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Article by DailyStocks_admin    (03-14-12 02:17 AM)

Description

Furiex Pharmact. Director, 10% Owner FREDRIC N ESHELMAN bought 52502 shares on 3-12-2012 at $ 22.61

BUSINESS OVERVIEW

Our Business

About Furiex Pharmaceuticals

We are a drug development collaboration company that uses innovative clinical development strategies to increase the value of partnered pharmaceutical assets and accelerate their development timelines. We collaborate with pharmaceutical and biotechnology companies to increase the value of their drug candidates by applying our novel approach to drug development, which we believe expedites research and development decision-making and can shorten drug development timelines. We share the risk with our collaborators by running and financing drug development programs up to agreed clinical milestones, and in exchange, we share the potential rewards, receiving milestone and royalty payments for successful drug candidates. This business model is designed to help feed product pipelines and deliver therapies to improve lives.

Our company continues the compound partnering business started by Pharmaceutical Product Development, Inc., or PPD, in 1998. We became an independent publicly traded company on June 14, 2010, when PPD spun-off its compound partnering business through a tax-free, pro-rata dividend distribution of all of the shares of the Company to PPD shareholders. PPD does not have any ownership or other form of equity interest in the Company following the spin-off. The Company’s operations are headquartered in Morrisville, North Carolina. Our website address is www.furiex.com . Information on our website is not incorporated herein by reference. We make available free of charge through our website press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after electronically filed with or furnished to the Securities and Exchange Commission.

Business Description

Our goal is to in-license from or form strategic alliances with pharmaceutical and biotechnology businesses to develop and commercialize therapeutics in which the risks and rewards are shared. We seek to collaborate with pharmaceutical and biotechnology companies to increase the value of early stage drug candidates by applying our novel approach to drug development that we believe expedites research and development decision-making and can shorten drug development timelines. Furiex’s team is staffed with the same key PPD team members who demonstrated proven success in the drug development collaboration business while at PPD, as well as highly-qualified additional members. Our strategy is to invest in drug candidates that have a relatively straightforward path to regulatory approval and a large addressable market. Every drug candidate we review is subjected to our rigorous due diligence process by our team of experts who possess experience in all aspects of the drug development process.

Once we in-license or form an alliance, we use our drug development experience and financial resources to advance the drug candidate through clinical development. We apply a novel approach that shortens drug development timelines that we believe transforms research and development into revenues more rapidly than the typical development cycle for such collaborations. Specifically, we set the development strategy based on a product candidate’s best market position, design and manage non-clinical and clinical studies, manage the drug manufacturing programs and evaluate the efficacy and safety data necessary to obtain regulatory approvals for the drug candidate. We use service providers to execute the tasks needed to develop and commercialize our product candidates.

Most of our collaborations involve late development and commercialization agreements with large pharmaceutical companies. Typically, if our collaborators are unable or unwilling to execute on late stage development and commercialization, then we have the option to seek new collaborators.

In exchange for our drug development efforts and sharing the risk with our collaborator, we are entitled to receive milestone payments and royalties based on the continued development and commercialization success of the drug candidate.

Our Business Strategy

Our strategy is to in-license and develop novel early stage drug candidates that address medical conditions with a significant unmet need. We invest in innovative early stage drug candidates whose targets have scientific or clinical validation, and in disease areas that have a relatively straightforward path to regulatory approval. We leverage our extensive drug development expertise to implement efficient and high quality development programs that accelerate time to market. We progress drug candidates to key value inflection points and form strategic collaborations with commercial pharmaceutical companies in exchange for milestones and royalties. Each potential drug candidate we consider is subjected to a rigorous review process by our due diligence team, which has expertise in all aspects of drug development, as well as in intellectual property and commercial assessment. This approach has enabled us to build what we believe is a strong, diversified portfolio of drug candidates and commercialized products that offer value to patients, our investors and collaborators. We plan to continue to grow our business by in-licensing or acquiring promising compounds and establishing new development and commercialization partnerships.

Our Portfolio

We have two Phase III-ready products in clinical development, with exclusive license rights to both products: MuDelta and JNJ-Q2. In addition we have one compound in Phase III development with a collaborator, SYR-472, and two compounds that are commercialized by collaborators, for which we are eligible to receive regulatory milestone payments plus worldwide sales royalty and milestone payments. These compounds, Nesina and Priligy, are currently marketed outside of the United States, and we have no further development obligations for any of these three compounds.

Compounds in Clinical Development

MuDelta for diarrhea-predominant irritable bowel syndrome

Diarrhea-predominant irritable bowel syndrome, or IBS-d, affects approximately 28 million patients in the United States and the five major European Union countries, and is characterized by chronic abdominal pain and frequent diarrhea. Studies have demonstrated that IBS-d is associated with work absenteeism, high medical costs and low quality of life. We believe the market for prescription treatments for IBS-d is underserved due to the limited number of available treatments and the adverse side effects associated with those treatments.

MuDelta is a novel, orally active, Phase III-ready investigational agent with combined mu opioid receptor agonist and delta opioid receptor antagonist activity. The compound’s dual opioid activity is designed to treat diarrhea and pain symptoms of IBS-d, without causing the constipating side effects that occur with mu opioid agonists. MuDelta acts locally in the gut and has very low oral bioavailability, thus limiting the potential for systemic side effects, such as sedation. In January 2011, the FDA granted Fast Track designation to the MuDelta IBS-d program. Fast Track is a process for facilitating the development and expediting the review of drugs to treat serious diseases and fill unmet medical needs, with the goal of bringing important new drugs to patients earlier. Approximately 700 subjects have been treated with MuDelta to date.

In 2011, we progressed the development of MuDelta from both a developmental and regulatory perspective. We completed a large multicenter randomized-double-blind Phase II Proof-of-Concept trial in patients with IBS-d, which demonstrated that MuDelta has a favorable efficacy and safety profile. We also presented top-line data for the study at the American College of Gastroenterology 2011 meeting. Key findings from the Phase II Proof- of-Concept study results are summarized below:

The study reached statistical significance for the primary endpoint of improvement in stool consistency and abdominal pain at week four of treatment, which was developed prior to the release of the FDA’s IBS guidance in 2010, as well as secondary endpoints of adequate relief of IBS-d symptoms at weeks 4, 8, and 12. Importantly, the favorable efficacy results were obtained in a post hoc responder analysis, using the composite endpoint of improvement in pain and diarrheal symptoms, based on the FDA 2010 guidance. Using this endpoint (where a responder is defined as a patient with a Bristol Stool Score of < 4 and daily pain ratings improved by > 30% compared to baseline for at least 50% of days of the 12-week treatment period), MuDelta showed statistically and clinically meaningful differences compared with placebo at both the 100 mg BID and 200 mg BID doses.

The FDA agreed at our End of Phase II Meeting, that the aforementioned endpoint is an acceptable primary endpoint for Phase III pivotal studies; we believe this provides a clear regulatory path for progressing the program. We believe that our favorable Phase II study results with this endpoint bodes well for the Phase III program.

In November 2011, we acquired full exclusive license rights to develop and commercialize MuDelta under our existing development and license agreement with Janssen Pharmaceutica, N.V., or Janssen. We acquired these rights as a result of Janssen’s recent decision not to exercise its option under the agreement to continue development of MuDelta. Based on our 2009 agreement, we will continue developing and commercializing the compound and Janssen may receive up to $50.0 million in regulatory milestone payments and, if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties are to be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

We are actively exploring various partnering and funding options to advance development of MuDelta. In January 2012, we received favorable written feedback from the FDA on the manufacturing program, which enables us to keep program timelines on track. We are conducting Phase III manufacturing as well as other study start-up activities, with the goal of commencing Phase III dosing in the third quarter of 2012. We are also in the process of obtaining Scientific Advice from the European regulatory authorities about a European development strategy for MuDelta.

