the time frame we anticipate, or if we are unable to adequately address all the deficiencies in our ANDA which have been identified by the FDA in a manner that is satisfactory to the FDA, our anticipated timeline for FDA approval of and commercial production and marketing of our Dronabinol HG capsule will be delayed, or we may be unable to market the product at all. Any such delays would adversely affect our ability to execute on our business plan.

On April 4, 2007, the FDA issued a “major deficiency” letter in which it cited 38 separate deficiencies in our Dronabinol HG capsule ANDA. In response to this deficiency letter, we submitted to the FDA a “major amendment” to our ANDA on June 26, 2007 but have not yet received any response from the FDA on the adequacy of this response. Under FDA procedures, the agency may take 180 days or longer to review and respond to a major amendment. Among the deficiencies cited in the FDA’s letter were the following:

We did not follow the FDA’s request to manufacture new test batches, but rather provided information and arguments for the adequacy of the original exhibit batch controls. We cannot assure you that the FDA will accept our response. If we are required to manufacture and test new exhibit batches, including

repeating our clinical trials, we estimate that we would not be able to generate and submit the new data for FDA review for approximately four months after hearing back definitively from the FDA on this point, after which time the FDA would resume its review of our ANDA, which further review could take 180 days or longer.

Risk factors

We cannot assure you that the FDA will consider these or any of our other responses adequate. A refusal by the FDA to accept any one or more of our responses, including those described above, could require us to undertake additional time-consuming and expensive manufacturing and testing activities, including clinical testing, which could cause significant delay in the review and potential approval of our ANDA, or prevent us from receiving approval at all. Moreover, any requirement to produce additional test batches of Dronabinol HG capsule would entail usage of dronabinol we currently anticipate allocating for other uses. Any delay in obtaining regulatory approval for Dronabinol HG capsule will afford our competition additional time to produce and seek regulatory approval for other generic versions of Marinol, which would likely have a material negative impact upon our competitive position and ability to generate revenue from Dronabinol HG capsule product sales. This in turn could have a material adverse affect on our ability to execute on our business plan and develop our other product candidates.

Moreover, we cannot file a supplement to our ANDA for our Dronabinol RT capsule product candidate and labeling providing for storage at room temperature untilunless the Dronabinol HG capsule ANDA is first approved by the FDA. Therefore, any delay in obtaining FDA approval for Dronabinol HG capsule will have a negative impact upon our timing for regulatory review of Dronabinol RT capsule which would harm our competitive position and our ability to generate revenue.

In addition, we intend to seek FDA approval of certain of our product candidates, including Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray, utilizing Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or Section 505(b)(2). Section 505(b)(2), if applicable to any NDA we file, would allow us to file that NDA with the FDA relying in part on data in the public domain or on the FDA’s prior findings regarding the safety and effectiveness of approved drugs, which could expedite the development program for our product candidates by potentially decreasing the overall scope of work we must do ourselves. If we are unable to utilize Section 505(b)(2), the development program for certain of our product candidates, including Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray, would be materially longer than we expect, and we would also have to conduct significantly more costly trials than we anticipate, which would harm our business. In addition, Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation.Moreover, even if we are able to utilize Section 505(b)(2), there is no guarantee this would ultimately lead to accelerated drug development or approval.

We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

The research, testing, development, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, marketing, distribution, possession and use of our product candidates, among other things, are subject to regulation by numerous governmental authorities in the United States and elsewhere. The FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, and implementing regulations. Noncompliance with any applicable regulatory requirements can result in refusal of the governmental authority to approve products for marketing,

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criminal prosecution and fines, warning letters, product recalls or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. FDA and comparable governmental authorities have the authority to withdraw product approvals that have been previously granted. In addition, the regulatory requirements relating to our products may change from time to time and it is impossible to predict what the impact of any such changes may be.

We are developing product candidates that are “controlled substances” as defined in the Controlled Substances Act of 1970, or CSA, which establishes, among other things, certain registration, production quotas, security, record keeping, reporting, import, export and other requirements administered by the DEA. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established medicinal use, and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances. Dronabinol in sesame oil and encapsulated in a soft gelatin capsule in the form previously approved by the FDA for the commercial sale of Marinol is currently listed by the DEA as a Schedule III substance under the CSA. Dronabinol in bulk or other product forms is currently classified by the DEA as a Schedule I substance under the CSA. If the FDA approves formulations of dronabinol other than Marinol, the DEA will have to make a scheduling determination and place the products in a schedule other than Schedule I, which does not apply to FDA-approved products. Fentanyl is listed by the DEA as a Schedule II substance under the CSA.

The manufacture, shipment, storage, sale and use, among other things, of controlled substances that are pharmaceutical products are subject to a high degree of regulation. For example, all Schedule II substance prescriptions, such as prescriptions for fentanyl, must be written and signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.

Moreover, the DEA limits the availability and production of all Schedule I and Schedule II substances through a quota system which includes a national aggregate quota and individual quotas. Our contract manufacturers must annually apply to the DEA for procurement quotas in order to obtain the active ingredients used in our product candidates, because they are currently classified, and in bulk form will remain classified, as Schedule I or Schedule II substances. As a result, the procurement quotas of the active ingredients for our product candidates may not be sufficient to meet our clinical trials needs or if we obtain regulatory approvals for any of these product candidates, our commercial needs. Any delay or refusal by the DEA in establishing the procurement quotas or a reduction in our contract manufacturer’s quota for any controlled substances could delay or stop our pre-clinical studies or clinical trials or if we obtain regulatory approvals for any of these product candidates, the launch or commercial sale of those products. This could have a material adverse effect on our business, our ability to execute on our business plan, our financial position and results of operations and our ability to generate revenue to fund the development of our other product candidates.

The DEA also conducts periodic inspections of registered establishments that handle controlled substances. Facilities that conduct research, manufacture, distribute, import or export controlled substances must be registered to perform these activities and have the security, control and inventory mechanisms required by the DEA to prevent drug loss and diversion. Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result in regulatory action that could have a material adverse effect on our business, results

of operations, financial condition and prospects. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.

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Every state also has its own controlled substance laws. Though state controlled substances laws often mirror federal law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states automatically schedule a drug when the DEA does so, in other states there has to be rulemaking or a legislative action. State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate state registrations inorder to be able to obtain, handle, and distribute controlled substances for clinical trials or commercial sale, andfailure to meet applicable regulatory requirements could lead to enforcement and sanctions from the states in addition to those from the DEA or otherwise arising under federal law.

