Amendment No. 1 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 16, 2010

Registration No. 333-168504

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

HORIZON PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   27-2179987

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

1033 Skokie Boulevard, Suite 355 Northbrook, Illinois 60062

(224) 383-3000

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

Timothy P. Walbert

Chairman, President and Chief Executive Officer

Horizon Pharma, Inc.

1033 Skokie Boulevard, Suite 355 Northbrook, Illinois 60062

(224) 383-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Lynda Kay Chandler, Esq.

Barbara L. Borden, Esq.

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

(858) 550-6000

 

Cheston J. Larson, Esq.

Divakar Gupta, Esq.

Matthew T. Bush, Esq.

Latham & Watkins LLP

12636 High Bluff Drive Suite 400

San Diego, California 92130

(858) 523-5400

 

 

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 number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

  Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
                    (Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

   

Title of each class of securities

to be registered

  

Proposed

maximum

aggregate

offering price(1)

  

Amount of

registration fee

 

Common Stock, $0.0001 par value per share

   $ 86,250,000    $ 6,149.63 (2) 
   

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover overallotments, if any.
(2) Previously paid.

 

 

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 Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


Table of Contents

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

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 2010

Preliminary Prospectus

             Shares

LOGO

Common Stock

 

 

 

We are offering              shares of our common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price to be between $             and $             per common share. We have applied to list our common stock on The NASDAQ Global Market under the symbol “HZNP.”

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 9.

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

 

 

 

     PER SHARE    TOTAL

Public Offering Price

   $                $            

Underwriting Discounts and Commissions

   $                $            

Proceeds to Horizon (Before Expenses)

   $                $            

 

 

Delivery of the shares of common stock is expected to be made on or about                     , 2010. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional              shares of our common stock to cover overallotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $             and the total proceeds to us, before expenses, will be $            .

 

Jefferies & Company   Piper Jaffray

 

 

 

JMP Securities   Lazard Capital Markets

Prospectus dated                     , 2010


Table of Contents

LOGO


Table of Contents

 

 

Table of Contents

 

     Page

Prospectus Summary

  1

Risk Factors

  9

Special Note Regarding Forward-Looking Statements

  38

Use of Proceeds

  39

Dividend Policy

  39

Industry and Market Data

  39

Capitalization

  40

Dilution

  42

Unaudited Pro Forma Condensed Consolidated Financial Information

  44

Selected Consolidated Financial Data

  53

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  55

Business

  75

Management

  99

Executive and Director Compensation

  105

Transactions with Related Persons

  122

Principal Stockholders

  129

Description of Capital Stock

  133

Shares Eligible for Future Sale

  138

Underwriting

  140

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

  143

Legal Matters

  146

Experts

  146

Where You Can Find Additional Information

  146

Index to Consolidated Financial Statements

  F-1

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus is only accurate on the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Until                     , 2010 (25 days after the date of this prospectus), all dealers that buy, sell, or trade in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


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Prospectus Summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” as well as our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Our Company

We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. We have two lead product candidates, HZT-501 and LODOTRA®, which have both successfully completed multiple Phase 3 clinical trials. In 2006, we reached agreement with the U.S. Food and Drug Administration, or FDA, on a special protocol assessment, or SPA, with respect to the clinical development plan for HZT-501. We submitted a new drug application, or NDA, for HZT-501, a novel tablet formulation containing a fixed-dose combination of ibuprofen and high-dose famotidine in a single pill, to the FDA in March 2010. We intend to submit a Marketing Authorization Application, or MAA, for HZT-501 in the United Kingdom, the Reference Member State, through the Decentralized Procedure in the fourth quarter of 2010. LODOTRA is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by our distribution partners, Merck Serono GmbH, or Merck Serono, and Mundipharma International Corporation Limited, or Mundipharma. We intend to submit an NDA for LODOTRA to the FDA in the fourth quarter of 2010. We have worldwide marketing rights for HZT-501 and have retained exclusive marketing rights for all of our products in the U.S.

HZT-501 is a novel combination of 800 mg ibuprofen and 26.6 mg famotidine in a single pill. Ibuprofen is one of the most widely prescribed non-steroidal anti-inflammatory drugs, or NSAIDs, worldwide and famotidine is a well-established gastrointestinal, or GI, agent used to treat dyspepsia, gastroesophageal reflux disease, or GERD, and active ulcers, and to reduce the risk of NSAID-induced upper GI ulcers. We have completed two pivotal Phase 3 clinical trials of HZT-501 under an SPA with the FDA in a total of over 1,500 patients with mild to moderate pain or arthritis that demonstrated a statistically significant reduction in the incidence of NSAID-induced upper GI ulcers when treated with HZT-501 versus ibuprofen alone. Based on these results, we submitted an NDA to the FDA in March 2010 requesting approval to market HZT-501 for reducing the risk of developing NSAID-induced upper GI ulcers in patients with mild to moderate pain and arthritis that require use of an NSAID. The FDA notified us in May 2010 that it had accepted the NDA for review and subsequently assigned a Prescription Drug User Fee Act, or PDUFA, goal date of January 21, 2011 for its review of the NDA.

LODOTRA, a proprietary programmed release formulation of low-dose prednisone, has received regulatory approval in Europe for the reduction of morning stiffness associated with rheumatoid arthritis, or RA. Prednisone is a drug used to inhibit the production of various pro-inflammatory cytokines, which are proteins associated with joint inflammation in RA. We have completed two pivotal Phase 3 clinical trials of LODOTRA in a total of over 600 patients with RA. The first pivotal Phase 3 trial supported the approval of LODOTRA in Europe in March 2009 where it is currently approved for marketing in 13 European countries. The second pivotal Phase 3 clinical trial was designed to support an NDA submission for U.S. marketing approval. LODOTRA achieved statistically significant results and met the primary endpoint in each of the two pivotal Phase 3 clinical trials.

We are focusing our efforts and capital resources on obtaining approval for and commercializing HZT-501 and LODOTRA. In addition to those product candidates, we have a pipeline of earlier stage product candidates to treat pain-related diseases and chronic inflammation. We are currently evaluating the development pathway for these product candidates, but do not intend to develop them further until such time as we generate sufficient cash from our operations or other sources.

 

 

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Our Product and Product Candidates

Our current product portfolio consists of the following:

 

 

 

Product

  

Disease

  

Phase of Development

  

Marketing Rights

  

Territory

HZT-501    Mild to moderate pain, osteoarthritis and rheumatoid arthritis    NDA submitted March 2010; PDUFA goal date January 21, 2011; MAA submission planned for Q4 2010    Horizon    Worldwide

LODOTRA

   Rheumatoid arthritis    Approved and marketed in Europe; NDA submission planned for Q4 2010   

Horizon

 

Merck Serono

 

Mundipharma

  

Worldwide, excluding Europe

 

Germany and Austria

 

Europe, excluding Germany and Austria

   Severe asthma    Phase 2a    Horizon    Worldwide, excluding Europe
TRUNOC    Pain-related diseases    Phase 1    Horizon    Worldwide
HZN-602    Mild to moderate pain and arthritis    Phase 1    Horizon    Worldwide

 

 

Our Markets

Pain is a serious and costly public health concern affecting more people in the U.S. than diabetes, heart disease and cancer combined. In 2006, the U.S. National Center for Health Statistics reported that an estimated 76.5 million people 20 years of age or over in the U.S. have experienced pain that persisted for more than 24 hours. Some of the most common and debilitating chronic inflammation and pain-related diseases are osteoarthritis, or OA, RA and acute and chronic pain. According to the Arthritis Foundation, a leading non-profit arthritis research advocacy group, arthritis affects nearly 46 million people in the U.S. With the aging of the U.S. population, the prevalence of arthritis is expected to rise by approximately 40% by 2030, impacting 67 million people in the U.S. We believe that the large and growing population afflicted with pain and arthritis and the limitations of current treatment options create a growing market opportunity for us.

NSAIDs are very effective at providing pain relief, including pain associated with OA and RA; however, there are significant upper GI-associated adverse events which can result from such treatments. According to a 2004 article published in Aliment Pharmacology & Therapeutics, significant GI side effects, including serious ulcers, afflict up to approximately 25% of all chronic arthritis patients treated with NSAIDs for three months, and OA and RA patients are two to five times more likely than the general population to be hospitalized for NSAID-related GI complications. It is estimated that NSAID-induced GI toxicity causes over 16,500 related deaths in OA and RA patients alone, and over 107,000 hospitalizations for serious GI complications each year in the U.S. We believe that there is a serious need for a drug that provides the proven benefits of an NSAID with increased GI protection.

Common agents for the treatment of RA include NSAIDs, disease modifying antirheumatic drugs, or DMARDs, biologic agents and corticosteroids, a class of drugs based on hormones formed in the adrenal gland used to reduce inflammation. Physicians are increasingly supportive of prescribing combination therapy as some RA patients are able to achieve a clinical remission with a combination of treatments. A Medical Marketing Economics May 2008 study of 150 RA patients in the U.S., which we sponsored, showed that despite the use of a combination of currently available treatments for RA, over 90% of the patients reported suffering from morning stiffness.