JNJ-Q2

Community-acquired bacterial pneumonia, or CABP, and acute bacterial skin and skin structure infections, or ABSSSI, are important public-health concerns due to increasing drug resistance of established antibiotics to causative pathogens. Due to the emerging resistance to established antibiotics, there is a large unmet need for antibiotics such as JNJ-Q2, that cover a broad range of pathogens, including resistant Staphylococcus (“Staph”) and Streptococcus (“Strep”), and that have the potential for both intravenous and oral use. Bacterial infections are a major cause of morbidity and mortality. More than 14 million ambulatory physician visits each year are related to skin and soft-tissue infections, and approximately 94,000 Americans developed serious MRSA (methicillin resistant Staphylococcus “Staph” aureus) infections in 2005, according to a recent study published in the Journal of the American Medical Association. Global microbiological surveillance suggests that approximately 40% of Staph infections in the U.S., Latin America and Asia Pacific are MRSA. According to Global Data, the global MRSA market was valued at $900 million in 2010 and is projected to exceed $1.0 billion by 2017. The pneumonia therapeutics market was valued at $2.0 billion in 2010 with $1.8 billion value forecast for 2018 due to expected patent expirations.

JNJ-Q2 is a novel broad-spectrum fluoroquinolone antibiotic that also has broad coverage against two important drug resistant pathogens: MRSA and drug-resistant Streptococcus pneumoniae . In addition, it is highly active against other common and difficult to treat bacteria, including those that are gram-negative, gram-positive, atypical and anaerobic, and it has a low propensity for drug resistance. JNJ-Q2 is also active against resistant pathogens that might be used in bioterrorism and also, in drug-resistant gonorrhea. This broad bactericidal spectrum gives JNJ-Q2 an advantage over many other antibiotics, which do not reliably treat polymicrobial infections (i.e., wound infections containing multiple bacterial species) or such a wide variety of respiratory pathogens. We are developing JNJ-Q2 for both IV and oral use, which differentiates it from many other MRSA treatments, which are available for IV use only. The product has been in development for both skin infections and pneumonia, with the lead indication being ABSSSI.

In November 2010, we reported positive results for our randomized, double-blind, multicenter Phase II clinical trial comparing the efficacy, safety and tolerability of JNJ-Q2 with linezolid (Zyvox ® ) in a study of 161 patients with ABSSSI receiving oral treatment twice a day with either JNJ-Q2 or linezolid for 7 to14 days. JNJ-Q2 had positive results for both clinical cure and early response endpoints involving cessation of skin lesion spread or reduction in lesion size and absence of fever within 48 to 72 hours after starting treatment, consistent with the latest FDA draft guidance, with a slightly higher response rate for JNJ-Q2 at 62.7% than for linezolid at 57.7%. These results were published in the December 2011 issue of Antimicrobial Agents and Chemotherapy (Volume 55: pages 5790-5797) and are also available on line http://aac.asm.org/content/55/12/5790.full .

In April 2011, we acquired full exclusive license rights to develop and commercialize JNJ-Q2 under our existing development and license agreement with Janssen. We acquired rights to JNJ-Q2 as a result of Janssen’s decision not to exercise its option under the agreement which gave Janssen the opportunity to continue development of JNJ-Q2. This decision was related to Janssen’s April 2011 announcement that it will be directing its research and development investments toward antivirals and vaccines and would not be investing in new antibacterial therapies. Based on our existing agreement, Janssen may receive up to $50.0 million in regulatory milestone payments, and if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

In June and July of 2011, we had productive End of Phase II meetings with both the FDA and with several EU regulatory authorities, providing what we believe is a clear regulatory path to support global Phase III development in ABSSSI. Also, a total of 13 peer-reviewed scientific papers and abstracts on JNJ-Q2 were published in 2011.

In the fourth quarter of 2011, we terminated our study of community-acquired bacterial pneumonia prior to full recruitment. This decision was made for business reasons related to challenges in recruiting the study based on the current FDA guidance and recent information that the FDA’s guidance might change. The study was a double-blind randomized trial where patients with severe community-acquired pneumonia received intravenous treatment with JNJ-Q2 (twice daily) versus moxifloxacin (once daily), and were switched from IV to oral therapy as their conditions improved. Although we enrolled only 32 patients, the data from this small study gives us valuable qualitative information about the drug’s efficacy and tolerability in this very ill patient population. The results were encouraging, with a clinical cure rate (primary endpoint) of 87.5% for patients receiving JNJ-Q2 versus 81.3% of patients receiving moxifloxacin. The study was too small, however, to verify statistical significance (i.e., non-inferiority testing). For the secondary endpoint of clinical stability at day 4 (determined by patients’ vital signs and respiratory status) 50.0% of patients receiving JNJ-Q2 met the endpoint compared with 43.8% of patients receiving moxifloxacin. Both the IV and oral formulations of JNJ-Q2 had favorable tolerability and safety profiles, with no nausea or vomiting reported.

We believe that these Phase II clinical trial data for CABP, taken together with the excellent lung penetration data from our Phase I study, support Phase III-readiness for a CABP indication. We believe these data add value to the asset, in that the Phase III-readiness of JNJ-Q2 for two indications may provide a competitive advantage over other antibiotics in the development pipeline.

We indicated in the fourth quarter of 2011 that we were invited to submit a government contract proposal for research funding of JNJ-Q2 to the Biomedical Advanced Research and Development Authority, or BARDA. Although we had a productive pre-proposal meeting with BARDA, we have elected not to proceed with a contract proposal at present, because of limitations in government funding to support Phase III development.

We are continuing to seek to out-license JNJ-Q2. We plan to maintain the Phase III-readiness of the program, which should require minimal expenditures during 2012. We believe this drug has the potential to be valuable broad spectrum therapy for serious skin and lung infections.

PPD-10558 (Statin compound)

In December 2006, we entered into an exclusive license agreement with Ranbaxy Laboratories, Ltd., or Ranbaxy, for rights to PPD-10558 as a potential treatment for dyslipidemia, a condition characterized by high cholesterol. In December 2011, we announced top-line results from the Phase II trial of the investigational drug PPD-10558 in patients with a history of statin-associated myalgia, or SAM. PPD-10558 did not meet its primary efficacy endpoint in this study.

Based on these results, we have made a decision to discontinue further spending on the PPD-10558 program and plan to terminate our license agreement with Ranbaxy in accordance with the terms of the agreement. As part of the agreement, we will owe Ranbaxy a $1.0 million development milestone payment upon completion of the Phase II final study report, which we anticipate will occur in the second quarter of 2012.

Marketed Products

Nesina (alogliptin) for Type II diabetes

Globally, as of 2010, it is estimated that there are 285 million people with diabetes. Type-2 diabetes comprises about 85%-95% of the total cases of diabetes. Worldwide sales of anti-diabetic treatments in 2010 were $34.4 billion.

Nesina, which is marketed by Takeda Pharmaceuticals Company Limited, or Takeda, is the trade name for alogliptin, a member of a relatively new class of drugs for the oral treatment of Type-2 diabetes. Nesina is a highly selective dipeptidyl peptidase-4, or DPP-4, inhibitor that slows the inactivation of hormones known as incretins, which play a major role in regulating blood sugar levels and might improve pancreatic function. Pivotal trials demonstrated that Nesina was well-tolerated when given as a single daily dose and it significantly improved glycemic control in Type-2 diabetes patients without raising the incidence of hypoglycemia. Additionally, Nesina has been shown to enhance glycemic control when used in combination with other commonly prescribed diabetes drugs.

We continue to see increasing sales of Nesina in Japan, with royalty revenues growing more than 64% over each of the last two quarters. Nesina was approved in Japan as monotherapy for Type-2 diabetes in 2010. In February 2011, additional indications for Nesina were approved in Japan for use in combination with sulfonylureas and use in combination with biguanides. In the third quarter of 2011, Takeda launched two dosages of Liovel, a fixed dose combination tablet of Nesina (alogliptin) and Actos (pioglitazone HCL), in Japan.

In July 2011, Takeda announced resubmission of the U.S. NDAs for alogliptin and alogliptin in fixed-dose combination with pioglitazone and a Prescription Drug User Fee Act, or PDUFA, action date of January 25, 2012 was assigned by the FDA. On November 18, 2011, Takeda announced that the PDUFA action date was delayed until April 25, 2012. If U.S. approval is granted, we would be eligible to receive a $25.0 million milestone payment as well as royalties and sales-based milestones. Also, Takeda announced that it had submitted an NDA in the U.S. for a fixed-dose combination of alogliptin and metformin, and that this application has a PDUFA action date in December 2012.