Annual DEA quotas on the amount of dronabinol allowed to be produced in the United States and our specific allocation of dronabinol by the DEA could significantly limit the clinical development of our dronabinol product candidates as well as the production or sale of any of dronabinol product candidates for which we obtain regulatory approval.approval.

Because dronabinol is subject to the DEA’s production and procurement quota scheme, the DEA establishes annually an aggregate quota for how much dronabinol may be produced in total in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of dronabinol that the DEA allows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. Our dronabinol manufacturer, Austin Pharma, must receive an annual quota from the DEA in order to produce dronabinol for us. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. The DEA’s aggregate production quota for dronabinol was 312.5 kilograms for each of 2005, 2006 and 2007. In 2007, Austin Pharma was allocated a sufficient quantity of dronabinol to meet our testing needs through 2007. We will need significantly greater amounts of dronabinol in 2008 to implement our business plan. The DEA will allocate dronabinol among requesting parties in November 2007, and is unlikely to allocate a quota to any manufacturer that is greater than the amount that the DEA estimates the manufacturer could produce in any given year. Austin Pharma will wait to applyhas applied to the DEA for aits 2008 dronabinol procurement quota untiland must wait for an allocation decision, which we believe may take place in December 2007, because it must complete a build out of its current manufacturing capacity2007.

Moreover, in order to support an increased quota request. Ifprovide Austin Pharma fails to successfully complete its build out on a timely basis, it will not be able to procure adequaterequested allocation, for dronabinol and our business will be adversely affected.

Moreover, when Austin Pharma applies for its quota, it will be necessary that the DEA either have remaining quantity from its aggregate production quota for 2008 to allocate to Austin Pharma, that the DEA allocate to us for 2008 amounts allocated to others in 2007 and/or that the DEA agree to increase the 2008 aggregate production quota for dronabinol in order to provide Austin Pharma its requested allocation.dronabinol. We would first allocate any dronabinol Austin Pharma produces for us to our clinical trials in which human subjects are enrolled. Currently, that means we would give priority allocation of dronabinol to our program studying dronabinol as a potential treatment for multiple sclerosis over our other dronabinol product candidates. We believe we will need approximately four kilograms of dronabinol for these multiple sclerosis studies in 2008. Additionally, if the FDA were to respond to our Dronabinol HG capsule ANDA amendment and require that we produce new test batches, we believe we would need approximately one kilogram of dronabinol to produce those test batches. Finally, we do not know what amounts of dronabinol Solvay will be requesting for 2008 for its Marinol production or for use in other dronabinol development programs such as their program developing a metered dose inhaler version of dronabinol with Nektar which is currently in Phase 2 clinical trials. Nor do we know what amounts of dronabinol other companies developing dronabinol product candidates will request for 2008. The DEA, in assessing factors such as medical need, abuse potential and other policy

considerations, may choose to set the aggregate dronabinol quota lower than the total amount requested by the companies, and we may in any event not

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receive our requested allotment of dronabinol under whatever quota the DEA sets. We are permitted to petition the DEA to increase the 2008 aggregate quota after it is initially established, but there is no guarantee the DEA would act upon such a petition. Our procurement quota of dronabinol may not be sufficient to meet our pre-clinical and clinical development needs or commercial demand if we receive regulatory approval for any of our dronabinol product candidates. The success of our business plan will depend in large part on our being able to expand the overall market for the medical use of dronabinol by introducing new dronabinol formulations, and increasing the overall sales of any dronabinol product candidates for which we receive requisite regulatory approvals. In order to be able to increase our overall aggregate sales of our dronabinol product candidates, Austin Pharma will need to receive increasing allotments over time under the quotas set by the DEA. Austin Pharma can request an increase of its procurement quota at any time. However, any delay or refusal by the DEA in establishing the procurement quota or a reduction in our quota for dronabinol or a failure to increase it over time as we anticipate could delay or stop the clinical development of one or more of our dronabinol product candidates or if approved, the product launches or commercial sale of our dronabinol products or cause us to fail to achieve our expected operating results, which could have a material adverse effect on our business, our ability to execute on our business plan, our financial position and results of operations and our ability to generate revenue to fund the development of our other product candidates.

Failure to obtain or maintain Schedule III classification for any of our dronabinol product candidates would substantially limit our ability to produce and commercialize any such product candidates.

The DEA generally regulates dronabinol as a Schedule I controlled substance, except in the FDA-approved Marinol product, which is a Schedule III controlled substance. Schedule I controlled substances are deemed not to have any medically recognized use and may not lawfully be commercially sold or marketed. After the initial FDA approval of Marinol in 1985, the DEA scheduled dronabinol in sesame oil and encapsulated in a soft gelatin capsule in a form approved by the FDA under Schedule II. In 1999, the DEA promulgated a regulation that reclassified this formulation as a Schedule III controlled substance. This regulation directly corresponds to the product characteristics of Marinol, whose sponsor had petitioned the DEA for the scheduling change. Because our dronabinol HG and RT capsule product candidates utilize a hard capsule dosage form, which differs from the “soft capsule” form described in the DEA’s dronabinol Schedule III regulation, we submitted a rescheduling petition in November of 2006 requesting the DEA to amend its regulation in one of several alternative ways so that our dronabinol capsules would also be regulated as Schedule III drugs. The DEA has not yet acted on our petition, but it has informed us that our product will remain in Schedule I and may not be marketed until such time as the DEA amends its dronabinol scheduling regulation. The DEA also informed us that it is unable to predict whether our petition will be granted, or whether any such rescheduling decision will be made prior to any FDA approval of our Dronabinol HG ANDA. Subsequent to being so advised by the DEA, on September 24, 2007, the DEA published a proposed rule which would classify certain tablet and capsule formulations of natural (derived from plant material) or synthetic dronabinol in Schedule III if such products are subject to an approved ANDA. By definition, this proposed rule would include our Dronabinol HG capsule and Dronabinol RT capsule product candidates. Although we believe the DEA will ultimately schedule our Dronabinol capsules under Schedule III, if approved by the FDA, itFDA. It is possible that the DEA could decide to schedule our capsule product, or all dronabinol capsule products including Marinol and any other generic versions, as Schedule II controlled substances. It is also possible that the DEA will schedule other dosage forms of dronabinol, including our syrup or nebulizer products, in Schedule II.