 

 

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According to Datamonitor, approximately 50% of RA patients in the U.S., Japan, France, Italy, Spain, Germany and the United Kingdom are prescribed combination therapy which often includes corticosteroids, with prednisone being one of the most common. While corticosteroids are potent and effective agents to treat patients with RA, they are usually used at high doses which can lead to long-term adverse side effects. An additional limitation of existing RA treatment with corticosteroids is related to the time of their administration in the morning hours (approximately 8:00 am), which does not synchronize with patients’ pro-inflammatory cytokines achieving peak levels in the early morning hours (approximately 2:00 am). It is impractical to expect patients to wake up every night at that hour to take prednisone. Therefore, we believe an optimal treatment would provide prednisone in the early morning hours without awakening a patient to reduce cytokine levels when they are at their peak.

Our Products

We believe that our product and product candidates address unmet therapeutic needs in arthritis, pain and inflammatory diseases. We have developed HZT-501 and LODOTRA to provide significant advantages over existing therapies.

HZT-501

HZT-501 is a novel combination of 800 mg ibuprofen and 26.6 mg famotidine in a single pill. We believe that by combining ibuprofen and famotidine in a single pill, HZT-501 provides effective pain relief while decreasing stomach acidity, thus reducing the risk of NSAID-induced upper GI ulcers. According to IMS Health, in the U.S. alone, there were over 30 million prescriptions written for ibuprofen in 2009, and the high-dose prescriptions, 600 mg and 800 mg doses, accounted for approximately 90% of these prescriptions. In addition, ibuprofen’s flexible three times daily dosing allows it to be used for both chronic conditions such as OA, RA and chronic back pain as well as acute conditions such as sprains and strains. Famotidine, a potent antacid, was chosen as the ideal GI protectant to be combined with ibuprofen as it is a well studied drug with over 20 million patients treated worldwide.

Fixed-dose combination therapy can reduce the number of pills that each patient is taking, thereby increasing compliance and ensuring that the correct dosage of each component is taken at the correct time, and is often associated with better treatment outcomes. HZT-501 has been formulated to provide an optimal dosing regimen of ibuprofen and famotidine together in the convenience of a single pill.

LODOTRA

LODOTRA is a proprietary programmed release formulation of low-dose prednisone, a well-established drug used to inhibit the production of various pro-inflammatory cytokines, which are proteins associated with joint inflammation in RA. Prednisone is a corticosteroid that effectively reduces joint swelling and inflammation, but at high doses has the potential to cause significant long-term adverse side effects, such as osteoporosis, cardiovascular disease and weight gain. In addition, we believe current formulations, which are administered in the morning hours, are suboptimal because they fail to deliver prednisone at the time of most need to RA patients.

LODOTRA was developed utilizing a proprietary formulation technology enabling a programmed release of low-dose prednisone and is comprised of an active core containing prednisone, which is encapsulated by an inactive porous shell. The inactive shell acts as a barrier between the product’s active core and a patient’s GI fluids. At approximately four hours following bedtime administration of LODOTRA, water in the digestive tract diffuses through the shell, causing the active core to expand, which leads to a weakening and breakage of the shell and allows the release of prednisone from the active core. By synchronizing the prednisone delivery time with the patient’s peak cytokine levels in the early morning hours, LODOTRA exerts its effect at a physiologically optimal point to inhibit cytokine production and thus significantly reduces the signs and symptoms of RA. We believe that being able to deliver safe, low-dose prednisone at the time during which patients can recognize the greatest benefit represents a significant competitive advantage over existing therapies.

Our Strategy

Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of HZT-501 and LODOTRA in the U.S. market following FDA approval. We retain all U.S.

 

 

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commercialization rights for our products and plan to build internally or retain through a third party a sales and marketing organization to market these products in the U.S. to key specialists, such as rheumatologists, orthopedic surgeons and pain specialists, and top prescribing primary care physicians. Over time, we plan to expand this sales force and/or establish relationships with companies that have appropriate commercial platforms in our key markets. We intend to enter into partnering, co-promotion or other distribution arrangements for commercialization of our products outside the U.S., such as our relationships with Merck Serono and Mundipharma for the commercialization of LODOTRA in Europe. As part of our longer-term strategy, we anticipate we will further develop our product candidates and selectively in-license or acquire additional products and/or late stage product candidates that are synergistic with our commercial strategy.

Our Strategic Partnerships

We have entered into several strategic partnerships with respect to the manufacturing, distribution and marketing of LODOTRA. We entered into a transfer, license and supply agreement with Merck Serono for the commercialization of LODOTRA in Germany and Austria. We also entered into a distribution agreement with Mundipharma for the exclusive distribution and marketing rights pertaining to LODOTRA for Europe, excluding Germany and Austria, and a manufacturing and supply agreement with Mundipharma Medical Company, pursuant to which we supply LODOTRA to Mundipharma. We have also entered into a manufacturing and supply agreement with Jagotec AG, an affiliate of SkyePharma AG, from whom we purchase LODOTRA.

Risks Associated with Our Business

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary, beginning on page 9. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include:

 

   

We are highly dependent on the success of HZT-501 and LODOTRA, which are subject to extensive regulation, and we may not be able to successfully obtain marketing approval in the U.S. or successfully commercialize these product candidates.

 

   

Even if we obtain regulatory approval to commercialize our product candidates, our ability to generate revenues from any resulting products will be subject to attaining significant market acceptance among physicians, patients and healthcare payors.

 

   

Our current business plan is highly dependent upon our ability to successfully execute on our sales and marketing strategy for the commercialization of HZT-501 and LODOTRA. If we are unable to execute on our sales and marketing strategy, we may not be able to generate significant product revenues or execute on our business plan.

 

   

We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic products, and our operating results will suffer if we fail to compete effectively.

 

   

Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.

 

   

Reimbursement may not be available, or may be available at only limited levels, for HZT-501, LODOTRA or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

 

   

We have incurred significant operating losses since our inception, including an accumulated deficit of $85.8 million as of June 30, 2010, and anticipate that we will continue to incur losses for the foreseeable future.

 

   

We may not be able to successfully obtain or protect intellectual property rights related to our product and product candidates, and we may be subject to claims that we infringe the intellectual property of third parties.

 

   

We rely on third parties to manufacture commercial supplies of LODOTRA, and we intend to rely on third parties to manufacture commercial supplies of any approved product candidates. Our commercialization of any of our product candidates could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

 

 

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Recapitalization and Nitec Acquisition

Prior to April 1, 2010, we operated as Horizon Therapeutics, Inc. On April 1, 2010, we effected a recapitalization pursuant to which we formed a holding company, Horizon Pharma Inc., and all of the shares of capital stock of Horizon Therapeutics, Inc. were converted into shares of Horizon Pharma, Inc. Horizon Therapeutics, Inc. survived as our wholly-owned subsidiary and changed its name to Horizon Pharma USA, Inc. Also on April 1, 2010, we acquired all of the shares of Nitec Pharma AG, or Nitec, in exchange for newly-issued shares of our capital stock. As a result of the acquisition, Nitec became our wholly-owned subsidiary and changed its name to Horizon Pharma AG. Following the recapitalization and acquisition of Nitec, we are organized as a holding company that operates through our wholly-owned subsidiaries, Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec).

Corporate Information

We were incorporated as Horizon Pharma, Inc. in Delaware on March 23, 2010. As described above, on April 1, 2010, we became a holding company that operates primarily through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc., a Delaware corporation, and Horizon Pharma AG, a company organized under the laws of Switzerland. Horizon Pharma AG owns all of the outstanding share capital of its wholly-owned subsidiary, Horizon Pharma GmbH, a company organized under the laws of Germany and formerly known as Nitec Pharma GmbH, through which Horizon Pharma AG conducts most of its European operations.

Our principal executive offices are located at 1033 Skokie Boulevard, Suite 355, Northbrook, Illinois 60062, and our telephone number is (224) 383-3000. Our website address is www.horizonpharma.com. The information contained in or that can be accessed through our website is not part of this prospectus.

Unless the context indicates otherwise, as used in this prospectus, the terms “Horizon,” “Horizon Pharma,” “we,” “us” and “our” refer to Horizon Pharma, Inc., a Delaware corporation, and its subsidiaries taken as a whole. Also, unless the context indicates otherwise, for historical periods prior to April 1, 2010, the terms “Horizon,” “Horizon Pharma USA,” “we,” “us” and “our” refer to Horizon Therapeutics, Inc.

“Horizon Therapeutics,” a stylized letter “H,” and “LODOTRA” are registered trademarks in the U.S. and certain other countries. We have applied for registration of the trademark “Horizon Pharma” with the U.S. Patent and Trademark Office. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.

 

 

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The Offering

 

Common stock offered by us

                     shares

 

Overallotment option

We have granted the underwriters an option for a period of 30 days to purchase up to an additional                      shares of common stock.