SYR-472 is part of the DPP-4 inhibitor portfolio that Takeda purchased from PPD and Syrrx in 2005. SYR-472 has the same mechanism of action as alogliptin. However, in contrast to alogliptin, which is a once-daily oral therapy, SYR-472 is a once-weekly oral formulation, which offers potential for greater convenience for diabetes patients. On September 8, 2011, Takeda announced that SYR-472 entered Phase III clinical trials in Japan for treatment of Type-2 diabetes. If SYR-472 is approved, then we would be eligible to receive royalty payments at the same rates as for Nesina. Under our agreement with Takeda, we would be entitled to receive milestone payments for SYR-472 or Nesina, whichever compound achieves the milestone(s) first.

Under our agreement with Takeda, we will be entitled to receive up to $45.0 million in future regulatory milestone payments ($25.0 million for U.S. approval, $10.0 million on regulatory filing for marketing authorization in the EU and $10.0 million for EU marketing authorization), and up to $33.0 million in sales-based milestone payments. In addition, we are entitled to receive payments on worldwide sales of Nesina based on royalty rates of 7% to 12% in the U.S., 4% to 8% in Europe and Japan and 3% to 7% in regions other than the U.S., Europe or Japan. These royalty payments are subject to a reduction of up to 0.5% for a portion of payments by Takeda to a licensor for intellectual property related to Nesina. Royalties are to be paid for the later of ten years following the first commercial sale or two years following the expiration of the last to expire patent. Takeda must pay us royalties for Liovel sales based on the proportion of Nesina’s average sales price compared to that of pioglitazone plus Nesina. We have no further financial obligation under this agreement.

CEO BACKGROUND

Peter B. Corr, Ph.D. is Co-Founder and General Partner of Celtic Therapeutics Management LLP. Dr. Corr retired from Pfizer Inc. in December 2006 where he was Senior Vice President for Science and Technology, a position he had held since 2002. In 2002 and 2003, he also headed worldwide pharmaceutical research and development for Pfizer. Previously, Dr. Corr served as Executive Vice President, Pfizer Global Research & Development, and President, Worldwide Development. Prior to Pfizer, Dr. Corr served as Senior Vice President, Discovery Research, at Monsanto/Searle and President of Pharmaceutical Research and Development at Warner Lambert/Parke Davis. Dr. Corr, who received his Ph.D. from Georgetown University School of Medicine, spent 18 years as a researcher in molecular biology and pharmacology at Washington University in St. Louis. When he left Washington University, Dr. Corr was Professor, Department of Medicine (Cardiology) and Professor, Department of Pharmacology and Molecular Biology. His research has been published in more than 160 scientific manuscripts. In addition to his work at Pfizer, Dr. Corr was Chairman of the Science & Regulatory Executive Committee of the Pharmaceutical Research and Manufacturers of America (PhRMA); Chairman of the PhRMA Foundation Board of Directors; and Chairman of the Hever Group, representing Chief Scientific Officers (CSO’s) across the European and U.S. based pharmaceutical industry.

Among other experience, qualifications, attributes and skills, Dr. Corr’s executive experience at a leading pharmaceutical research and development company supports his service as a director of our company in light of our business and structure.

Wendy L. Dixon, Ph.D. is a Senior Advisor to The Monitor Group, a worldwide consulting firm. She has had an over 30-year career in the pharmaceutical and biotechnology business, combining a technical background and experience in drug development and regulatory affairs with commercial responsibilities in building and leading organizations and launching and growing more than 20 pharmaceutical products including Tagamet, Fosamax, Singulair, Plavix, Abilify, Reyataz and Baraclude. From 2001 to 2009 she was Chief Marketing Officer and President, Global Marketing for Bristol-Myers Squibb, and served on the CEO’s Executive Committee. From 1996 to 2001 she was Senior VP Marketing at Merck and prior to that she held executive management positions at West Pharmaceuticals, Osteotech and Centocor, and various positions at SmithKline and French (now GlaxoSmithKline) in marketing, regulatory affairs, project management and as a biochemist. Dr. Dixon serves on the boards of directors of Alkermes, Inc., Incyte Corporation and Orexigen Therapeutics, Inc.

Among other experience, qualifications, attributes and skills, Dr. Dixon’s technical background in drug development, commercialization, marketing and regulatory affairs supports her service as a director of our company in light of our business and structure.

Fredric N. Eshelman, Pharm.D. has served as our Chairman since we were founded in 2010, and has served as PPD’s Executive Chairman since July 2009. He served as Chief Executive Officer of PPD from July 1990 to July 2009 and as Vice Chairman of its Board of Directors from July 1993 to July 2009. Dr. Eshelman founded PPD’s predecessor and served as its Chief Executive Officer until its sale to PPD in 1989. Dr. Eshelman served as Senior Vice President, Development and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc, from 1989 through 1990 before rejoining PPD.

Among other experience, qualifications, attributes and skills, Dr. Eshelman’s status as our founder, and his unique experience, in-depth knowledge and understanding of drug discovery and development, stature in the pharmaceutical and clinical research organization industries, and perspective on our business in particular led to the conclusion of our Nominating and Governance Committee and of our full Board that he should serve as a director of our Company in light of our business and structure.

Stephen W. Kaldor, Ph.D. most recently served as president and chief executive officer of Ambrx, a San Diego-based biopharmaceutical company with a mission to deliver breakthrough protein therapeutics. Prior to this role, Dr. Kaldor served as president and chief scientific officer of Takeda San Diego Inc., the U.S. Discovery Research Center for Takeda Pharmaceuticals. Dr. Kaldor ran Syrrx, a privately-held, structure-based drug discovery company, as its president and chief scientific officer from 2003 to 2005. He also has over 12 years of drug discovery and development experience at Eli Lilly and Company, has served as a researcher and director with line management responsibility for groups of up to 270 people. Dr. Kaldor holds a B.S. in chemistry from Columbia University and a Ph.D. in organic chemistry from Harvard University. Dr. Kaldor is the co-inventor of multiple compounds that have advanced into the clinic, including Viracept ® , a marketed HIV protease inhibitor.

Among other experience, qualifications, attributes and skills, Dr. Kaldor’s technical background in drug discovery and management of drug development companies supports his service as a director of our company in light of our business and structure. Dr. Eshelman recommended Dr. Kaldor as a director, and our Nominating/Corporate Governance Committee reviewed his qualifications and recommended his candidacy to the full Board, which appointed him in December 2010.

Robert P. Ruscher has more than 20 years of experience working closely with emerging growth, technology-based companies (privately held/venture capital backed and publicly traded), as well as the investors and investment banks that help finance them. Mr. Ruscher began his business career as a certified public accountant working with San Francisco Bay area technology companies for three years, which was followed by seven years as a corporate attorney representing primarily life science companies, including those focused in the fields of biotechnology and specialty pharmaceuticals. In 1995 Mr. Ruscher joined Salix Pharmaceuticals (a gastroenterology specialty pharmaceutical company) as Director, Business Development and advanced to positions of increasing responsibility, culminating in becoming President and Chief Executive Officer and a member of the Board of Directors in 1999. As President and Chief Executive Officer, Mr. Ruscher formulated and implemented Salix’s strategic change from a “virtual” model to a successful product-based sales and marketing focused specialty pharmaceutical company, including managing significant employee growth (7 to 125), overseeing a successful FDA New Drug Application approval process for Salix’s first product and receiving an FDA approvable letter for its second product. Mr. Ruscher served as President and Chief Executive Officer of Salix from 1999 to 2002, served as Executive Chairman of the Board from 2002 to 2003, and retired from Salix in 2005. Since that time he has been a private investor.

Among other experience, qualifications, attributes and skills, Mr. Ruscher’s experience in public company management, business development and accounting supports his service as a director of our company in light of our business and structure.

MANAGEMENT DISCUSSION FROM LATEST 10K

Results of Operations

On June 14, 2010 we became an independent company upon the spin-off by Pharmaceutical Product Development, Inc. As part of and prior to the spin-off, PPD transferred to us $100.0 million in cash and current accounts receivable and payable associated with the compound partnering business.