Failure to obtain Schedule III classification for our dronabinol product candidates would result in significantly greater restrictions on our anticipated ability to produce and commercialize any such

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dronabinol products and would have a material adverse affect on our business and ability to generate revenue. This is because the restrictions on the manufacture, sale, distribution, prescribing, and dispensing of Schedule III substances are less stringent than for Schedule II substances. For instance, Schedule II drugs or substances may not be dispensed without the written prescription of a practitioner, and prescriptions for these drugs or substances may not be refilled. Although the DEA regulates the frequency of Schedule III prescription refills, physicians are not prohibited from issuing non-written prescriptions and permitting refills of prescriptions for such substances. A failure by the DEA to respond favorably to the petition before, or in a timely manner after, FDA approval of our dronabinol HG ANDA, or a refusal by the DEA to grant our request to schedule our product under Schedule III, would have an adverse impact on our ability to promptly or effectively commercialize our dronabinol HG product.

Because the DEA currently regulates the scheduling of dronabinol on a product-specific basis, as opposed to regulating all dronabinol-containing products under one schedule as it does with many other controlled substances, such as fentanyl, we believe that the DEA will also need to make individual scheduling decisions with respect to our dronabinol syrup and nebulizer products, based on, among other factors, assessments of the drug abuse potential for each of our formulations. Even if the DEA agrees to classify our dronabinol capsules under Schedule III, because our Dronabinol RT syrup and Dronabinol RT nebulizer will, if approved, represent novel dosage forms, and in the case of the nebulizer a novel route of administration, for dronabinol, the DEA may determine that the stricter controls of Schedule II are appropriate for those products and the agency may not agree to schedule these other dronabinol products under Schedule III. Moreover, the DEA’s scheduling decisions for any or all of our products may be not be issued until significantly after any FDA approval of those products, if any. Even with FDA approval, we will not be able to market any of our controlled substance products until the DEA has issued a scheduling decision with respect to each drug product.

We use hazardous materials, chemicals and controlled substances in our research and development activities and we may incur significant costs complying with the environmental, health and safety laws and regulations that govern such use. In addition, if we fail to comply with the applicable environmental, health and safety regulations, we could be exposed to significant liabilities.

Our research and development activities involve the use of potentially harmful hazardous materials, chemicals and controlled substances that could be hazardous to human health and safety or the environment and which are subject to a variety of federal, state and local laws and regulations governing their use, generation, manufacture, storage, handling and disposal. These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal. We cannot completely eliminate the risk of contamination, which could cause:

In such an event, we may be held liable for any resulting damages, and any such liability could exceed our resources. Although we carry insurance in amounts and type that we consider commercially reasonable, we do not havecarry specific biological or hazardous waste insurance coverage for losses relating to an interruption of our research and development efforts caused by contamination, and we cannot be certain that the coverage or coverage limits of our insurance policies will be adequatecoverage.

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Risk factors

Even if any of our product candidates receives regulatory approvals, our product candidates will still be subject to extensive ongoing obligations of the FDA and DEA and continued regulatory review, which may result in significant expense and limit our ability to commercialize our product candidates.

If we receive regulatory approval for any of our product candidates, we will also be subject to ongoing FDA obligations and continued regulatory review, such as continued safety testing, surveillance and reporting requirements, and we may also be subject to additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize our product candidates. We and our contract manufacturers will also be subject to ongoing DEA regulatory obligations, including annual registration renewal, security, recordkeeping, theft and loss reporting, and periodic inspection, and must receive annual quota allotments for the raw material for commercial production of our products.

If any of our product candidates receive U.S. regulatory approval, the FDA may impose significant restrictions or limitations on the indicated uses for which such drugs may be marketed or impose ongoing requirements for potentially costly post-marketing testing and surveillance to monitor the safety and efficacy of the products. In addition, regulatory agencies such as the FDA and the DEA, subject a drug, its manufacturer and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of previously unknown problems with a drug, including adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured, may result in restrictions on the marketing of that drug, and could include withdrawal of the drug from the market. Failure to comply with applicable regulatory requirements may result in:

In addition, our product labeling, advertising and promotion is subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular, a drug may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the

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Risk factors

laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.

The FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to achieve and maintain regulatory compliance, we might not be permitted to market our drugs and our business could suffer.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

In addition to FDA and DEA restrictions on the marketing of pharmaceutical products and federal and state restrictions on prescribing these products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical and medical device industries in recent years. These laws include anti-kickback statutes and false claims statutes.

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or, in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not, in all cases, meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company’s marketing of the product for unapproved, and thus non-reimbursable, uses. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

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Risk factors

If we are not able to obtain regulatory approvals or we are unable to successfully sell our generic Dronabinol HG capsules, our future results of operations would be adversely affected.

Our future results of operations depend on our ability to obtain regulatory approval for and commercialize our generic and most advanced product candidate, Dronabinol HG capsule. To obtain regulatory approval for this product candidate, we will be required to demonstrate to the satisfaction of the FDA, among other things, that our generic product contains the same active ingredients, is of the same dosage strength, form and route of administration, and has the same labeling, with certain exceptions. Our generic product must also meet compendial or other applicable standards for strength, quality, purity and identity. Our generic product must also be bioequivalent, meaning generally that there are no significant differences in the rate and extent to which the active ingredients are absorbed and become available at the site of drug action.

We must also demonstrate the adequacy of our methods, controls and facilities used in the manufacture of the product, including that they meet current good manufacturing practices, or cGMP. We cannot predict whether any of our generic product candidates will meet FDA requirements for approval.

The patent covering the Marinol composition, known as U.S. Patent No. 3,668,224, expired in June 1989. Also, U.S. Patent No. 6,703,418 includes claims to the use of Marinol to treat weight loss in patients suffering from symptomatic HIV infection, which is a different indication than that sought in our ANDA. This is the only use patent listed in the FDA’s Orange Book for Marinol. We will not seek approval of that appetite loss use in our ANDA for Dronabinol HG capsule or our ANDA supplement for Dronabinol RT capsule. In the past, other companies have attempted to produce a generic version of Marinol and we believe other companies are currently in the process of attempting to successfully produce or seeking FDA approval for a generic version of Marinol.