 

Common stock to be outstanding after this offering 

                     shares

 

Use of proceeds

We intend to use the net proceeds from this offering to fund the development, regulatory approval and U.S. commercialization of HZT-501 and LODOTRA and for working capital, capital expenditures and general corporate purposes. Please read “Use of Proceeds” on page 39.

 

Risk factors

You should read the “Risk Factors” section of this prospectus beginning on page 9 and all of the other information set forth in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

We have applied for listing of our common stock on The NASDAQ Global Market under the symbol “HZNP.”

The number of shares of our common stock that will be outstanding after this offering is based on 29,771,443 shares outstanding as of June 30, 2010, and excludes:

 

   

3,115,855 shares of common stock issuable upon the exercise of outstanding options under our 2005 stock plan as of June 30, 2010, having a weighted average exercise price of $5.82 per share;

 

   

                     shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering (including                      shares of common stock reserved for future issuance under our 2005 stock plan which will be added to the shares reserved under our 2010 equity incentive plan upon its effectiveness); and

 

   

821,564 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2010, having a weighted average exercise price of $3.92 per share.

Unless otherwise noted, the information in this prospectus assumes:

 

   

a 1-for-              reverse stock split of our common stock to be effected prior to the completion of this offering;

 

   

the issuance by us of 1,271,520 shares of common stock upon the completion of this offering upon an assumed conversion of outstanding convertible promissory notes in the aggregate principal amount of $10.0 million (plus interest accrued thereon) that we issued in July 2010, or the 2010 notes, assuming a conversion price of $7.968 per share and assuming a conversion date of August 29, 2010;

 

   

the conversion of all of our outstanding shares of preferred stock into an aggregate of 24,961,340 shares of common stock upon the completion of this offering;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws upon the completion of this offering; and

 

   

no exercise of the underwriters’ overallotment option.

 

 

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Summary Consolidated Financial Information

The following tables summarize our consolidated financial data. We have derived the following summary of our statement of operations data for the years ended December 31, 2007, 2008 and 2009 from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the six months ended June 30, 2009 and 2010 and the balance sheet data as of June 30, 2010 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments necessary to fairly state our financial position as of June 30, 2010 and results of operations for the six months ended June 30, 2009 and 2010. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary of our financial data set forth below should be read together with our financial statements and the related notes to those statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus.

 

 

 

     Actual     Pro Forma     Actual     Pro Forma  
     Year Ended December 31,           Six Months Ended June 30,  
     2007     2008     2009     2009     2009     2010     2010  
     (in thousands, except share and per share data)  

Statement of Operations Data:

              

Revenues

              

Sales of goods

   $ —        $ —        $ —        $ 2,694      $ —        $ 1,694      $ 1,972   

Contract revenue

     —          —          —          429        —          —          175   
                                                        

Total revenues

     —          —          —          3,123        —          1,694        2,147   

Cost of goods sold

     —          —          —          8,333        —          2,519        4,082   
                                                        

Gross profit (loss)

     —          —          —          (5,210     —          (825     (1,935

Operating expenses

              

Research and development

     24,483        22,295        10,894        22,710        5,085        7,159        9,203   

Sales and marketing

     617        1,337        2,072        5,789        969        1,668        3,904   

General and administrative

     1,640        3,235        5,823        11,197        2,905        9,893        15,513   
                                                        

Total operating expenses

     26,740        26,867        18,789        39,696        8,959        18,720        28,620   
                                                        

Loss from operations

     (26,740     (26,867     (18,789     (44,906     (8,959     (19,545     (30,555

Interest income

     934        340        25        1,837        23        13        303   

Interest expense

     (6     (869     (2,214     (4,693     (1,048     (814     (1,667

Other income (expense), net

     (35     (503     478        468        209        14,481        14,481   

Foreign exchange gain

     —          —          —          —          —          40        40   
                                                        

Loss before income tax

     (25,847     (27,899     (20,500     (47,294     (9,775     (5,825     (17,398

Income tax expense

     —          —          —          (57     —          (14     (31
                                                        

Net loss

   $ (25,847   $ (27,899   $ (20,500   $ (47,351   $ (9,775   $ (5,839   $ (17,429
                                                        

Capital contribution

     —          —          3,489        3,489        —          —          —     
                                                        

Net loss attributed to common stockholders

   $ (25,847   $ (27,899   $ (17,011   $ (43,862   $ (9,775   $ (5,839   $ (17,429
                                                        

Net loss per share, basic and diluted

   $ (27.92   $ (28.51   $ (17.12   $ (12.40   $ (9.85   $ (2.31   $ (4.93
                                                        

Weighted average number of shares outstanding

     925,685        978,439        993,569        3,538,583        992,169        2,526,459        3,538,583   
                                                        

Pro forma net loss per share, basic and diluted (unaudited)(1)

       $ (2.15       $ (0.28  
                          

Weighted average pro forma shares outstanding, basic and diluted (unaudited)(1)

         8,148,259            20,787,563     
                          

 

 

 

 

(1) Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate the pro forma basic and diluted net loss per share and the number of shares used in the computation of the per share amounts.

 

 

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     As of June 30, 2010
     Actual     Pro Forma     Pro Forma
as Adjusted
     (in thousands)

Balance Sheet Data:

      

Cash and cash equivalents

   $ 13,266      $ 23,266     

Working capital

     1,703        11,703     

Total assets

     170,822        180,822     

Long-term debt, net of current portion

     7,576        7,576     

Accumulated deficit

     (85,826     (85,826  

Total stockholders’ equity

     118,966        128,966     

 

 

The summary unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2009 and the six months ended June 30, 2010 are based on the historical statements of operations of Horizon Pharma USA and Nitec, giving effect to our acquisition of Nitec in April 2010 as if the acquisition and related transactions had occurred on January 1, 2009. The unaudited pro forma condensed consolidated statement of operations data for the six months ended June 30, 2010 include the results of operations for Nitec for the three months ended March 31, 2010. The summary unaudited pro forma condensed consolidated balance sheet data as of June 30, 2010 give effect to our issuance of the 2010 notes and accrued interest thereon as well as 1,271,520 shares of common stock upon the completion of this offering upon an assumed conversion of the 2010 notes and accrued interest, assuming a conversion price of $7.968 per share and assuming a conversion date of August 29, 2010. The unaudited pro forma condensed consolidated statement of operations data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. See “Unaudited Pro Forma Condensed Consolidated Financial Information” beginning on page 44 of this prospectus. These estimates and assumptions are preliminary and subject to change, and have been made solely for the purposes of developing this pro forma information. The summary unaudited pro forma condensed consolidated statement of operations data are presented for illustrative purposes only and are not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during these periods.

The June 30, 2010 pro forma as adjusted balance sheet reflects the pro forma balance sheet data at June 30, 2010, as adjusted for the sale by us of                      shares of common stock in this offering 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, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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Risk Factors

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes thereto. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks comes to fruition, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. 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 Business and Industry

We are highly dependent on the success of our HZT-501 and LODOTRA product candidates, and we may not be able to successfully obtain marketing approval in the U.S. or successfully commercialize these product candidates.

To date, we have expended significant time, resources, and effort on the development of HZT-501 and LODOTRA, and a substantial majority of our resources are now focused on seeking marketing approval for and planning for potential commercialization of these product candidates in the U.S. Our ability to generate significant product revenues in the near term will depend almost entirely on our ability to successfully obtain U.S. marketing approval for and commercialize these product candidates. HZT-501 is not approved for marketing in any jurisdiction and therefore, unless it obtains regulatory approval, it may never be commercialized. Although LODOTRA is approved for marketing in 13 European countries, to date it has only been marketed in Belgium, Denmark, Finland, Germany and Norway. While we anticipate that LODOTRA will be marketed in additional European countries as our distribution partners formulate their reimbursement strategy, the ability to market LODOTRA in additional European countries will depend on our distribution partners’ ability to obtain regulatory and reimbursement approvals in these countries. Even if we obtain additional marketing and reimbursement approvals, our product revenues in Europe are entirely dependent upon the marketing efforts of our exclusive distribution partners, over which we have no control. LODOTRA is not approved for marketing in the U.S., which we believe represents its largest commercial opportunity. Before we can market and sell these product candidates in a particular jurisdiction, we will need to obtain necessary regulatory approvals (from the Food and Drug Administration, or FDA, in the U.S. and from similar foreign regulatory agencies in other jurisdictions) and in some jurisdictions, reimbursement authorization. There are no guarantees that we will obtain the required regulatory approvals we are seeking for these product candidates. Because we believe the U.S. represents the largest market opportunity for our product candidates, if we are unable to obtain FDA approval to market our product candidates in the U.S., we will likely not be able to generate significant revenues from commercial sales of our product candidates. Even if we obtain the required regulatory approvals, we may never generate significant revenues from any commercial sales of these product candidates. If we fail to successfully commercialize either of these product candidates, we may be unable to generate sufficient revenues to sustain and grow our business, and our business, financial condition and results of operations will be adversely affected.