Our business consists solely of compound development and partnering activities. Accordingly, we operate in one reportable business segment. Historically, our revenues consisted primarily of milestone and royalty payments from collaborators from out-licensed compounds. For the year ended December 31, 2010, our year-to-date revenue includes $7.5 million in regulatory approval milestones resulting from regulatory and pricing approval of Nesina in Japan in addition to $1.3 million in royalty revenue from the sale of Priligy and Nesina by our collaborators, Alza and Takeda. For the year ended December 31, 2011, our year-to-date revenue of $4.5 million is comprised of royalty revenue from the sale of Priligy and Nesina/Liovel by our collaborators, Alza and Takeda.

We incurred research and development expenses of $50.1 million and $44.2 million for the years ended December 31, 2010 and 2011, respectively. Our research and development expenses include costs incurred for our clinical-stage drug candidates, including the statin, PPD-10558, and the two compounds in-licensed from Janssen. We expect our level of research and development expenditures related to Phase II studies to decline significantly over the next quarter as work on our various Phase II studies comes to completion. We currently expect expenses associated with the continued development of MuDelta to be between $30.0 and $35.0 million over the next year related to Phase III costs. These expenses include contract research organization services provided by PPD, non-clinical testing and clinical trial material manufacturing provided by third parties, and the direct cost of our personnel managing the programs and payments to third parties. All research and development expenses for our drug candidates and external collaborations are expensed as incurred.

The timing and amount of any future expenses, completion dates and revenues related to our drug candidates are subject to significant uncertainty due to the nature of our development programs. We do not know if we will be successful in developing any of our drug candidates. The timing and amount of our research and development expenses will depend upon the costs associated with the present and potential future clinical trials of our drug candidates, any related expansion of our research and development organization, regulatory requirements, advancement of our pre-clinical programs and manufacturing costs. There are numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of events arising during clinical development. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate to complete clinical development of a drug candidate, or if we experience significant delays in enrollment in any of our clinical trials, we would be required to expend significant additional financial resources and time on the completion of clinical development. The timing and amount of revenues, if any, are equally dependent upon the success of the clinical trials as well as the commercial success of these products in the marketplace, all of which are subject to a variety of risk factors and uncertainties.

For the year ended December 31, 2011, we reported an operating loss of $48.6 million and net loss of $49.0 million. We expect to continue to incur net losses until revenues from all sources reach a level sufficient to support our ongoing operations.

Our business is subject to various risks and uncertainties. See “Risk Factors” described in Part 1 Item A for information on these risks and uncertainties.

Basis of Accounting

The accompanying combined financial statements for periods prior to June 14, 2010, have been derived from the combined financial statements and accounting records of PPD, and from the historical cost basis of the assets and liabilities of the various activities that reflect the combined results of operations, financial condition and cash flows of the discovery sciences segment of PPD. All the business components of the discovery sciences segment have been included in the historical statements because they were managed by common PPD segment management, and because they reflected historical performance of segment management.

In May 2010, PPD discontinued operations of its wholly owned subsidiary PPD Dermatology, Inc., formerly Magen Biosciences, Inc., due to unfavorable efficacy data associated with the MAG-131 program. This business unit is recorded as discontinued operations in the statements of operations. Additionally, the discovery sciences segment included pre-clinical consulting services not offered by us. All rights and obligations related to pre-clinical consulting services and the definitive purchase agreements related to PPD Dermatology, Inc. have been retained by PPD.

For periods prior to the June 14, 2010 spin-off, we were allocated expenses from PPD such as executive oversight, risk management, accounting, tax, legal, investor relations, human resources, information technology, facilities and depreciation, but were not allocated the underlying productive assets, such as information systems equipment, and furniture and facilities that were not assigned to us, but from which we have benefited. Such expenses have been reflected in the combined and consolidated financial statements as expense allocations from PPD. The basis of these allocations included full-time equivalent employees for the respective periods presented and square footage of occupied space. See Note 14 to our combined and consolidated financial statements for further discussion of the allocations.

Management believes that the assumptions and allocations underlying the combined and consolidated financial statements are reasonable. For periods prior to the June 14, 2010 spin-off, the financial information in these combined and consolidated financial statements does not include all expenses that would have been incurred had we been a separate, stand-alone publicly traded entity. For periods prior to the June 14, 2010 spin-off, the combined and consolidated financial statements include assets, liabilities and operations for PPD Dermatology, Inc. and pre-clinical consulting services that are not included in our operations after the spin-off. As a result, the financial information herein does not reflect our financial position, results of operations or cash flows had we been a separate, stand-alone entity during the historical periods presented.

On April 18, 2011, Janssen announced that in connection with a broad strategic review of its portfolio of infectious disease programs, it will be redirecting its research and development efforts toward antivirals and vaccines, and will not be investing in the development of new antibacterial therapies. As a result, Janssen elected not to exercise its option to continue the development of the JNJ-Q2 compound. On April 19, 2011, we announced that we had acquired full exclusive license rights to develop and commercialize the JNJ-Q2 compound under our existing development and license agreement with Janssen. On November 1, 2011, we announced we had acquired full exclusive license rights to develop and commercialize the MuDelta compound under our existing development and license agreement with Janssen. We acquired these rights as a result of Janssen’s decision not to exercise its option under the agreement to continue development of MuDelta. We plan to continue evaluating other partnering and funding opportunities for both the JNJ-Q2 and MuDelta compounds.

In December 2011, we announced top-line results from the Phase II trial of PPD-10558. Based on these results, we have discontinued further spending on the PPD-10558 program and plan to terminate the license agreement with Ranbaxy in accordance with the terms of the agreement. We will owe Ranbaxy a $1.0 million development milestone payment upon completion of the Phase II final study report, which is expected to occur in the second quarter of 2012.

R&D expenses may fluctuate significantly from period to period for a variety of reasons, including the number of compounds under development, the stages of development and changes in development plans. We currently expect expenses associated with the continued development of MuDelta to be between $30.0 and $35.0 million over the next year related to Phase III costs.

Selling, general and administrative, or SG&A expenses, increased $0.5 million to $8.8 million for the year ended December 31, 2011 from 2010.

Income Taxes

During 2010 and 2011, we did not record a tax benefit related to our operating losses because we have provided full valuation allowances against our assets based on our history of operating losses. Additionally, with the exception of the pre-acquisition federal and state tax filings for Magen BioSciences, Inc. and certain separate state filings, through the June 14, 2010 spin-off, our operations were included in the consolidated federal and combined state tax returns of PPD, and the resulting tax attributes have been fully utilized by PPD and are no longer available to us for future use. Subsequent to June 14, 2010, we have filed federal and state returns separately from PPD and can use our tax attributes accordingly. However, we anticipate that we will require a full valuation allowance against any deferred tax assets until such time as we are able to demonstrate a consistent pattern of profitability. For the years ended December 31, 2010 and 2011, we recorded an insignificant amount of income tax expense. This amount relates to the adjustment of a deferred tax liability associated with historical goodwill, which is amortized and deductible for tax purposes, but is an indefinite-lived intangible asset for financial reporting purposes.

Results of Operations

Operating loss decreased $0.9 million from a loss of $49.5 million in 2010 to a loss of $48.6 million in 2011. This decrease in loss from operations resulted primarily from the $5.9 million decrease in R&D expense, offset by the $4.5 million decrease in revenue, as described above.

Net loss of $49.0 million in 2011 represents a $5.7 million decrease from net loss of $54.7 million in 2010. This decrease in net loss resulted primarily from discontinued operations, in addition to changes in revenue and R&D described above. In May 2010, PPD discontinued operations of its wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, this business unit is shown as discontinued operations for 2010. Loss from discontinued operations was $5.1 million for the year ended December 31, 2010.

Results of Operations

Operating loss increased $41.2 million from a loss of $8.3 million in 2009 to a loss of $49.5 million in 2010. This increase in loss from operations resulted primarily from the $38.3 million increase in R&D expense and the $5.7 million increase in SG&A, as described above, partially offset by an increase of $2.7 million in revenue.

In May 2009, PPD completed the disposition of substantially all of the assets of Piedmont Research Center, LLC. Piedmont Research Center, LLC provided pre-clinical research services for clients with anti-cancer agents and other therapeutic candidates. In December 2009, PPD completed the disposition of its wholly owned subsidiary, PPD Biomarker Discovery Sciences, LLC. PPD Biomarker Discovery Sciences, LLC provided biomarker discovery services and participant sample analysis. In May 2010, PPD discontinued operations of its wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, these business units are shown as discontinued operations for 2009 and 2010. Loss from discontinued operations was $0.6 and $5.1 million for the year ended December 31, 2009 and 2010, respectively.