On October 25, 2007, Unimed Pharmaceuticals, Inc., a wholly-owned subsidiary of Solvay Pharmaceuticals, Inc., or Solvay, submitted a citizen petition to the FDA requesting that the FDA require ANDAs for generic versions of Marinol to contain both the CINV indicationandthe indication for the treatment of appetite loss in patients with Acquired Immune Deficiency Syndrome, or AIDS. The Solvay petition has the potential to cause delay in the approval of our pending ANDA for our Dronabinol HG capsules. Because there is a listed patent for the AIDS indication for Marinol (U.S. Patent No. 6,703,418), if the FDA granted Unimed’s petition, we would be required to provide a patent certification to the FDA, either in the form of a Paragraph III certification, in which case we would wait for the patent to expire, or a Paragraph IV certification alleging the invalidity and/or non-infringement of the patent. If Unimed then filed a patent infringement lawsuit within 45 days of its receipt of a Paragraph IV certification, the FDA would automatically be prevented from approving our ANDA until the earlier of 30 months, expiration of the patent (in February 2011), settlement of the lawsuit or a decision in the infringement case that is favorable to us. Any such delay of the potential approval of our ANDA by the FDA would have a material adverse effect on our business and future results of operations.

Our ability to successfully sell generic products, including Dronabinol HG capsule if approved, depends in large part on the acceptance of those products by third parties such as wholesalers, pharmacies, physicians and

patients. Although the brand-name products generally have been marketed safely for many years prior to the introduction of a generic alternative, there is a possibility that one of our generic products could produce an unanticipated clinical side effect, or be considered less effective or less convenient, or otherwise inferior, to the branded product, which could result in an adverse effect on our

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Risk factors

ability to achieve acceptance by third parties. In addition, brand-name manufacturers have taken numerous steps to combat competition from generics, including:

If these or other efforts, including action to oppose rescheduling of dronabinol generics, or to delay or impede generic competition, are successful, we may be delayed or unable to sell our generic products, such as Dronabinol HG capsule if approved, that are subject to these efforts which could have a material adverse effect on our sales and profitability.

Risks Relating to Our Intellectual PropertyRISKS RELATING TO OUR INTELLECTUAL PROPERTY

Our success depends in part upon our ability to protect our intellectual property for our branded products, such as Dronabinol RT capsule, Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray.

Our commercial success with respect to our branded products, including Dronabinol RT capsule, Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray, depends on obtaining and maintaining patent protection in both the United States and in other countries and trade secret protection for our product candidates, proprietary technologies and their uses. Our ability to protect our drug products from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents.

Due to evolving legal standards relating to patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for our product candidates and products or provide sufficient protection to afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents have issued or will issue, we cannot guarantee that the claims of these patents are or will be valid or enforceable or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. Patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however,

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patent applications remain confidential in the United States Patent and Trademark Office, or USPTO, for the entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in the scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors were the first to invent, or the first to file patent applications on our product candidates or products.

In the event that a third party has also filed a U.S. patent application relating to our drug product or a similar invention, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a loss of our U.S. patent position. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our product candidates or by covering similar technologies that affect our target markets.

The laws of some foreign jurisdictions do not have intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

Fentanyl SL spray product candidate. If we or our licensors fail to appropriately prosecute and maintain patent protection for Dronabinol RT capsule, Dronabinol RT syrup, Dronabinol RT nebulizer, Fentanyl SL spraythese product candidates or other product candidates that we may develop, our ability to develop and commercialize these or any other product candidates we develop may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. This failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our business, financial condition and results of operation.

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Risk factors

Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with certain of our employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights.Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.

We license patent rights from third party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects willmay be harmed.

We are party to a number of licenses that give us rights to third party intellectual property that isare necessary or useful for our business. In particular, we have obtained licenses from the University of Mississippi and University of Kentucky with respect to a suppository formulation of dronabinol hemisuccinate esters and morphine-6-O-sulfate, respectively. We may enter into additional licenses to third-party intellectual property in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would.would, and we only maintain the right to assume patent maintenance and prosecution activities if the applicable licensor fails or decides to not take any action under certain of these licenses. In addition, our licensors may terminate their agreements with us in the event we breach the applicable license agreement and fail to cure the breach within a specified period of time. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success also depends upon our ability and the ability of our future collaborators to develop, manufacture, market and sell our product candidates and to use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products. Because patent applications can take many years to issue, there may be currently pending applications, which may later result in issued patents that our product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product candidates of which we are not aware.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents was found to cover our product candidates, proprietary technologies or their uses, we or our future collaborators could be required to pay damages and could be unable to commercialize our product candidates or to use our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our future collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a

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Risk factors

preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. And in particular, the generic drug industry is characterized by frequent litigation between generic drug companies and branded drug companies. If a third party claims that we infringe its intellectual property rights, we may face a number of issues, including, but not limited to:

We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third party patents containing claims covering our product candidates, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege they have patent rights encompassing our products, technology or methods. Other product candidates that we may in-license or acquire could be subject to similar risks and uncertainties.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us.

As is common in the biotechnology and pharmaceutical industry, certain of our employees were formerly employed by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Moreover, we engage the services of consultants to assist us in the development of our product candidates, many of whom were previously employed at or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, weWe may be subject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. For example, on November 2, 2007, we received a letter from counsel for Solvay Pharmaceuticals, Inc. and Unimed Pharmaceuticals, Inc., or Solvay/Unimed, in which Solvay/Unimed asserted that we may have used its confidential and proprietary information in the development of our dronabinol technology and products, and requested various information and written assurances from us. Solvay/Unimed’s letter contains broad allegations concerning its Marinol manufacturing and business strategy, but does not specifically identify any particular confidential or proprietary information allegedly used by us. The allegations appear to be

Risks Related36

Risk factors

based primarily on the fact that one of our founders worked for Solvay/Unimed five years ago. We are investigating the allegations raised in the letter. Based on our present knowledge, information and belief, the allegations appear to Our Dependencebe without merit, and we responded to Solvay/Unimed to that effect on Third PartiesNovember 14, 2007 and informed them at that time that we do not intend to comply with any of the requests made in their letter. There can be no assurance, however, that we would not be sued by Solvay/Unimed. Any such litigation would be protracted, expensive, and potentially subject to an unfavorable outcome.

RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES

Failure to maintain our relationshipsrelationship with our third-party suppliers of fentanyl or of Austin Pharma to maintain its relationships with its third-party suppliers of the two starting materials for dronabinol, or any failure by either of these suppliers to supply the materials in sufficient quantities or on a timely basis, may delay the clinical development of or regulatory approval for our product candidates, or their ultimate commercial production if approved.

We purchase the fentanyl utilized in connection with our Fentanyl SL spray candidate from Johnson Matthey, Inc. For dronabinol, there are two chemicals that are used as starting materials for its production—olivetol and para-menthadienol, or PMD. Austin Pharma sources olivetol from Avra Laboratoriesa company in Hyderabad, India, and sources PMD, a highly unstable and scarce chemical compound, from Kumar Organics Private Ltd.another company in Bangalore, India through theirits U.S.-based intermediary QV Chemicals.intermediary. Our ability and the ability of Austin Pharma to obtain fentanyl or the starting materials for dronabinol in sufficient quantities and on a timely basis will be critical to the successful completion of our clinical trials for our Fentanyl SL spray and dronabinol product candidates on our anticipated timeline and, if we obtain regulatory approvals for any of these product candidates, their commercial sale. There is no assurance that these suppliers will be able to continue to produce the materials in the quantities and at the time they are needed, if at all, or that Austin Pharma will be able to manufacture dronabinol using those materials in the amounts and at the time needed if at all, especially in light of the fact that we intend to significantly increase our orders for these materials in the years ahead. Moreover, the replacement of any of these suppliers, particularly the suppliers of the dronabinol starting materials or Austin Pharma, could lead to significant delays and increase in our costs.

In addition, the suppliers of the two starting materials we utilize to manufacture dronabinol are located in India. This exposes us to a number of risks and uncertainties outside our control. India has suffered political instability in the past due to various factors including the failure of any party to win an absolute majority in the Indian Parliament for several years. In addition, there have been armed conflicts between India and neighboring Pakistan. Moreover, extremist groups within India and neighboring Pakistan have from time to time targeted Western interests. In addition, India is susceptible to natural disasters such as earthquakes and floods. Political instability, future hostilities with countries such as Pakistan, targeting of our interests by extremist attacks, and

earthquakes or other natural disasters in India could harm our operations and impede our ability to produce dronabinol and complete our clinical trials on our anticipated timeline, or at all.

We do not have internal manufacturing capabilities, and if we fail to develop and maintain supply relationships with various third-party manufacturers, we may be unable to develop or commercialize our product candidates.

Our ability to develop and commercialize our product candidates depends, in part, on our ability to outsource their manufacturing at a competitive cost, in accordance with regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. All of our manufacturing is outsourced to third parties and we do not plan to build manufacturing capabilities. In particular, we are highly dependent on our exclusive relationship with Austin Pharma, which is currently in the process of building a second manufacturing facility for the production of our dronabinol supply. Austin Pharma is our sole supply source for dronabinol. We are only aware of one other manufacturer that is able to produce dronabinol in the United States. We are aware of five manufacturers that hold DMFs for the production of dronabinol in the United States. Because dronabinol is a controlled substance, inability to manufacture dronabinol in the United States would have a material adverse affect on our business given the regulatory difficulties associated with obtaining authorization to import and transport controlled substances cross-border. Moreover, we believe dronabinol is very hard to produce. Several third-party manufacturers contribute to the production of our Fentanyl SL spray product candidate, including DPT Labs in Lakewood, New Jersey that fills the fentanyl liquid vials and assembles the spray technology

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device for our Fentanyl SL spray product candidate. We have not entered into any long-term agreements with these third-party manufacturers for their services. At this time we submit purchase orders for specific quantities and/or services needed from time to time in our development process for our Fentanyl SL spray product candidate. Our Dronabinol RT nebulizer product candidate requires a nebulizer unit from PARI Pharma and our Fentanyl SL spray product candidate requires a delivery unit from Pfeiffer GmbH. Presently, we are in what we believe are the final stages of negotiating a development agreement with PARI to customize their proprietary nebulizer platform for our Dronabinol RT nebulizer product candidate, as well as with Pfeiffer to begin the initial development of the delivery unit for our Fentanyl SL spray product candidate. Once the development of these units is complete, we will then sell to formally negotiate for long-term exclusive supply agreements. Currently, we obtain supply of the nebulizer unit from PARI and the delivery unit from Pfeiffer through individual purchase orders on a case by case basis. Though we are in discussions with PARI and Pfeiffer to obtain long-term exclusive supply arrangements, there is no assurance we will be able to procure such arrangements on reasonable terms, if at all. If we are unable to obtain exclusive supply rights to the PARI nebulizer unit for our Dronabinol RT nebulizer product candidate or exclusive supply rights to the Pfeiffer delivery unit for our Fentanyl SL spray product candidate, we may not be able to replace these manufacturers or these manufacturers may offer such units through our competitors, which would harm our ability to compete in our core markets. The replacement of any of these manufacturers, in particular Austin Pharma, or any other manufacturer of our products candidates would lead to significant delays due to commercial and regulatory reasons and increase in our costs.

Our contract manufacturers may encounter manufacturing failures that could delay the clinical development or regulatory approval of our product candidates, or their commercial production if approved.

Any performance failure on the part of any of our manufacturers could delay the clinical development or regulatory approval of our product candidates. Our manufacturers may encounter difficulties involving, among other things, obtaining DEA quotas, production yields, regulatory compliance, quality control and quality assurance, as well as shortages of qualified personnel. In connection with our ANDA for Dronabinol HG capsule, the FDA raised questions regarding the quality of the product candidate test batch we sent them. Approval of our product candidates could be delayed, limited or denied if the FDA does not approve and maintain the approval of our contract manufacturer’s processes or facilities. Moreover, our contract manufacturers may encounter difficulties that have a negative impact on our operations and business. In particular, our sole contract manufacturer of dronabinol, Austin Pharma, has not manufactured commercial batches or pivotal clinical supplies of dronabinol. In addition, Austin Pharma is currently in the process of expanding its facilities and manufacturing capacity and must demonstrate it can produce dronabinol satisfying FDA standards in order to do so. Austin Pharma or our other manufacturers may encounter difficulties with the manufacturing processes required to manufacture commercial quantities of our product candidates or the quantities needed for our pre-clinical studies or clinical trials. Such difficulties could result in delays in our pre-clinical studies, clinical trials and regulatory submissions, in the commercialization of our product candidates or, if our dronabinol product candidates, Fentanyl SL spray product candidate or any of our other product candidates are approved, in the recall or withdrawal of such products from the market. Further, development of large-scale manufacturing processes may require additional validation studies, which the FDA must review and approve. If any of our manufacturers, including Austin Pharma, fail to deliver the required commercial

quantities or quantities needed for our pre-clinical studies and clinical trials on a timely basis and upon terms that we find acceptable, we may be unable to meet demand for any of our product candidates that are approved and could lose potential revenue.