Our product candidates are subject to extensive regulation, and we may not obtain required regulatory approvals for HZT-501 or obtain additional regulatory approvals for LODOTRA.

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, marketing and distribution, and other possible activities relating to our product candidates are, and any resulting drugs will be, subject to extensive regulation by the FDA and other regulatory agencies. Failure to comply with FDA and other applicable regulatory requirements may, either before or after product approval, subject us to administrative or judicially imposed sanctions.

We are not permitted to market HZT-501, LODOTRA or any of our other product candidates in the U.S. until we obtain regulatory approval from the FDA. To market a new drug in the U.S., we must submit to the FDA and obtain FDA approval of a new drug application, or NDA. To market a new drug in Europe, we must submit to the applicable regulatory authority in the designated Reference Member State and obtain approval of, a Marketing Authorization Application, or MAA. An NDA or MAA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the applicable product candidate.

 

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Regulatory approval of an NDA or an MAA is not guaranteed. The number and types of preclinical studies and clinical trials that will be required for NDA or MAA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional preclinical studies, CMC studies or clinical trials. The FDA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:

 

   

may not deem a product candidate to be adequately safe and effective;

 

   

may not find the data from preclinical studies, CMC studies and clinical trials to be sufficient to support a claim of safety and efficacy;

 

   

may interpret data from preclinical studies, CMC studies and clinical trials significantly differently than we do;

 

   

may not approve the manufacturing processes or facilities associated with our product candidates;

 

   

may conclude that we have not sufficiently demonstrated long-term stability of the formulation for which we are seeking marketing approval;

 

   

may change approval policies (including with respect to our product candidates’ class of drugs) or adopt new regulations; or

 

   

may not accept a submission due to, among other reasons, the content or formatting of the submission.

Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. As part of the U.S. Prescription Drug User Fee Act, or PDUFA, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a drug application is 10 months for a standard application and six months for a priority review application. The FDA’s review goals are subject to change, and it is unknown whether the review of our NDA filing for HZT-501, or an NDA filing for any of our other product candidates, will be completed within the FDA’s review goals or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other NDAs that are submitted to the FDA around the same time period.

We submitted an NDA to the FDA in March 2010 requesting approval to market HZT-501 for reducing the risk of developing non-steroidal anti-inflammatory drug-, or NSAID-, induced upper gastrointestinal, or GI, ulcers in patients with mild to moderate pain and arthritis that require use of an NSAID. In connection with our NDA for HZT-501, we are requesting the FDA to, and intend to request the Medicines and Healthcare products Regulatory Agency in the United Kingdom in connection with the HZT-501 MAA to, approve a formulation that is different from the formulation used in our Phase 3 clinical trials, which we determined had inadequate stability characteristics to be suitable for commercialization. As a result, we were required to demonstrate the bioequivalence of famotidine between the new and old formulations in addition to the other NDA and MAA requirements. We successfully completed this bioequivalence study prior to submitting the NDA for HZT-501. We also demonstrated the bioequivalence of ibuprofen between the two formulations of HZT-501 and the reference labeled drug (RLD) ibuprofen as part of the NDA submission. We continue to complete CMC studies with the new formulation, and we cannot assure you that we will not have additional formulation issues related to HZT-501 or any of our other product candidates. As part of the ongoing review of our NDA for HZT-501, the FDA has asked for data from incremental lots of manufactured material. We expect to submit this requested data to the FDA in the fourth quarter of 2010. The FDA notified us in May 2010 that it had accepted the NDA for review and subsequently assigned a PDUFA goal date of January 21, 2011 for its review of the NDA. There can be no assurance that the FDA will meet this goal date. We anticipate submitting an NDA to the FDA for LODOTRA for the treatment of rheumatoid arthritis, or RA, in the fourth quarter of 2010. We also anticipate submitting an MAA for HZT-501 in the United Kingdom, the Reference Member State, through the Decentralized Procedure in the fourth quarter of 2010. There are no guarantees that any of these future events will take place on our anticipated timeline, if at all.

With the exception of our recently submitted HZT-501 NDA, we have not previously submitted NDAs to the FDA. In addition, we have never obtained FDA approval for any drug. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for HZT-501, LODOTRA or our other product candidates. Even if we believe that data collected from our preclinical studies, CMC studies and clinical trials of our product candidates are promising and that our information and procedures regarding CMC are sufficient, our data may not be sufficient to

 

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support marketing approval by the FDA or any other U.S. or foreign regulatory authority, or regulatory interpretation of these data and procedures may be unfavorable. In addition, the FDA’s regulatory review of NDAs for product candidates intended for widespread use by a large proportion of the general population is becoming increasingly focused on safety. Even if approved, product candidates may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the drug may be marketed, restricted distribution methods or other limitations. Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of any of our product candidates. As a result, we cannot predict when or whether regulatory approval will be obtained for any product candidate we develop.

To market any drugs outside of the U.S., we and current or future collaborators must comply with numerous and varying regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, including obtaining reimbursement approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, 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, including the risk that our product candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed. While we anticipate that LODOTRA will be marketed in additional European Union countries as our distribution partners formulate their reimbursement strategy, the ability to market LODOTRA in additional European Union countries will depend on our distribution partners’ ability to obtain regulatory and reimbursement approvals in these countries.

Even if we obtain regulatory approval to commercialize our product candidates, our ability to generate revenues from any resulting products will be subject to attaining significant market acceptance among physicians, patients and healthcare payors.

HZT-501, LODOTRA and our other product candidates, if approved, may not attain market acceptance among physicians, patients, healthcare payors or the medical community. To date, LODOTRA has only been sold in a limited number of European countries. Sales in these markets have been limited to date and sales in Europe may not grow to expected levels, in part because we depend on our distribution partners, Merck Serono GmbH, or Merck Serono, and Mundipharma International Corporation Limited, or Mundipharma, for commercialization of LODOTRA in these markets. We believe that the degree of market acceptance and our ability to generate revenues from any products for which we obtain marketing approval will depend on a number of factors, including:

 

   

timing of market introduction of our products as well as competitive drugs;

 

   

efficacy and safety of our products;

 

   

continued projected growth of the arthritis, pain and inflammation markets;

 

   

prevalence and severity of any side effects;

 

   

acceptance by patients, primary care physicians and key specialists, including rheumatologists, orthopedic surgeons and pain specialists;

 

   

potential or perceived advantages or disadvantages of our products over alternative treatments, including cost of treatment and relative convenience and ease of administration;

 

   

strength of sales, marketing and distribution support;

 

   

the price of our products, both in absolute terms and relative to alternative treatments;

 

   

the effect of current and future healthcare laws;

 

   

availability of coverage and adequate reimbursement and pricing from government and other third-party payors; and

 

   

product labeling or product insert requirements of the FDA or other regulatory authorities.

With respect to HZT-501, studies indicate that physicians do not commonly co-prescribe GI protective agents to high-risk patients taking NSAIDs. We believe this is due in part to a lack of awareness among physicians prescribing NSAIDs of the risk of NSAID-induced upper GI ulcers, in addition to the inconvenience of prescribing two separate medications

 

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and patient compliance issues associated with multiple prescriptions. If physicians remain unaware of, or do not otherwise believe in, the benefits of combining GI protective agents with NSAIDs, our market opportunity for HZT-501 will be limited. Some physicians may also be reluctant to prescribe HZT-501 due to the inability to vary the dose of ibuprofen or if they believe treatment with NSAIDs or GI protectants other than ibuprofen and famotidine, including those of our competitors, would be more effective for their patients. With respect to both HZT-501 and LODOTRA, their higher cost compared to the generic forms of their active ingredients alone may limit adoption by physicians, patients and healthcare payors. If our product candidates are approved and fail to attain market acceptance, we may not be able to generate significant revenue to achieve or sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects.

Our current business plan is highly dependent upon our ability to successfully execute on our sales and marketing strategy for the commercialization of HZT-501 and LODOTRA. If we are unable to successfully execute on our sales and marketing strategy, we may not be able to generate significant product revenues or execute on our business plan.

Our strategy is to build a fully-integrated U.S.-focused biopharmaceutical company to successfully execute the commercial launches of HZT-501 and LODOTRA in the U.S. market following FDA approval. Even if we are able to obtain U.S. regulatory approval for HZT-501 and LODOTRA, we may not be able to successfully commercialize either product candidate in the U.S. We currently do not have a commercial organization for the sales, marketing and distribution of pharmaceutical products, and as a company, we do not have any experience commercializing pharmaceutical products on our own. LODOTRA, our only currently marketed product, was commercially launched in Europe by our exclusive distribution partners Merck Serono and Mundipharma. In order to commercialize any approved products, we must build our sales, marketing, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We currently have limited resources and the establishment and development of our own commercial organization to market these products and any additional products we may develop will be expensive and time-consuming and could delay any product launch, and we cannot be certain that we will be able to successfully develop this capability. We will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. We also face competition in our search for collaborators and potential co-promoters of our products. To the extent we rely on additional third parties to commercialize any approved products, we are likely to receive less revenues than if we commercialized these products ourselves. In addition, we may have little or no control over the sales efforts of any third parties involved in our commercialization efforts. In the event we are unable to develop our own commercial organization or collaborate with a third-party sales and marketing organization, we would not be able to commercialize our product candidates and execute on our business plan. If we are unable to successfully implement our commercial plans and drive adoption by patients and physicians of any approved products through our sales, marketing and commercialization efforts, or if our partners fail to successfully commercialize our products, then we will not be able to generate sustainable revenues from product sales which will have a material adverse effect on our business and prospects.

Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.

We were recently incorporated as Horizon Pharma, Inc. on March 23, 2010. On April 1, 2010, we effected a recapitalization and acquisition pursuant to which we became a holding company that operates through our two wholly-owned subsidiaries, Horizon Pharma USA, Inc. (formerly known as Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly known as Nitec Pharma AG, or Nitec). Horizon Pharma USA began its operations in 2005 and Nitec began its operations in 2004. We face considerable risks and difficulties as a recently formed holding company with limited operating history, particularly as a consolidated entity with operating subsidiaries that also have limited operating history. If we do not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. Our limited operating history makes it particularly difficult for us to predict our future operating results and appropriately budget for our expenses. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected. Moreover, we have only one product, LODOTRA, approved for commercial sale and only in select countries within Europe, and for which our distribution partners have only recently commenced marketing. We have no products approved for sale in the U.S., which we believe represents the largest commercial opportunity for our product candidates. To date, we have been primarily focused on the development of our product candidates and have only recently increased

 

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our commercialization activities to include product sales. This limited history of commercial sales also makes evaluating our business and future prospects difficult, and may increase the risk of your investment. We have limited experience as a consolidated operating entity, particularly with commercialization activities, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical or biotechnology areas.

We may not realize the benefits we expected from our recapitalization and acquisition of Nitec.

We recently completed our recapitalization and acquisition of Nitec pursuant to which Horizon Pharma USA and Horizon Pharma AG became our wholly-owned subsidiaries. The integration of the businesses of our subsidiaries will be complex, time-consuming and expensive and may cause disruptions in the combined business. We will need to overcome significant challenges in order to realize any benefits or synergies from the acquisition of Nitec. These challenges include the timely, efficient and successful execution of a number of tasks, including the following:

 

   

integrating the business, operations and technologies of the companies;

 

   

retaining and assimilating the key personnel of each company;

 

   

managing the regulatory and reimbursement approval processes, intellectual property protection strategies and commercialization activities of the companies, including compliance with the laws of a number of different jurisdictions;

 

   

retaining strategic partners of each company and attracting new strategic partners;

 

   

creating uniform standards, controls, procedures, policies and information systems, including with respect to disclosure controls and procedures and internal control over financial reporting;

 

   

managing international operations; and

 

   

meeting the challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs.

Many of these challenges are exacerbated by the fact that Horizon Pharma USA is a U.S.-based company and Horizon Pharma AG is a company based in Switzerland, with most of its European operations occurring through its subsidiary, Horizon Pharma GmbH, in Germany.

We may encounter difficulties successfully managing a substantially larger and internationally diverse organization and may encounter significant delays in achieving successful management of our organization. Integration of our subsidiaries’ operations will involve considerable risks and may not be successful. These risks include the following:

 

   

the potential disruption of ongoing business and distraction of our management;

 

   

the potential strain on our financial and managerial controls and reporting systems and procedures;

 

   

our inability to manage the research and development, regulatory and reimbursement approval, both in the U.S. and in Europe, and commercialization activities of our subsidiaries;

 

   

unanticipated expenses and potential delays related to integration of the operations, technology and other resources of two subsidiaries;

 

   

the impairment of relationships with employees and suppliers as a result of any integration of new management personnel or other activities;

 

   

greater than anticipated costs and expenses related to the integration of our subsidiaries’ businesses; and

 

   

potential unknown liabilities associated with the strategic combination and the combined operations.

We may not succeed in addressing these risks or any other problems encountered in connection with the integration of our subsidiaries’ businesses. The inability to integrate successfully the operations, technology and personnel of our businesses, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations and prospects, and on the market price of our common stock.

 

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We have experienced recent growth and expect to continue to grow the size of our organization, and we may experience difficulties in managing this growth.

As of December 31, 2009, we employed 12 full-time employees as Horizon Therapeutics, Inc., and our subsidiary Horizon Pharma AG employed 23 full-time employees as Nitec. As of September 15, 2010, we employed 41 full-time employees as a combined entity.

We expect this growth to continue and accelerate in the near term. As our commercialization plans and strategies develop, and as we transition into operating as a public company, we will need to recruit and train a substantial number of sales and marketing personnel and expect to need to expand the size of our employee base for managerial, operational, financial and other resources. Our ability to manage our planned growth effectively will require us to do, among other things, the following:

 

   

manage the FDA review process for HZT-501 and submission and review process for LODOTRA;

 

   

build or retain through a third party an appropriate commercial organization and manage the sales and marketing efforts for HZT-501 and LODOTRA, subject to receipt of applicable regulatory approvals;

 

   

enhance our operational, financial and management controls, reporting systems and procedures;

 

   

expand our international resources;

 

   

successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees;

 

   

establish and increase our access to commercial supplies of our product candidates;

 

   

expand our facilities and equipment; and

 

   

manage our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors, collaborators, distributors and other third parties.

Our management may also have to divert a disproportionate amount of its attention away from day-to-day activities and towards managing these growth activities. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and our failure to effectively manage growth could have a material adverse effect on our business, results of operations, financial condition and prospects.

We face significant competition from other biotechnology and pharmaceutical companies, including those marketing generic products, and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the U.S. and international markets, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or in-licensing on an exclusive basis products that are more effective and/or less costly than HZT-501 and LODOTRA or any product candidates that we are currently developing or that we may develop.

If approved, HZT-501 would face competition from Celebrex®, marketed by Pfizer Inc., Vimovo®, developed by Pozen Inc. and marketed by AstraZeneca AB, and Arthrotec®, marketed by Pfizer. In addition, HZT-501 would face significant competition from the separate use of NSAIDs for pain relief and GI protective medications to reduce the risk of NSAID-induced upper GI ulcers. Both NSAIDs and GI protective medications are available in generic form and will be less expensive to use separately than HZT-501. In addition, other product candidates that contain ibuprofen and famotidine in combination, while not currently known to us, may be developed and compete with HZT-501 in the future.

We expect LODOTRA will compete with a number of pharmaceuticals on the market to treat RA, including corticosteriods, such as prednisone, disease modifying antirheumatic drugs, or DMARDs, such as methotrexate, and biologic agents such as HUMIRA® , marketed by Abbott Laboratories, and Enbrel®, marketed by Amgen Inc. and Pfizer.

 

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It is typical for an RA patient to take a combination of a DMARD, an oral glucocorticoid, an NSAID and/or a biologic agent. Therefore, we expect that LODOTRA’s principal competition will be prednisone, the active pharmaceutical ingredient in LODOTRA, or other oral corticosteriods, which, while they may be suboptimal, are or are expected to be less expensive than LODOTRA. In addition, other product candidates that contain prednisone or other oral corticosteriods in alternative delayed release forms, while not currently known to us, may be developed and compete with LODOTRA in the future.

The availability and price of our competitors’ products could limit the demand, and the price we are able to charge, for HZT-501 and LODOTRA. We will not successfully execute on our business objectives if the market acceptance of HZT-501 or LODOTRA is inhibited by price competition, if physicians are reluctant to switch from existing products to HZT-501 or LODOTRA, or if physicians switch to other new products or choose to reserve HZT-501 or LODOTRA for use in limited patient populations.

In addition, established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license and develop novel compounds that could make our products obsolete. Our ability to compete successfully with these companies and other potential competitors will depend largely on our ability to leverage our experience in drug discovery and development to:

 

   

discover and develop medicines that are superior to other products in the market;

 

   

attract qualified scientific, product development and sales and marketing personnel;

 

   

obtain patent and/or other proprietary protection for our products and technologies;

 

   

obtain required regulatory approvals; and

 

   

successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new product candidates.

In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to be approved and overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, obtaining FDA approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact on our business. The inability to compete with existing products or subsequently introduced products would have a material adverse impact on our business, financial condition and prospects.

A variety of risks associated with operating our business and marketing our product candidates internationally could materially adversely affect our business.