Net loss of $54.7 million in 2010 represents a $45.8 million increase from net loss of $8.9 million in 2009. This increase in net loss resulted primarily from the $38.3 million increase in R&D expense, the $5.7 million increase in SG&A expense, and the $4.5 million increase in loss from discontinued operations, partially offset by an increase of $2.7 million in revenue.

Liquidity and Capital Resources

As of December 31, 2011, we had $43.6 million of cash, cash equivalents and short-term investments. The primary source of our cash is the $100.0 million PPD provided us upon the spin-off on June 14, 2010, $11.1 million of cash received related to milestone and royalty revenues since the spin-off and cash from the issuance of debt. On August 18, 2011, we entered into a Loan and Security Agreement with MidCap Funding III, LLC and Silicon Valley Bank. The loan agreement is structured in two tranches. The first tranche in the amount of $10.0 million was drawn upon closing of the transaction. The second tranche of $5.0 million only becomes available to us if a pre-defined financing event occurs prior to March 31, 2012. We expect that these sources of cash should fund our operations and working capital requirements for the next 12 months, based on current operating plans. In addition to the PPD cash contribution and borrowings under the loan agreement, we expect to receive future milestone and royalty payments from our existing collaborations that would provide additional support for our operations and working capital requirements.

The timing and amount of any future expenses, trial completion dates and revenues related to our compounds are subject to significant uncertainty. We do not know if we will be successful in developing any of our drug candidates. The timing and amount of our research and development expenses will depend upon the costs associated with the present and potential future clinical trials and non-clinical studies of our drug candidates, any related expansion of our research and development organization, regulatory requirements and manufacturing costs. There are numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of events arising during clinical development. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those we currently anticipate to complete clinical development of a drug candidate, or if we experience significant delays in enrollment in any of our clinical trials, we would be required to expend significant additional financial resources and time on the completion of clinical development. The timing and amount of revenues, if any, are dependent upon the success of the clinical trials as well as the commercial success of these products in the marketplace, all of which are subject to a variety of risks and uncertainties.

Our future capital requirements will depend on numerous factors, including, among others: the cost and expense of continuing the research and development activities of our existing candidates; new collaborative agreements that we might enter into in the future; progress of product candidates in clinical trials as it relates to the cost of development and the receipt of future milestone payments, if any; the ability of our licensees and collaborators to obtain regulatory approval and successfully manufacture and market licensed products; the continued or additional support by our collaborators or other third parties of R&D efforts and clinical trials; time required to gain regulatory approvals; the demand for our potential products, if and when approved; potential acquisitions of technology, product candidates or businesses by us; and the costs of defending or prosecuting any patent opposition or litigation necessary to protect our proprietary technologies. In order to develop and obtain regulatory approval for our potential product candidates we might need to raise additional funds through equity or debt financings or from other sources, collaborative arrangements, the use of sponsored research efforts or other means. Additional financing might not be available on acceptable terms, if at all, and such financing might only be available on terms dilutive or otherwise detrimental to our stockholders or our business.

For the year ended December 31, 2011, our operating activities used $49.0 million in cash as compared to $43.3 million used for the same period in 2010. The increase in net cash used in operating activities of $5.7 million was due primarily to changes in operating assets and liabilities, a decrease in revenue of $4.5 million and a decrease in R&D expenses of $5.9 million from 2010, and discontinued operations of $5.1 million in 2010.

For the year ended December 31, 2011, our investing activities used $10.0 million in cash related to the purchase of short-term investments. For the year ended December 31, 2010, our investing activities provided $2.8 million in cash. The purchaser of Piedmont Research Center, LLC had an indemnification holdback of $3.5 million, which PPD received, offset by purchases of property and equipment of $0.7 million.

For the year ended December 31, 2011, our financing activities provided $10.0 million in cash under the loan agreement with MidCap Funding III, LLC and Silicon Valley Bank and $0.6 million from the issuance of common stock related to option exercises by employees and consultants. For the year ended December 31, 2010, our financing activities provided $22.6 million of cash related to the net change in investment from our former parent and $100.0 million related to cash contributed by PPD as part of the spin-off.

As of December 31, 2011, we had three collaborations that involve potential future expenditures. The first is our collaboration with Alza for Priligy. In connection with this collaboration, we have an obligation to pay a royalty to Eli Lilly and Company of 5% on annual net sales of the compound in excess of $800.0 million. As of December 31, 2011, we are not obligated to pay any ongoing costs of development for this compound. We are actively evaluating and pursuing the possibility of restructuring the existing agreement with Alza, for Priligy, with the possibility of involving another collaborative partner. Any transaction might require that the Company negotiate additional out-licenses or collaborations, and could require additional external sources of financing.

The second collaboration involving future expenditures is in respect of the two compounds in-licensed from Janssen: JNJ-Q2 and MuDelta. On April 18, 2011, Janssen announced that in connection with a broad strategic review of its portfolio of infectious disease programs, it will be redirecting its research and development efforts toward antivirals and vaccines, and will not be investing in the development of new antibacterial therapies. As a result, Janssen elected not to exercise its option to continue the development of the JNJ-Q2 compound. On April 19, 2011, we announced we had acquired full exclusive license rights to develop and commercialize the JNJ-Q2 compound under our existing development and license agreement with Janssen. On November 1, 2011, we announced we had acquired full exclusive license rights to develop and commercialize the MuDelta compound under our existing development and license agreement with Janssen. We acquired these rights as a result of Janssen’s decision not to exercise its option under the agreement to continue development of JNJ-Q2 and MuDelta.

We plan to continue evaluating other partnering and funding opportunities for both the JNJ-Q2 and MuDelta compounds. We may be obligated to pay Janssen, for both the JNJ-Q2 and MuDelta compounds, individually, up to $50.0 million in regulatory milestone payments and, if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

We currently expect expenses associated with the continued development of MuDelta to be between $30.0 and $35.0 million over the next year related to Phase III costs.

The third collaboration involving future expenditures is with Ranbaxy for a statin compound, PPD-10558. In December 2011, we announced top-line results from the Phase II trial of PPD-10558. Based on these results, we have discontinued further spending on the PPD-10558 program and plan to terminate our license agreement with Ranbaxy in accordance with the terms of the agreement. We will owe Ranbaxy a $1.0 million development milestone payment upon completion of the Phase II final study report, which is expected to occur in the second quarter of 2012.

If required, we might seek funds from new collaborators or from issuances of equity or debt securities or from other sources.

While we believe we will have adequate sources of liquidity to fund our operations for at least 12 months, our sources of liquidity over that time period could be affected by among other things: risks and costs related to our development efforts, regulatory approval and commercialization of our product candidates; changes in regulatory compliance requirements; reliance on existing collaborators and the potential need to enter into additional collaborative arrangements; personal injury or other tort claims; international risks; environmental or intellectual property claims; or other factors described under “Item 1A. Risk Factors.”

Contractual Obligations

On August 18, 2011, we entered into a Loan and Security Agreement with MidCap Funding III, LLC and Silicon Valley Bank, collectively, the Lenders. The loans are divided into two separate tranches. The first tranche of $10.0 million closed on August 18, 2011. The second tranche of $5.0 million only becomes available to us if a pre-defined financing event occurs prior to March 31, 2012. The first tranche bears interest at a fixed rate of 10.25% per annum and is due August 1, 2015. Interest accrues monthly and is payable on the first day of the following month, in arrears. Principal payments of the first tranche begin on August 1, 2012, are due the first day of each month, and will be paid on a ratable monthly basis until maturity. We intend to use the proceeds from the loans to support research and development for our clinical stage compounds JNJ-Q2 and MuDelta.

A final payment fee is due to the Lenders in an amount equal to 2.5% of the loan commitments, payable at the maturity date or earlier prepayment of the loans. We may prepay the first tranche subject to a prepayment fee of between one and four percent of the amount borrowed, depending on the time of the prepayment. The amount of interest expense related to the Loan Agreement included in the statements of operations for the year ended December 31, 2011 was $0.4 million. Included in this amount is the ratable accrual over the term of the loan of the final payment fee, payable upon the maturity date, which is presented in other long-term liabilities within the consolidated balance sheets.