Our contract manufacturers must comply with current good manufacturing practices, or cGMP, enforced by the FDA through its facilities inspection program and review of submitted technical information. In

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addition, they must obtain and maintain necessary DEA licenses,registrations, and must establish and maintain processes to assure compliance with DEA requirements governing among other things, the storage, handling, security, record-keeping and reporting for controlled substances. They must also apply for and receive a quota for these products. We have little control over our contract manufacturers’ compliance with these regulations and standards, and they may not comply. Any failure by our contract manufacturers to comply with these requirements may result in penalties, including fines and civil penalties, suspension of production, suspension or delay in product approvals, product seizure or recall, operating restrictions, criminal prosecutions or withdrawal of product approvals, any of which could significantly and adversely affect our business. If the safety of any drug product or component supplied by third parties is compromised due to their failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize the affected product candidate, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay or termination of clinical trials, regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or result in our being unable to effectively commercialize our products.

Certain changes in the manufacturing process or procedure, including a change in the location where the product candidate is manufactured or a change of a third-party manufacturer, generally require prior FDA, or foreign regulatory authority, review and/or approval of the manufacturing process and procedures in accordance with cGMP. We may need to conduct additional pre-clinical studies and clinical trials to support approval of such changes. This review may be costly and time-consuming, and could delay or prevent the launch of a product candidate.

We rely on third parties to conduct and oversee our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

We rely on third parties to conduct and oversee our clinical trials. For example, we have contracted with Clinimetics, Inc. to serve as our master CRO for our Fentanyl SL spray Phase 3 clinical trials. We also rely upon medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations and DEA regulations governing the handling, storage, security and record-keeping for controlled substances. These CROs play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials.

There is no guarantee that Clinimetics or other CROs, investigators and third parties will devote adequate time and resources to our clinical trials or perform as required by contract and in accordance with regulatory requirements. If Clinimetics or any other third parties upon which we rely for administration and conduct of our clinical trials fail to meet expected deadlines, fail to adhere to our clinical protocols or act in accordance with regulatory requirements, or otherwise perform in a substandard manner, our clinical trials may be extended, delayed or terminated, and we may not be able to commercialize our product candidates.

If any of our clinical trial sites terminate their involvement in one of our clinical trials for any reason, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA.

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Risks Relating to Our FinancesRisk factors

RISKS RELATING TO OUR FINANCES

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 research and development programs or commercialization efforts.

Our operations have consumed substantial amounts of cash since inception. To date, our sole funding source has been a trust controlled by our chairman, John N. Kapoor. We expect to continue to spend substantial amounts on development, including significant amounts on conducting clinical trials for our product candidates, manufacturing clinical supplies and expanding our product development programs. Our cash flow used for operating activities in 2006 was an average of approximately $0.6 million per month. We expect that our monthly cash used by operations will increase substantially for the next several years.

We believe that the net proceeds from this offering, together with interest thereon, and our existing cash, cash equivalents and short-term investments, will be sufficient to fund our operations through at least the next 12 months, and to allow us to advance and commercialize current product candidates while developing our product pipeline and identifying in-license prospects. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Further, we may need to raise additional capital following this offering to fund our operations and continue to conduct clinical trials to support potential regulatory approval of marketing applications.

The amount and timing of our future funding requirements will depend on many factors, including, but not limited to the:

We will be required to raise additional capital to complete the development and commercialization of our current product candidates. Future capital requirements will also depend on the extent to which we acquire or in-license additional product candidates. We currently have no commitments or agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenue and achieve profitability, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements, as well as through interest income earned on cash balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are

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Risk factors

unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our product development programs. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available.

Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution to you, restrict our operations or require us to relinquish proprietary rights.

We may raise additional funds through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be diluted. Any future debt financing we enter into may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any borrowings under any future debt financing will need to be repaid, which creates additional financial risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying-off or refinancing our outstanding debt obligations.

In addition, if we raise additional funds through corporate collaboration and licensing arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. If adequate funds are not available, our ability to achieve profitability or to respond to competitive pressures would be significantly limited and we may be required to delay, significantly curtail or eliminate the development of one or more of our product candidates.

If we are unable to successfully remediate the material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In connection with the audit of our financial statements for the year ended December 31, 2006, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting during such periods in accordance with the provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses.

Our independent registered public accounting firm identified material weaknesses related to a lack of sufficient staff with appropriate training in GAAP and SEC rules and regulations with respect to financial reporting. This deficiency resulted in a more than remote likelihood that a material misstatement of our interim financial statements would not be prevented or detected. As a result, audit adjustments to our financial statements were identified during the course of the audit. In an effort to remediate these weaknesses, in August 2007, we hired a new Chief Financial Officer who is a certified public accountant and has served as the chief financial officer in August 2007. Weof several other companies. With only two finance and accounting personnel currently employed by us (our new Chief Financial Officer and our Chief

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Risk factors

Operating Officer), we intend to hire additional finance and accounting personnel, build our financial management and reporting infrastructure, further develop and document our accounting policies and financial reporting procedures. For example, we have begun a search for a controller and expect to fill that position in 2007. In 2008, we currently anticipate hiring several additional finance and accounting personnel to assist with internal audit functions, financial reporting, accounts receivable and payable, and payroll. We currently rely on consultants to provide many accounting, book-keeping and administerial services. We cannot assure you that we will be successful in these hiring efforts or that these measures will significantly improve or remediate any of the material weaknesses described above. We also cannot assure you that we have identified all or that we will not in the future have additional material weaknesses. Accordingly, material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting for purposes of our attestation required by reporting requirements under the Securities Exchange Act of 1934 or Section 404 of the Sarbanes-Oxley Act after this offering.