In addition to our U.S. operations, we have operations in Switzerland and Germany. Moreover, LODOTRA is currently being marketed in a limited number of European countries, and our distribution partners are in the process of obtaining pricing and reimbursement approval for, and preparing to market, LODOTRA in other European countries. We face risks associated with our international operations, including possible unfavorable regulatory, pricing and reimbursement, political, tax and labor conditions, which could harm our business. We are subject to numerous risks associated with international business activities, including:

 

   

compliance with differing or unexpected regulatory requirements for our products;

 

   

difficulties in staffing and managing foreign operations;

 

   

in certain circumstances, including with respect to the commercialization of LODOTRA in Europe, increased dependence on the commercialization efforts of our distributors or strategic partners;

 

   

compliance with Swiss laws with respect to our Horizon Pharma AG subsidiary, including laws requiring maintenance of cash in the subsidiary to avoid overindebtedness, which requires Horizon Pharma AG to maintain assets in excess of its liabilities;

 

   

compliance with German laws with respect to our Horizon Pharma GmbH subsidiary through which Horizon Pharma AG conducts most of its European operations;

 

   

foreign government taxes, regulations and permit requirements;

 

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U.S. and foreign government tariffs, trade restrictions, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, natural disasters, war, events of terrorism or political instability in particular foreign countries;

 

   

fluctuations in currency exchange rates, which could result in increased operating expenses and reduced revenues, and other obligations related to doing business in another country;

 

   

compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;

 

   

workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

 

   

changes in diplomatic and trade relationships; and

 

   

challenges in enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the U.S.

These and other risks associated with our international operations may materially adversely affect our business, financial condition and results of operations.

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including our Chairman, President and Chief Executive Officer, Timothy P. Walbert, our Executive Vice President and Chief Financial Officer, Robert J. De Vaere, and our Executive Vice President, Development, Regulatory Affairs and Chief Medical Officer, Dr. Jeffrey W. Sherman. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide incentive stock options that vest over time. The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Our scientific team in particular has expertise in many different aspects of drug discovery, development and commercialization, and may be difficult to retain or replace. We conduct our operations at our facilities in Northbrook, Illinois, Reinach, Switzerland and Mannheim, Germany, and may face challenges recruiting personnel to these geographic locales. Moreover, these regions are headquarters to many other biopharmaceutical companies and many academic and research institutions, and therefore we face increased competition for personnel in those geographies. Competition for skilled personnel in our markets is very intense and competition for experienced scientists may limit our ability to hire and retain highly qualified personnel on acceptable terms.

Despite our efforts to retain valuable employees, members of our management and scientific and development teams may terminate their employment with us on short notice. Although we have written employment arrangements with all of our employees, these employment arrangements generally provide for at-will employment, which means that our employees can leave our employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, financial condition and prospects. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

Many of the other biotechnology and pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than that which we have to offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can develop and commercialize product candidates will be limited.

 

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If we fail to obtain and maintain approval from regulatory authorities in international markets for HZT-501 and LODOTRA and any future product candidates for which we have rights in international markets, our market opportunities will be limited and our business will be adversely impacted.

Sales of our product candidates outside of the U.S. will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of our product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials. In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our product is also subject to approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others.

Even if we obtain regulatory approval for any of our product candidates, we will be subject to ongoing FDA obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we obtain for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices, or cGMPs, good clinical practices, or GCPs, and good laboratory practices, which are regulations and guidelines enforced by the FDA for all of our products in clinical development, for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

   

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

   

fines, Warning Letters or holds on clinical trials;

 

   

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners, or suspension or revocation of product license approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; and

 

   

injunctions or the imposition of civil or criminal penalties.

If we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects.

Reimbursement may not be available, or may be available at only limited levels, for HZT-501, LODOTRA or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of HZT-501, LODOTRA or any other product candidates that we may develop will depend in large part on global reimbursement policies and may be affected by future healthcare reform measures, both in the U.S. and other key international markets. Successful commercialization of our products will depend in part on the

 

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availability of governmental and third-party payor reimbursement for the cost of our products. Government health administration authorities, private health insurers and other organizations generally provide reimbursement. In particular, in the U.S., private health insurers and other third-party payors often provide reimbursement for treatments based on the level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. In the U.S., the European Union and other significant or potentially significant markets for our product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. Further, the increased emphasis on managed healthcare in the U.S. and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.

In Europe, the success of our commercialized products, including LODOTRA, will depend largely on obtaining and maintaining government reimbursement, because in many European countries patients are unlikely to use prescription drugs that are not reimbursed by their governments. To date, Merck Serono has obtained reimbursement for LODOTRA in Germany and is in the process of seeking reimbursement in Austria. Mundipharma is seeking reimbursement in a number of countries in Europe and currently sells LODOTRA without reimbursed pricing in a limited number of European countries. Negotiating prices with governmental authorities can delay commercialization by 12 months or more. Reimbursement policies may adversely affect our ability to sell our products on a profitable basis. In many international markets, governments control the prices of prescription pharmaceuticals, including through the implementation of reference pricing, price cuts, rebates, revenue-related taxes and profit control, and expect prices of prescription pharmaceuticals to decline over the life of the product or as volumes increase. Recently, many countries in the European Union have increased the amount of discounts required on pharmaceutical products, which we believe has impacted the reimbursement rates and timing to launch for LODOTRA to date, and we expect these discounts to continue as countries attempt to manage healthcare expenditures, especially in light of the global economic downturn. For example, legislation was recently enacted in Germany that will increase the rebate on prescription pharmaceuticals and likely lower the revenues from the sale of LODOTRA in Germany that we would otherwise receive. As a result of these pricing practices, it may become difficult to achieve profitability or expected rates of growth in revenue or results of operations. Any shortfalls in revenue could adversely affect our business, financial condition and results of operations.

In light of such policies and the uncertainty surrounding proposed regulations and changes in the reimbursement policies of governments and third-party payors, we cannot be sure that reimbursement will be available for HZT-501, for LODOTRA in any additional markets or for any other product candidates that we may develop. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize HZT-501, LODOTRA or any other product candidates that we may develop.

The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the U.S. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Among the provisions of PPACA of greatest importance to the pharmaceutical industry are the following:

 

   

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, beginning in 2011;

 

   

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;

 

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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning in 2011;

 

   

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 23, 2010;

 

   

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

   

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective in January 2010;

 

   

new requirements to report certain financial arrangements with physicians, including reporting any “transfer of value” made or distributed to prescribers and other healthcare providers, effective March 30, 2013, and reporting any investment interests held by physicians and their immediate family members during the preceding calendar year;

 

   

a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012;

 

   

a licensure framework for follow-on biologic products; and

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

We expect to experience pricing pressures in connection with the sale of HZT-501, LODOTRA and any other products that we may develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. There may be additional pressure by payors and healthcare providers to use generic drugs that contain the active ingredients found in HZT-501 and LODOTRA or any other product candidates that we may develop. If we fail to successfully secure and maintain adequate coverage and reimbursement for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and expected revenue and profitability which would have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the U.S., our operations may be directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs.

The federal Anti-Kickback Statute prohibits persons from knowingly and willingly soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and

 

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possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of pharmaceutical, medical device and other healthcare companies to have to defend a False Claims Act action. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

We are unable to predict whether we could be subject to actions under any of these or other fraud and abuse laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations, all of which could have a material adverse effect on our business and results of operations.

We rely on third parties to manufacture commercial supplies of LODOTRA, and we intend to rely on third parties to manufacture commercial supplies of any approved product candidates. The commercialization of any of our product candidates could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient quantities of product or fail to do so at acceptable quality levels or prices.

The facilities used by our third-party manufacturers to manufacture our product candidates must be approved by the applicable regulatory authorities. We do not control the manufacturing processes of third-party manufacturers and are currently completely dependent on our third-party manufacturing partner Pharmaceutics International, Inc., located in Hunt Valley, Maryland, for production of HZT-501, and Jagotec AG, a wholly-owned subsidiary of SkyePharma PLC and operating through its affiliate SkyePharma SAS, located in Lyon, France, for production of LODOTRA. We purchase the primary active ingredients for HZT-501 from BASF in Bishop, Texas and Dr. Reddy’s Laboratories in India. If any of our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our product candidates or if they withdraw any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates.

We currently do not have any long-term agreement for the manufacture of HZT-501. Our agreement with Pharmaceutics International is a master services agreement under which we submit work orders for specific manufacturing services. Pharmaceutics International is not obligated to accept any work orders that we submit in the future and we cannot be certain that Pharmaceutics International will continue to be willing to perform manufacturing services related to HZT-501 on acceptable terms to us or at all. While it is our intention to establish and qualify sanofi-aventis U.S. LLC with the FDA as a long-term source of supply for HZT-501, we may not be able to reach mutually agreeable terms on a long-term supply agreement, or sanofi-aventis may be unable or unwilling to complete manufacturing scale-up and validation work necessary to supply HZT-501 in sufficient commercial quantities. If we are unable to establish a long-term supply arrangement for the commercial supply of HZT-501, if approved for marketing, our ability to successfully and timely launch and commercialize HZT-501 would be subject to a substantial risk of supply failure.