Under the Loan Agreement, we are subject to affirmative covenants customary for financings of this type, including the obligations to maintain good standing, provide certain notices to the Lenders, deliver financial statements to the Lenders, maintain insurance, discharge all taxes, protect intellectual property and protect collateral. We are also subject to negative covenants customary for financings of this type, including that we may not enter into a merger or consolidation or certain change of control events, incur liens on the collateral, incur additional indebtedness, dispose of any property, change our jurisdictions of organization or our organizational structures or types, declare or pay dividends (other than dividends payable solely in common stock), make certain investments or acquisitions, and enter into certain transactions with affiliates, in each case subject to certain customary exceptions, including exceptions that allow us to acquire additional compounds and to enter into licenses and similar agreements providing for the use and collaboration of our intellectual property provided certain conditions are met. Our cash, cash equivalents and short-term investment accounts serve as collateral for the loan. We are currently in compliance with our obligations under the Agreement.

The Loan Agreement provides that events of default include failure to make payment of principal or interest on the loan when required, failure to perform certain obligations under the Loan Agreement and related documents, defaults in certain other indebtedness and certain other events including certain adverse actions taken by the Food and Drug Administration or other governmental authorities. Upon events of default, our obligations under the Loan Agreement may, or in the event of insolvency or bankruptcy will automatically, be accelerated. Upon the occurrence of any event of default, our obligations under the Loan Agreement will bear interest at a rate equal to the lesser of (a) 4% above the rate of interest applicable to such obligations immediately prior to the occurrence of the event of default and (b) the maximum rate allowable under law.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Forward-looking Statements

This Form 10-Q contains forward-looking statements. All statements other than statements of historical facts are forward-looking statements, including any projections of milestones, royalties or other financial items, any statements of the plans and objectives of management for the future operations, any statements concerning research and development, proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “believes”, “might”, “will”, “expects”, “plans”, “anticipates”, “estimates”, “potential” or “continue”, or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the risk factors disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

About Furiex Pharmaceuticals

We are a drug development collaboration company that uses innovative, clinical development strategies to increase the value of partnered pharmaceutical assets and accelerate their development timelines. We collaborate with pharmaceutical and biotechnology companies to increase the value of their drug candidates by applying our novel approach to drug development, which we believe expedites research and development decision-making and can shorten drug development timelines. We share the risk with our collaborators by running and financing drug development up to agreed clinical milestones, and in exchange, we share the potential rewards, receiving milestone and royalty payments for any successful drug candidates. This business model is designed to help feed product pipelines and deliver therapies to improve lives. Furiex spun-off from Pharmaceutical Product Development, Inc., or PPD, becoming an independent publicly traded company on June 14, 2010.

Our Business Strategy

Our strategy is to leverage our drug development experience to in-license, develop and out-license novel early stage drug candidates that address medical conditions with large unmet markets. We look to invest in drugs whose targets have scientific or clinical validation, and to study disease indications that have a relatively straightforward path to regulatory approval. We subject every potential drug candidate we consider to a rigorous due diligence review process by our team, which possesses experience in all aspects of the drug development process and commercial and intellectual property assessment. This approach has enabled us to build what we believe is a strong, diversified portfolio of products and product candidates. We plan to continue to build our pipeline by identifying and in-licensing or acquiring promising compounds and by developing strong partnerships in the pharmaceutical and biotechnology sectors.

Our Portfolio

We have three products in clinical development: JNJ-Q2, MuDelta, and PPD-10558. In addition we have two compounds that are commercialized by collaborators, for which we are eligible to receive regulatory milestone payments plus worldwide sales royalty and milestone payments. These compounds, Priligy™ and Nesina®, are currently marketed outside of the United States, and we have no further development obligations for these products.

Compounds in Clinical Development

MuDelta for diarrhea-predominant irritable bowel syndrome

Diarrhea-predominant irritable bowel syndrome, or IBS-d, affects approximately 28 million patients in the United States and the five major E.U. countries, and is characterized by chronic abdominal pain and frequent diarrhea. Studies have demonstrated that IBS-d is associated with work absenteeism, high medical costs and low quality of life. We believe the market for prescription treatments for IBS-d is underserved due to the limited number of available treatments and the adverse side effects associated with those treatments.

MuDelta is a novel, orally active, Phase III-ready investigational agent with combined mu opioid receptor agonist and delta opioid receptor antagonist activity that we have exclusively licensed from Janssen Pharmaceutica N.V., or Janssen. The compound’s dual opioid activity is designed to treat diarrhea and pain symptoms of IBS-d, without causing the constipating side effects that occur with mu opioid agonists. MuDelta acts locally in the gut and has very low oral bioavailability, thus limiting the potential for systemic side effects, such as sedation. In January 2011, the Food and Drug Administration, or FDA, granted Fast Track designation to the MuDelta IBS-d program. Fast Track is a process for facilitating the development and expediting the review of drugs to treat serious diseases and fill unmet medical needs. The purpose is to facilitate bringing important new drugs to the patient earlier.

Recent events : Our Phase II Proof-of-Concept trial has recently completed, and MuDelta demonstrated favorable efficacy and tolerability in patients with IBS-d. On September 6, 2011, we announced top line results from this study, and have subsequently presented additional data at several healthcare investor meetings (presentations from these meetings are available on our web site). In addition, a “late-breaker” abstract of the Phase II trial results was recently accepted at the American College of Gastroenterology 2011 meeting, and presented on November 1.

The study reached statistical significance for the primary endpoint of improvement in stool consistency and abdominal pain at week-four of treatment, which was developed prior to the release of the FDA’s IBS guidance in 2010, as well as key secondary endpoints, including adequate relief of IBS-d symptoms. Importantly, when treatment response was evaluated based on achieving improvement in the composite endpoint of improvement in pain and diarrheal symptoms for at least 50% of the time over the 12-week study, consistent with the FDA 2010 guidance, MuDelta again showed statistically and clinically meaningful differences compared with placebo. On September 27, 2011, we had a productive End-of-Phase II meeting with the FDA, where we reached agreement with the agency that the latter endpoint is suitable for Phase III pivotal trials.

We recently announced that we have acquired full exclusive license rights to develop and commercialize the MuDelta compound under our existing development and license agreement with Janssen. We acquired these rights as a result of Janssen’s recent decision not to exercise its option under the agreement to continue development of MuDelta. Based on our 2009 agreement, we have the option to continue developing and commercializing the compound and Janssen may receive up to $50.0 million in regulatory milestone payments and, if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties are to be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

Given the positive Phase II results and productive End-of-Phase II meeting with FDA, we believe there is a clear path for progressing this asset through Phase III pivotal trials. MuDelta has the potential to fill a significant unmet need in the treatment of IBS-d and we look forward to the opportunity to progress its development. We intend to evaluate various partnering and funding options to advance MuDelta, and will provide updates when appropriate.

Fluoroquinolone (JNJ-Q2) for severe infections including methicillin-resistant “Staph” aureus (MRSA)

Acute bacterial skin and skin structure infections, or ABSSSI, and community-acquired bacterial pneumonia, or CABP, are growing public-health concerns due to increasing drug resistance of causative pathogens to established antibiotics. JNJ-Q2 is a novel broad-spectrum fluoroquinolone antibiotic that also has potent coverage against two important drug-resistant pathogens: methicillin-resistant Staphylococcus (“ Staph ”) aureus , or MRSA, and drug-resistant Streptococcus (“Strep”) pneumoniae . JNJ-Q2 is also highly active against other common and difficult to treat bacteria, including gram-negative, gram-positive, atypical and anaerobic bacteria, and it has a low propensity for development of drug resistance. We have completed a successful Phase II study for the treatment of ABSSSI with JNJ-Q2, and are developing both intravenous and oral formulations to enable use in a variety of clinical settings. JNJ-Q2’s broad antimicrobial spectrum and its demonstrated ability to successfully treat severe skin infections as an oral agent differentiates it from a number of other approved and developmental products for MRSA, which generally are only available for intravenous treatment and have a limited spectrum of microbicidal activity. Due to the emerging resistance to established antibiotics, there is a large unmet need for antibiotics such as JNJ-Q2, that cover a broad range of pathogens, including resistant Staph and Strep , and that have the potential for both intravenous and oral treatment. More than 14 million ambulatory physician visits each year are related to skin and soft-tissue infections, and approximately 94,000 Americans developed serious MRSA infections in 2005, according to a recent study published in the Journal of the American Medical Association. We estimate that the worldwide sales for antibiotics to treat MRSA is over $2.0 billion annually, based on 2009 sales of $1.14 billion for Zyvox ® , $538.0 million for Cubicin ® , $303.0 million for Tygacil ® and $185.0 million for generic vancomycin, which are the products primarily used to treat MRSA. Fluoroquinolone antibiotics generated $7.0 billion in sales in 2009.