The standards required for a Section 404 assessment under the Sarbanes-Oxley Act will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. These stringent standards require that our audit committee be advised and regularly updated on management’s review of internal controls. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company. If we fail to staff our accounting and finance

function adequately or maintain internal controls adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately or in a timely manner and our business and stock price may suffer.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act and the Nasdaq Stock Market Rules, or Nasdaq rules. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition.

The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. We are in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in preparation for compliance with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments. Both we and our independent auditors will be testing our internal controls in connection with the Section 404 requirements and could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to

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Risk factors

maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could cause the market value of our common stock to decline.

In accordance with Nasdaq rules, we will be required to maintain a majority independent board of directors. We also expect that the various rules and regulations applicable to public companies will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of Nasdaq rules, and officers will be significantly curtailed.

Compliance with these reporting, Sarbanes-Oxley Act and Nasdaq requirements will require us to build out our accounting and finance staff. We recently hired our Chief Financial Officer who is a certified public accountant and has served as the chief financial officer of several other companies. He and our Chief Operating Officer are the only dedicated accounting and finance employee.employees currently employed by us. Our failure to adequately build out our accounting and financing staff would harm our ability to comply with the requirements listed above.

Rules established by the Financial Accounting Standards Board, or FASB, require us to expense equity compensation given to our employees and may impact our ability to effectively utilize equity compensation to attract and retain employees.

The FASB has adopted changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives effective January 1, 2006, which we have adopted. These accounting changes may cause us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel. Additionally, it may be difficult for us to estimate the impact of such compensation charges on future operating results because they will be based upon the fair market value of our common stock and other assumptions at future dates.

Future interpretations of existing accounting standards could adversely affect our operating results.

Generally accepted accounting principles in the United States are subject to interpretation by FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies that promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Risks Related to This Offering and Ownership of Our Common StockRISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK

Our chairman and principal stockholder can individually control our direction and policies, and his interests may be adverse to the interests of our stockholders.

A trust controlled our chairman, by John N. Kapoor, has been our sole source of financing to date. At July 31,September 30, 2007, Dr. Kapoor beneficially owned approximately 69.7%67.1% of our outstanding shares of

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Risk factors

capital stock. Upon completion of this offering, assuming no exercise of the underwriters’ option to purchase additional shares and including the shares of common stock beneficially owned by Dr. Kapoor that he will receive upon conversion of $             million in aggregate principal amount of notes and accrued interest thereon atowed to the completion of this offering,trust, Dr. Kapoor will beneficially own approximately     % of our outstanding shares of common stock. By virtue of his holdings, Dr. Kapoor can and will continue to be able to effectively control the election of the members of our board of directors, our management and our affairs and prevent corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders or cause a transaction that we or our other stockholders may view as unfavorable. Accordingly, this concentration of ownership may harm the market price of our common stock by:

In addition, sales of shares beneficially owned by Dr. Kapoor could be viewed negatively by third parties and have a negative impact on our stock price. Moreover, upon his passing, we cannot assure you as to how these shares will be distributed and subsequently voted.

There may not be a viable public market for our common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representativesrepresentative of the underwriters and may not be indicative of the market price of our common stock following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market or otherwise or how liquid that market

might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

Risk factors

In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock or securities convertible into our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock or securities convertible into 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 shares of common stock based on the number of shares outstanding as of July 31,September 30, 2007. This includes the shares that we are selling in this offering, which may be resold in the public market immediately unless held by an affiliate of ours. Of the remaining shares,              shares may be sold upon the expiration of lock-up agreements at least 180 days after the date of this offering and the remaining shares may be sold from time to time after the expiration of applicable holding periods specified in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, or Rule 144, as more fully described in the “Shares Eligible for Future Sale” section of this prospectus.

In July 2007, the SEC announced proposed revisions to Rule 144. If the proposed changes to Rule 144 are approved, the holding period for restricted shares of our common stock after the completion of this offering may be reduced to six months under specified circumstances, the restrictions on the sale of restricted shares of our common stock held by our affiliates may be reduced and certain other restrictions

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Risk factors

on resale of the shares of our common stock under Rule 144 may be modified to make it easier for our stockholders under specified circumstances to sell their shares upon the expiration of the lock-up agreements, beginning 180 days after the date of this prospectus. We do not know whether these proposed revisions to Rule 144 will be adopted as proposed or in a modified form, or at all.

Moreover, we also intend to register all shares of common stock that we may issue after this offering under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described above and in the “Underwriting” section of this prospectus.

If a large number of our shares of our common stock or securities convertible into our common stock are sold in the public market after they become eligible for sale, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

Anti-takeover provisions in our charter documents and Delaware law might deter acquisition bids for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a

change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $             per share, because the initial public offering price of $             is substantially higher than the pro forma net book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Moreover, investors who purchase shares of common stock in this offering will contribute approximately     % of our total funding to date but will own only     % of our outstanding shares. In addition, you may also experience additional dilution upon

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Risk factors

future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See the “Dilution” section of this prospectus.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Because management has broad discretion as to the use of the net proceeds from this offering, you may not agree with how we use them, and such proceeds may not be applied successfully.

Our management will have considerable discretion over the use of proceeds from this offering. We intend to use the net proceeds from this offering to:

In addition, a portion may also be used to acquire or license products, technologies or businesses. However, we do not currently have any specific plans for use of the proceeds of this offering, nor have we performed studies or made preliminary decisions with respect to the best use of the capital resources resulting from this offering. As such, 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 operating results or enhance the value of our common stock. You will be relying on the judgment of our management concerning these uses and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.

We do not expect to pay any cash dividends for the foreseeable future.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any

determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

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FORWARD-LOOKING STATEMENTSForward-looking statements

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

In some cases, you can identify these statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or the negative of those terms, and similar expressions. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under the heading “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ

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Forward-looking statements

materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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USE OF PROCEEDSUse of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             million, based upon an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

We anticipate using the net proceeds of this offering to:

In addition, we may use a portion of the net proceeds to us from this offering to acquire or in-license products or product candidates, technologies or businesses, but webusinesses. We currently have no agreements or commitments relating to material acquisitions or licenses.licenses, but if an attractive opportunity presents itself, we will analyze our financial resources at such time.