Regardless of whether we have long-term supply agreements, our manufacturers may not perform as agreed or may terminate their agreements with us. Under our manufacturing and supply agreement with Jagotec, either we or Jagotec may terminate the agreement in the event of an insolvency, liquidation or bankruptcy of the other party or upon an uncured breach by the other party. While we have the right to receive a continuing supply of LODOTRA from Jagotec

 

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for a period of 24 months after termination, we cannot assure you that we would be able to establish another commercial supply of LODOTRA in that time-frame, or qualify any new supplier with the applicable regulatory authorities on a timely basis or at all.

In addition, we do not have the capability to package HZT-501, LODOTRA or any other product candidates for distribution. Consequently, we have entered into an agreement with Catalent Pharma Solutions for packaging of LODOTRA, in Schorndorf, Germany, and if HZT-501 and LODOTRA are approved by the FDA, for packaging of HZT-501 and LODOTRA at facilities in the U.S. If we obtain marketing approval from the applicable regulatory authorities including the FDA, we intend to sell drug product finished and packaged by either Catalent or an alternate packager.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Though we believe we have resolved any stability issues with respect to the commercial formulation of HZT-501, we cannot assure you that any other stability or other issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to launch HZT-501 and LODOTRA in the U.S. or provide any product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in our ability to meet commercial demand for HZT-501 or LODOTRA will result in the loss of potential revenues and could adversely affect our ability to gain market acceptance for these products. In addition, any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

Failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of any of our product candidates and could have a material adverse effect on our business, results of operations, financial condition and prospects.

We are dependent on third parties to commercialize certain of our product candidates in certain foreign countries. Failure of these or any other third parties to successfully commercialize our product candidates in the applicable jurisdictions could have a material adverse effect on our business.

We rely on Merck Serono for commercialization of LODOTRA in Germany and Austria, and on Mundipharma for commercialization of LODOTRA in Albania, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Italy, Israel, Latvia, Lithuania, Lichtenstein, Luxemburg, Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Serbia, Former Soviet Union Countries, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United Kingdom. We have limited contractual rights to force either distribution partner to invest significantly in commercialization of LODOTRA in their respective markets. In the event that Merck Serono or Mundipharma or any other third party with any future commercialization rights to any of our product candidates fails to adequately commercialize those product candidates because it lacks adequate financial or other resources, decides to focus on other initiatives or otherwise, our ability to successfully commercialize our product candidates in the applicable jurisdictions would be limited, which would adversely affect our business, financial condition, results of operations and prospects. In addition, our agreements with Merck Serono and Mundipharma may be terminated by either party in the event of a bankruptcy of the other party or upon an uncured material breach by the other party. If Merck Serono or Mundipharma terminated their agreement with us, we may not be able to secure an alternative distributor in the applicable territory in Europe on a timely basis or at all, in which case our ability to generate revenues from the sale of LODOTRA in Europe would be materially harmed.

HZT-501, LODOTRA or any other product candidate that we develop may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization.

Undesirable side effects caused by any product candidate that we develop could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, or cause us to evaluate the future of our

 

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development programs. In addition, the FDA or other regulatory authorities may require, or we may undertake, additional clinical trials to support the safety profile of our product candidates.

In addition, if HZT-501, LODOTRA or any other product candidate that we may develop receives marketing approval and we or others later identify undesirable side effects caused by the product, or there is a perception that the product is associated with undesirable side effects:

 

   

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

   

regulatory authorities may withdraw their approval of the product or place restrictions on the way it is prescribed; and

 

   

we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product or implement a risk evaluation and mitigation strategy.

If any of these events occurred with respect to HZT-501 or LODOTRA, our ability to generate significant revenues from the sale of these products would be significantly harmed.

We rely on third parties to conduct our preclinical and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We have agreements with third-party contract research organizations, or CROs, to conduct our clinical programs, including ongoing smaller safety studies of HZT-501 and LODOTRA, and anticipate that we may enter into other such agreements in the future regarding our other product candidates. We rely heavily on these parties for the execution of our clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol. We and our CROs are required to comply with current GCPs. The FDA enforces these GCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCP regulations, the data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply or complied with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations, and require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Switching or adding additional CROs can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition or prospects.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates

 

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may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical testing.

To the extent that we are required to conduct additional clinical development of HZT-501 or LODOTRA or we conduct clinical development of our earlier stage product candidates or additional indications for LODOTRA, we may experience delays in these clinical trials. In the future we intend to further investigate LODOTRA for the treatment of severe asthma and polymyalgia rheumatica. We also have a pipeline of earlier stage product candidates to treat pain-related diseases, and plan to investigate TRUNOC (tarenflurbil) for the treatment of pain-related diseases and HZN-602, a single pill combination of naproxen and famotidine, for reducing the risk of NSAID-induced upper GI ulcers in patients with mild to moderate pain and arthritis who require the use of naproxen. We do not know whether any additional clinical trials will be initiated, begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays related to:

 

   

obtaining regulatory approval to commence a trial;

 

   

reaching agreement with the FDA on any special protocol assessments, or SPAs, we submit;

 

   

reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

obtaining institutional review board or ethics committee approval at each site;

 

   

recruiting suitable patients to participate in a trial;

 

   

having patients complete a trial or return for post-treatment follow-up;

 

   

clinical sites dropping out of a trial;

 

   

adding new sites; or

 

   

manufacturing sufficient quantities of product candidates for use in clinical trials.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we expect to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our future clinical trials and while we intend to have agreements governing their committed activities, we will have limited influence over their actual performance.

We could encounter delays if prescribing physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or if we terminate, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition, results of operations and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

The FDA may not ultimately approve our proposed trade names for our product candidates.

Any trade names that we intend to use for our product candidates must be approved by the FDA irrespective of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or PTO. The FDA

 

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conducts a rigorous review of proposed product names and may reject a proposed product name for a variety of reasons, including if it believes that the name inappropriately implies medical claims or if it poses the potential for confusion with other product names. Although we utilize the name “LODOTRA” in Europe, the FDA has rejected our usage of this product name in the U.S. and, if approved, LODOTRA will be sold under another name in the U.S., losing in the U.S. market the benefit of any brand equity it may develop in Europe. In addition, if the FDA determines that the trade names of other product candidates that are approved prior to the approval of our product candidates may present a risk of confusion with any of our proposed trade names, the FDA may not ultimately approve those proposed trade names. If the FDA does not approve any of our proposed product names prior to their applicable NDA approval dates, we may be required to launch commercial sales of such products without brand names, and our efforts to build successful brand identities for, and commercialize, such products may consequently be adversely impacted.

If we fail to develop and commercialize other product candidates or products, our business and prospects would be limited.

A key element of our strategy is to develop and commercialize a portfolio of other product candidates in addition to HZT-501 and LODOTRA. Since we do not have proprietary drug discovery technology, the success of this strategy depends in large part upon the combination of our regulatory, development and commercial capabilities and expertise and our ability to identify, select and acquire or in-license clinically enabled product candidates for the treatment of pain-related diseases or that otherwise fit into our development plans on terms that are acceptable to us. Identifying, selecting and acquiring or licensing promising product candidates requires substantial technical, financial and human resources and technical expertise. Efforts to do so may not result in the actual acquisition or license of a particular product candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. If we are unable to identify, select and acquire or license suitable product candidates from third parties on terms acceptable to us, our business and prospects will be limited.

Moreover, any product candidate we identify, select and acquire or license will require additional, time-consuming development efforts prior to commercial sale, including preclinical studies if applicable, and extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risk of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such products that are approved will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective or desired than other commercially available alternatives.

In addition, if we fail to successfully develop and commercialize HZT-501 and LODOTRA, there is a greater likelihood that we will fail to successfully develop a pipeline of other product candidates to follow these lead product candidates, and our business and prospects would therefore be harmed.

We may seek to engage in strategic transactions that could have a variety of negative consequences, and we may not realize the benefits of such transactions or attempts to engage in such transactions.

From time to time, we may seek to engage in strategic transactions with third parties, such as acquisitions of companies or divisions of companies, asset purchases, or in-licensing of product candidates or technologies that we believe will complement or augment our existing business. We may also consider a variety of other business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and other investments. Any such transaction may require us to incur non-recurring and other charges, increase our near and long-term expenditures, pose significant integration challenges, require additional expertise, result in dilution to our existing stockholders and disrupt our management and business, which could harm our operations and financial results. Moreover, we face significant competition in seeking appropriate strategic partners and transactions, and the negotiation process for any strategic transaction can be time-consuming and complex. In addition, we may not be successful in our efforts to engage in certain strategic transactions because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential. There is no assurance that, following the consummation of a strategic transaction, we will achieve the revenues or specific net income that justifies such transaction. Any failures or delays in entering into strategic transactions could also delay or negatively impact the development and commercialization of our product candidates and reduce their competitiveness even if they

 

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reach the market. In addition, any failures or delays in entering into strategic transactions anticipated by analysts or the investment community could result in a decline in our stock price.