In April 2011, we announced that we acquired full exclusive license rights to develop and commercialize JNJ-Q2 under our existing development and license agreement with Janssen. We acquired rights to JNJ-Q2 as a result of Janssen’s decision not to exercise its option under the agreement which gave Janssen the opportunity to continue development of JNJ-Q2. This decision was related to Janssen’s April 2011 announcement that it will be directing its research and development investments toward antivirals and vaccines and would not be investing in new antibacterial therapies. Based on our 2009 agreement, Janssen may receive up to $50.0 million in regulatory milestone payments, and if approved for marketing, up to $75.0 million in sales-based milestone payments and sales-based royalties increasing from the mid- to upper-single digit percentages as sales volume increases. Royalties would be paid for a period of ten years after the first commercial sale or, if later, the expiration of the last valid patent claim or the expiration of patent exclusivity.

Recent events : We have had productive End-of-Phase II and Scientific Advice Meetings with the FDA and E.U. regulatory authorities, and based on these discussions, we believe the development potential for JNJ-Q2 remains favorable.

As part of our 2009 option agreement with Janssen, we initiated a Phase II study of severe CABP in late 2010, prior to Janssen’s opt-out decision. As we have previously indicated, enrollment has been extremely slow, and we have recently made a business decision to stop enrollment of this study, having recruited a limited number of patients. We made this decision for several reasons: (1) it is exceedingly difficult to recruit patients with the current protocol, which follows the 2009 FDA guidance; (2) the FDA has recently indicated that they might modify this current guidance; and (3) ABSSSI is the lead indication for JNJ-Q2, with pneumonia being the secondary indication. We believe that the available data, when unblinded and analyzed, should give us valuable qualitative information about the effectiveness of JNJ-Q2 in pneumonia, although a statistical analysis will likely not be feasible, given the low enrollment. We might resume development for the pneumonia indication at a future time, including potentially proceeding directly into Phase III trials. Given JNJ-Q2’s potent coverage of respiratory pathogens and outstanding lung penetration, we believe that it has promise as an agent for patients with severe respiratory infections involving gram-positive (including Staph aureus ), gram-negative, atypical and anaerobic bacteria, all of which occur in patients with severe pneumonia. Discontinuing the CABP study should allow us to focus resources on our highest priority programs; we plan to share information about the study results in a scientific meeting or publication in 2012.

In recent months, there have been eleven publications about JNJ-Q2. We have recently announced these citations, which are also available on our web site. Several of these publications were presented at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) and the Infectious Diseases Society of America meeting, which are key international meetings in infectious diseases. Most importantly, a full publication describing our successful Phase II Proof-of-Concept study for ABSSSI, in addition to others, were recently published in peer-review journals.

We believe JNJ-Q2 has the potential to become an important therapy in the treatment of ABSSSI and are continuing to explore potential partnerships with pharmaceutical companies, as well as alternative funding strategies. In addition, we are also exploring potential partnering opportunities with The Biomedical Advanced Research and Development Authority, or BARDA, an agency within the U.S. Department of Health and Human Services. BARDA’s Broad Spectrum Antimicrobials Program provides funding support for the development of commercially promising antibiotics that also have potential for use as biodefense countermeasures or for treatment of drug-resistant bacterial infections. In September, we submitted a “white paper” to BARDA and have recently been invited to submit a formal proposal for a contract award.

PPD-10558 for treatment of high cholesterol in patients with statin-associated myalgia

Our novel statin, PPD-10558, is a potential treatment for dyslipidemia, a condition characterized by high cholesterol. We licensed exclusive rights to PPD-10558 for this indication from Ranbaxy Laboratories, Ltd., or Ranbaxy. Ranbaxy retained co-marketing rights for the compound in India, and for generic forms of the compound in countries where such generic forms are already being sold.

Statins are highly-effective therapies for lowering cholesterol, leading to prevention of heart attacks and strokes, and therefore lower death rates from these potentially devastating events. One of the most common side effects of statins is chronic muscle pain, sometimes associated with weakness, known as statin-associated myalgia, or SAM. Chronic muscle problems are reported to occur in up to 10% of statin users, limiting both their exercise tolerance as well as their ability to reach their target cholesterol levels. Given that the overall high cholesterol market is estimated to be more than $35.0 billion, the statin-intolerant population represents a large potential market. There continues to be increased recognition of statin muscle toxicity. For example, in June 2011, the FDA issued new restrictions on the use of high dose simvastatin due to muscle toxicity risks.

We are developing PPD-10558 as a muscle-sparing statin that could be a valuable new therapy for the large population of statin users who cannot reach their target cholesterol levels due to SAM. Pre-clinical and Phase I human studies demonstrate that PPD-10558 has similar cholesterol-lowering efficacy as atorvastatin (Lipitor ® ), a best-in-class statin. The pharmacologic and toxicological profile of PPD-10558 suggests that it should have lower risk of muscle-related toxicity than currently marketed statins. In addition to its muscle-sparing properties, PPD-10558 does not interact with cytochrome P450 metabolizing enzymes, which mitigates the risk of toxic drug interactions that can occur with most other statins. PPD-10558 can also be safely used with gemfibrozil, a trigycleride-lowering agent. This is in contrast to several popular statins, which can cause significant toxicity if used concomitantly with gemfibrozil due to significant drug-drug interactions.

A number of pre-clinical studies have been conducted to investigate the muscle toxicity of PPD-10558 in comparison to atorvastatin. These studies showed that high doses of atorvastatin cause severe muscle necrosis and death in rats. In contrast, the same dosing regimen of PPD-10558 did not cause any toxicity. We have pre-clinical results that further support our hypothesis that PPD-10558 could be a muscle-sparing statin. In a drug distribution study, rats were treated with high doses of atorvastatin or PPD-10558; drug concentrations in muscle of atorvastatin-treated rats were approximately 40-fold higher relative to drug concentrations in muscle of rats treated with PPD-10558. The findings from these studies suggest that accumulation of atorvastatin in rat muscle tissue is related to muscle toxicity, and the lack of muscle toxicity seen in the rat following dosing of PPD-10558 is consistent with the low levels of PPD-10558 seen in the rat muscle. Taken together, these data support the clinical hypothesis that PPD-10558 could be as effective as atorvastatin, yet with lower risk of muscle side effects.

Our communication with the FDA in late 2010 confirmed that the agency: (1) concurs with our development strategy to seek an indication for cholesterol-lowering in patients with SAM; and (2) does not expect that a cardiac outcomes study will be needed for approval.

Under our agreement with Ranbaxy, we are obligated to pay Ranbaxy up to a total of $43.0 million in development and sales-based milestones if we further develop PPD-10558 and it were to be approved and commercialized, and it meets specific commercialization and sales milestones. We also would be obligated to pay Ranbaxy sales-based royalties of a mid-single digit percentage. We are solely responsible and will bear all costs and expenses for the development, manufacture and marketing of the compound and licensed products. If we exercise our right to terminate early, other than for safety or efficacy reasons, a material product failure or Ranbaxy breach, we are obligated to pay Ranbaxy $1.0 million.

Recent events : Last quarter, we successfully completed the enrollment of a 12-week Phase II Proof-of-Concept study, evaluating the tolerability and efficacy of PPD-10558 in patients with high cholesterol, who have previously experienced statin-intolerance due to SAM. This randomized, double-blind study is comparing the rates of SAM with PPD-10558, atorvastatin and placebo, and will also compare cholesterol-lowering as a secondary endpoint. We expect to have results available in early 2012.