The expected use of proceeds of this offering represents our intentions based on our current plans and business conditions, and we have not performed studies or made preliminary decisions with respect to the best use of the capital resources resulting from this offering. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the proceeds of this offering, or the amounts we will actually spend on the uses set forth above. In addition, we are unable to estimate where in the drug development process we expect our product candidates to be after expenditure of the proceeds of this offering due to the uncertainty regarding the FDA’s current review of our ANDA for our Dronabinol HG capsule. The amounts and timing of our actual expenditures will depend on numerous factors, including progress of our research, development and commercialization efforts, the progress and results of our clinical trials, and our operating costs and expenditures. Accordingly,At present, however, we believe that the net proceeds from this offering, together with interest thereon, and our existing cash, cash equivalents and short-term investments, will be sufficient to fund our operations through at least the next 12 months. However, given the uncertainties mentioned above, our management will have broad discretion in the application of the net proceeds of this offering to us, and investors will be relying on the judgment of our management regarding the application of these proceeds.

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

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DIVIDEND POLICYDividend policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

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CAPITALIZATIONCapitalization

The following table sets forth our capitalization as of JuneSeptember 30, 2007:

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

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The number of shares of our common stock that will be outstanding after the closing of this offering is based on 23,159,98724,231,737 shares outstanding as of JuneSeptember 30, 2007, and excludes the following:

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DILUTIONDilution

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. The historical net tangible book value of our common stock as of JuneSeptember 30, 2007 was approximately $(17,618,000)$(22,579,000), or approximately $(0.76)$(0.93) per share of common stock, based on the number of shares of common stock outstanding as of JuneSeptember 30, 2007. Historical net tangible book value per share is determined by dividing the number of shares of our common stock outstanding as of JuneSeptember 30, 2007 into our total tangible assets (total assets less intangible assets) less total liabilities. Pro forma net tangible book value as of JuneSeptember 30, 2007 of approximately $             million, or $             per share of our common stock, represents our historical net tangible book value as of JuneSeptember 30, 2007 after giving effect to the automatic conversion of all shares of our non-voting common stock into common stock and the issuance of              shares of our common stock upon the completion of this offering upon the conversion of $             million in aggregate principal amount of notes and accrued interest thereon owed to a trust controlled by our chairman, assuming an initial public offering price of $             per share (the mid-point of the price range set forth on the front cover of this prospectus), immediately prior to the closing of this offering.

After giving effect to the sale of common stock by us in this offering at an assumed initial public offering price of $             per share, the mid-point range of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of JuneSeptember 30, 2007 would have been approximately $             million, or approximately $             per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to existing common stockholders, and an immediate dilution of $             per share to investors participating in this offering. The following table illustrates this per share dilution:

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $             per share and the dilution in pro forma net tangible book value per share to investors in this offering by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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Dilution

If the underwriters exercise in full their option to purchase additional shares, the pro forma net tangible book value per share after the offering would be $             per share, the increase in net tangible book value per share to existing stockholders would be $             per share and the dilution to new investors would be $             per share.

The following table summarizes, on a pro forma basis as of JuneSeptember 30, 2007, the differences between the number of shares of common stock purchased from us, the total consideration, which includes cash received from the exercise of stock options and the value of common stock issued to employees and non-employees, and the average price per share paid by existing stockholders and by investors participating in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus.

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

If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to              shares or     % of the total number of shares of common stock to be outstanding after this offering.

As of JuneSeptember 30, 2007, there were:

Effective upon the closing of this offering, an aggregate of             ,              and              shares of our common stock will be reserved for issuance under our 2007 equity incentive plan, our 2007 non-employee directors’ stock option plan and our 2007 employee stock purchase plan, respectively, and these share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options or warrants are exercised, new stock awards are issued under our equity incentive plans or we issue additional shares of common stock or other equity securities in the future, there will be further dilution to investors participating in this offering.

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SELECTED FINANCIAL DATASelected financial data

The following selected financial data should be read together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected statement of operations data for the period from October 2002 (inception) through JuneSeptember 30, 2007 and the years ended December 31, 2002, 2003, 2004, 2005 and 2006 and the selected balance sheet data as of December 31, 2002, 2003, 2004, 2005 and 2006 are derived from our audited financial statements. Our audited statements of operations for the years ended December 31, 2004, 2005 and 2006 and our audited balance sheets as of December 31, 2005 and 2006 are included elsewhere in this prospectus. The selected statement of operations data for the sixnine months ended JuneSeptember 30, 2006 and 2007 and the selected balance sheet data as of JuneSeptember 30, 2007 are derived from our unaudited interim condensed financial statements, which are included elsewhere in this prospectus.

You should read this selected financial data in conjunction with the financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of our future results.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS56

Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Forward-Looking Statements.”

OverviewOVERVIEW

We are a biopharmaceutical company focused on discovering, developing and commercializing innovative products to address CINV, pain management and other central nervous system disorders. We seek to apply new proprietary formulations and delivery methods to existing pharmaceutical compounds in order to achieve enhanced efficacy, faster onset of action, reduced side effects, convenient delivery and increased patient compliance. We are basing our drug development programs on existing compounds with known safety, efficacy and commercialization histories, which we believe will increase the likelihood of success of our drug development and commercialization efforts. Our goal is to leverage our expertise in the expanding synthetic cannabinoid derivatives and specialized opioid markets to build a portfolio of products that address the limitations of existing therapies.

Our initial product candidate is Dronabinol HG capsule. ThisIf approved, we believe this product candidate is designed towill provide us with near-term revenues to help fund development of our other product candidates and to help us establish a market presence. We have filedIn September 2006, we submitted an ANDA for Dronabinol HG capsule and if our ANDA is approved by the FDA, Dronabinol HG capsule could be the first generic version of the branded CINV drug Marinol. The approval of our Dronabinol HG capsule is an important first step in the development of our additional proprietary dronabinol formulations, such as formulations suitable for room temperature storage.

Our other most advanced product candidates focus on new proprietary formulations and delivery methods for dronabinol, the active ingredient in Marinol, and fentanyl, the active ingredient in the pain management drugs Actiq and Fentora. These product candidates include Dronabinol RT capsule, Dronabinol RT syrup, Dronabinol RT nebulizer and Fentanyl SL spray. We believe these markets are underserved due to limitations of existing therapies, and that our product candidates have the potential to provide a number of advantages over currently marketed products. We anticipate filing NDAs using the drug approval process under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, which we expect will reduce the time and cost of development and commercialization.

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