Marketed Products

Nesina (alogliptin) for Type II diabetes

The World Health Organization estimates that more than 170 million people worldwide have Type-1 and Type-2 diabetes and that the number will double by 2030. Worldwide sales of antidiabetic treatments in 2009 were $30.4 billion.

Nesina, which is marketed by Takeda Pharmaceutical Company Limited, or Takeda, is the trade name for alogliptin, a member of a relatively new class of drugs for the oral treatment of Type-2 diabetes, or T2D. Nesina is a highly selective dipeptidyl peptidase-4, or DPP-4, inhibitor that slows the inactivation of hormones known as incretins, which play a major role in regulating blood sugar levels and might improve pancreatic function. Pivotal trials demonstrated that Nesina was well-tolerated when given as a single daily dose and it significantly improved glycemic control in T2D patients without raising the incidence of hypoglycemia. Additionally, Nesina has been shown to enhance glycemic control when used in combination with other commonly prescribed diabetes drugs.

Nesina received regulatory and pricing approval in Japan during the second quarter of 2010 and for co-administration of Nesina with thiazolidinediones, including Takeda’s Actos (pioglitazone), which is a multi-billion dollar-a-year product, in August 2010. In February 2011, Takeda reported that the Japanese Ministry of Health, Labour and Welfare approved combination therapy for Nesina with sulfonylureas and combination therapy for Nesina with biguanides.

Under our agreement with Takeda, we will be entitled to receive up to $45.0 million in future regulatory milestone payments, and up to $33.0 million in sales-based milestone payments. In addition, we are entitled to receive payments on worldwide sales of Nesina based on royalty rates of 7% to 12% in the U.S., 4% to 8% in Europe and Japan and 3% to 7% in regions other than the U.S., Europe or Japan. These royalty payments are subject to a reduction of up to 0.5% for a portion of payments by Takeda to a licensor for intellectual property related to Nesina. Royalties are to be paid for the later of ten years following the first commercial sale or two years following the expiration of the last to expire patent.

Recent events : On July 25, 2011, Takeda announced resubmission of the U.S. new drug applications, or NDAs, for alogliptin and alogliptin in fixed-dose combination with pioglitazone. Takeda has indicated that the FDA review process should take 6 months. If U.S. approval is granted, we would receive a $25.0 million milestone payment as well as potential royalties and sales-based milestones. Finally, we continue to be pleased with the uptake of Nesina in Japan, with royalty revenues increasing 64% on a quarter-over-quarter basis from the second quarter of 2011.

On September 8, 2011, Takeda announced that SYR-472 entered Phase III clinical trials in Japan to evaluate its safety and efficacy for the treatment of T2D. SYR-472 is part of the DPP-4 inhibitor portfolio that was purchased by Takeda from PPD and Syrrx in 2005. SYR-472 has the same mechanism of action as alogliptin. However, in contrast to alogliptin, which is a once-daily oral therapy, SYR-472 is a once-weekly oral formulation, which offers potential for greater convenience for diabetes patients. The program is at Phase II in the United States and E.U. If SYR-472 is approved, then we would be eligible for royalty payments at the same rates as for Nesina. Under our agreement with Takeda, we would be entitled to receive payment for: E.U. submission, E.U. approval, or U.S. approval milestones for SYR-472 or Nesina, whichever compound achieves the milestone(s) first. The potential regulatory milestones are: U.S. approval, $25.0 million; E.U. filing, $10.0 million; and E.U. approval, $10.0 million.

On September 20, 2011 Takeda launched Liovel ® , a fixed-dose combination product containing alogliptin and pioglitazone, in Japan. Liovel is the first fixed-dose combination product containing a DPP-4 inhibitor and thiazolidinedione available in Japan. Takeda must pay us royalties for Liovel sales based on the proportion of Nesina’s average sales price compared to that of pioglitazone plus Nesina.

Priligy (dapoxetine) for premature ejaculation

Priligy is the trade name for dapoxetine, a drug in tablet form specifically indicated for the “on-demand” treatment of premature ejaculation, or PE. It is the first oral medication to be approved for this condition. The reported percentage of men affected with PE at some point during their lives ranges from 4% to 30%, depending on the methodology and criteria used. Priligy is a unique, short-acting, selective serotonin reuptake inhibitor, or SSRI, designed to be taken only when needed, one to three hours before sexual intercourse, rather than every day. Priligy has been studied in five randomized, placebo-controlled Phase III clinical trials involving more than 6,000 men with PE and is marketed in 14 countries in Europe, Asia-Pacific and Latin America.

We acquired Priligy from Eli Lilly and Company, or Lilly, and out-licensed it to Alza Corporation, or Alza, and it is currently being marketed by Alza’s affiliate Janssen. Under our license agreement with Alza, we have the right to receive up to $15.0 million in additional regulatory milestone payments, up to $50.0 million in sales-based milestone payments, and sales-based royalties ranging from 10% to 20% for sales of patented products without generic competition and ranging from 10% to 17.5% for non-patented products without generic competition, in both cases the percentages rise as sales volumes increase, and a royalty of 7.5% for patented and non-patented products with generic competition regardless of sales volume based on the level of Priligy sales worldwide. We are obligated to pay Lilly a royalty of 5% on annual sales in excess of $800.0 million.

Recent events : Janssen continues to conduct additional studies with Priligy in the United States and abroad. Currently, Priligy is approved for on-demand treatment of premature ejaculation in seven European countries: Germany, Spain, Italy, Portugal, Finland, Sweden and Austria. On October 18, the Committee for Human Medicinal Products, or CHMP, of the European Medicines Agency adopted a positive opinion recommending the approval of Priligy (dapoxetine) in the European Union Member States where the drug had not yet been approved. The CHMP is the committee responsible for the scientific assessment of products seeking centralized marketing authorization throughout the European Union. The CHMP’s positive opinion will now be referred to the European Commission for a final decision, which we expect in the coming months.

We are enthusiastic about the potential for Priligy ex-U.S.; however, we cannot assure that the drug will be approved in the United States. We are actively evaluating the possibility of restructuring our existing agreement with Alza for Priligy. Any transaction might require that we negotiate additional out-licenses or collaborations, and could require additional external sources of financing.

Results of Operations

The Company’s business consists solely of compound development and collaborative activities. Accordingly, the Company operates in one reportable business segment. Historically, our revenues consisted primarily of milestone and royalty payments from collaborators. For the nine month period ended September 30, 2010, our year-to-date revenue included $7.5 million in regulatory approval milestones resulting from regulatory and pricing approval of Nesina in Japan and $1.0 million in royalty revenue from the sale of Priligy and Nesina by our collaborators, Alza and Takeda, respectively. For the nine month period ended September 30, 2011, our revenue included $2.5 million in royalties from the sale of Priligy and Nesina by our collaborators.

We incurred research and development expenses of $40.2 million and $38.1 million for the nine month period ended September 30, 2010 and September 30, 2011, respectively. Our research and development expenses include costs incurred for our clinical-stage drug candidates, including the novel statin, PPD-10558, and the two compounds in-licensed from Janssen. We expect our level of research and development expenditures related to Phase II studies to further decrease over the next quarter and decline significantly thereafter as work on our various Phase II studies comes to completion. We expect to invest a limited amount in Phase II to Phase III transition and enabling activities during this same time period. These expenses include contract research organization services provided by PPD, non-clinical testing and clinical trial material manufacturing provided by third parties, and the direct cost of our personnel managing the programs and payments to third parties. All research and development expenses for our drug candidates and external collaborations are expensed as incurred.

For the nine month period ended September 30, 2011, we reported an operating loss of $42.1 million. We expect to continue to incur additional losses, and expect that our results will fluctuate from quarter to quarter and that such fluctuations might be substantial.

Our business is subject to various risks and uncertainties. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 for information on these risks and uncertainties.

Basis of Accounting

The accompanying combined financial statements for periods prior to June 14, 2010, have been derived from the combined financial statements and accounting records of PPD, and from the historical cost basis of the assets and liabilities of the various activities that reflect the combined results of operations, financial condition and cash flows of the discovery sciences segment of PPD. All the business components of the discovery sciences segment have been included in the historical statements because they were managed by common PPD segment management, and because they reflected historical performance of segment management.

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