Business interruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions. While we carry insurance for certain of these events, the occurrence of any of these business interruptions could seriously harm our business and financial condition and increase our costs and expenses. A majority of our management operates in our principal executive offices located in Northbrook, Illinois. If our Northbrook offices were affected by a natural or man-made disaster or other business interruption, our ability to manage our domestic and foreign operations could be impaired, which could materially and adversely affect our results of operations and financial condition. We rely on third-party manufacturers, located in Hunt Valley, Maryland and Lyon, France, to produce our product candidates. Our ability to obtain commercial supplies of our product candidates could be disrupted, and our results of operations and financial condition could be materially and adversely affected if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. The ultimate impact of such events on us, our significant suppliers and our general infrastructure is unknown.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

We face an inherent risk of product liability as a result of the commercial sales of LODOTRA and the clinical testing of our product candidates, and will face an even greater risk if we commercialize HZT-501 and LODOTRA in the U.S. or other additional jurisdictions or if we engage in the clinical testing of new product candidates or commercialize any additional products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates or products that we may develop;

 

   

injury to our reputation;

 

   

withdrawal of clinical trial participants;

 

   

initiation of investigations by regulators;

 

   

costs to defend the related litigation;

 

   

a diversion of management’s time and our resources;

 

   

substantial monetary awards to trial participants or patients;

 

   

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

loss of revenue;

 

   

exhaustion of any available insurance and our capital resources;

 

   

the inability to commercialize our product candidates; and

 

   

a decline in our stock price.

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical studies and commercial product sales in the amount of $10 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent to increase our product liability coverage due to the

 

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commercial launch of HZT-501 and/or the commercial launch of LODOTRA in additional markets, we may be unable to obtain such increased coverage on acceptable terms or at all. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Our business involves the use of hazardous materials, and we and our third-party manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our third-party manufacturers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates and other hazardous compounds. We and our manufacturers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of our third-party manufacturers’ activities involving hazardous materials, our business and financial condition may be adversely affected. In the future we may seek to establish longer term third-party manufacturing arrangements, pursuant to which we would seek to obtain contractual indemnification protection from such third-party manufacturers potentially limiting this liability exposure.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Risks Related to Our Financial Position and Capital Requirements

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

We have a limited operating history. We have financed our operations primarily through private placements of preferred stock and debt financing and have incurred significant operating losses since our inception. We had a net loss of $5.8 million for the six months ended June 30, 2010 and net losses of $20.5 million, $27.9 million and $25.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. Nitec had a net loss of CHF 25.9 million ($24.8 million) for the nine months ended March 31, 2010, and a net loss of CHF 22.1 million ($19.7 million) for the year ended June 30, 2009. On a pro forma basis giving effect to the acquisition of Nitec, we would have had net losses of $47.4 million and $17.4 million for the year ended December 31, 2009 and the six months ended June 30, 2010, respectively. As of June 30, 2010, we had an accumulated deficit of $85.8 million. Before our acquisition of Nitec, as of March 31, 2010, we had an accumulated deficit of $87.9 million and Nitec had an accumulated deficit of CHF 65.8 million ($61.7

 

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million). We do not know whether or when we will become profitable. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. Our losses have resulted principally from costs incurred in our development activities for our product candidates. We anticipate that our operating losses will substantially increase over the next several years as we execute our plan to expand our development and commercialization activities, including the planned commercialization of HZT-501 and LODOTRA, and as we transition into operating as a public company.

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this prospectus.

Our report from our independent registered public accounting firm for the year ended December 31, 2009 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. After this offering, future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We have limited product revenues and other sources of revenues. We may never achieve or sustain profitability, which would depress the market price of our common stock, and could cause you to lose all or a part of your investment.

Our ability to become profitable depends upon our ability to generate revenues from sales of our products. To date, only LODOTRA is approved for marketing in Europe, and we have no other products approved for commercial sale and have generated only limited revenues from sales of LODOTRA. We may never be able to develop or commercialize other products or sell LODOTRA in the U.S., which we believe represents its most significant commercial opportunity. We do not anticipate generating revenues, if any, from sales of HZT-501 until at least the second half of 2011, and will never generate revenues from HZT-501 if we do not obtain regulatory approval. Our ability to generate future revenues depends heavily on our success in:

 

   

developing and securing U.S. and/or foreign regulatory approvals for HZT-501 and LODOTRA;

 

   

commercializing HZT-501 and LODOTRA and any other product candidates for which we obtain approval; and

 

   

developing and commercializing a portfolio of other product candidates in addition to HZT-501 and LODOTRA.

Even if we do generate additional product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

The terms of our debt facilities place restrictions on our operating and financial flexibility, and if we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

In April 2010, we entered into a $12.0 million debt facility with Kreos Capital III (UK) Limited, or Kreos, and Silicon Valley Bank, which we refer to as the Kreos-SVB facility, and concurrently borrowed $7.0 million under this facility. In September 2010, we borrowed the remaining $5.0 million available under the Kreos-SVB facility. Each drawdown is payable in equal monthly installments over 36 months, at a fixed interest rate of 12.9% per annum. The Kreos-SVB facility is secured by a lien on substantially all of our assets, including intellectual property. Upon completion of this offering, assuming we receive gross proceeds of not less than $50.0 million, the lien on our intellectual property securing the Kreos-SVB facility will be released. In addition, after December 31, 2012, if the FDA has approved HZT-501 and we achieve cumulative gross revenues of not less than $50.0 million from product sales, or if we meet certain liquidity requirements, the lien on the assets of Horizon Pharma AG may be released with the consent of the lenders, provided we

 

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are not in default under the Kreos-SVB facility. In April 2010, we also amended an existing credit facility between Kreos and Nitec, which we refer to as the Kreos facility, to permit us to acquire Nitec and to enter into the Kreos-SVB facility. As of June 30, 2010, the outstanding principal balance of the Kreos facility was approximately $5.5 million. The loans under this facility require interest only payments through December 2010 and thereafter are payable in equal monthly installments of principal and interest through November 2013. The Kreos facility is secured by a lien on trade receivables and intellectual property. Upon completion of this offering, assuming we receive gross proceeds of not less than $50.0 million, the lien on the intellectual property securing the Kreos facility will be released.

The Kreos-SVB facility and the Kreos facility restrict our ability to incur additional indebtedness, incur liens, pay dividends and engage in significant business transactions, such as a change of control, so long as we owe any amounts to the lenders under the related loan agreements. Any of these restrictions could significantly limit our operating and financial flexibility and ability to respond to changes in our business or competitive activities. In addition, if we default under our debt facilities, our lenders may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, our lenders’ right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Our lenders could declare a default under our debt facilities upon the occurrence of any event that the lenders interpret as having a material adverse effect upon us as defined under the loan agreements, thereby requiring us to repay the loans immediately or to attempt to reverse the lenders’ declaration through negotiation or litigation. Any declaration by the lenders of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

If we fail to obtain additional financing, we may be unable to complete the development and commercialization of HZT-501, LODOTRA or other product candidates, or continue our other research and development programs.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to:

 

   

complete the regulatory approval process, and any future required clinical development related thereto, for HZT-501 and LODOTRA;

 

   

launch and commercialize any product candidates for which we obtain regulatory approval, including building our own sales force in the U.S.; and

 

   

continue our research and development programs to advance our product pipeline in the future.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months. We may need to raise additional funds sooner if we choose to expand our commercialization efforts more rapidly than we presently anticipate. We will also require additional capital if the FDA requires us to conduct additional clinical trials with respect to either HZT-501 or LODOTRA.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our other research and development initiatives. We also could be required to:

 

   

seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

 

   

relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

Our report from our independent registered public accounting firm for the year ended December 31, 2009 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment.

 

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Any of the above events could significantly harm our business, financial condition and prospects and cause the price of our common stock to decline.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish intellectual property rights to our product candidates.

We may seek additional capital through a combination of private and public equity offerings, debt financings, receivables or royalty financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt, receivables and royalty financings may be coupled with an equity component, such as warrants to purchase stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us.

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

Our management will have broad discretion in the application of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management may not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering to fund the regulatory approval and commercialization of HZT-501 and LODOTRA and for working capital, capital expenditures and general corporate purposes. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of our common stock to decline.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have concluded that as a result of our acquisition of Nitec and related transactions occurring on April 1, 2010, we have triggered an “ownership change” limitation and that we will be subject to annual limits on our ability to utilize net operating loss carryforwards. We estimate that these annual limits will be $13.7 million, $18.1 million, $18.1 million, $18.1 million and $16.9 million for 2010, 2011, 2012, 2013 and 2014, respectively, and will be cumulative such that any use of the carryforwards below the limitation in one year will result in a corresponding increase in the limitation for the subsequent tax year. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including as a result of the completion of this offering.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have been experiencing extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by the recent economic downturn and volatile business environment and continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon

 

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commercialization or development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

At June 30, 2010, we had $13.3 million of cash and cash equivalents consisting of cash and money market funds. While as of the date of this prospectus, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since June 30, 2010, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by us.

Changes in accounting rules or policies may affect our financial position and results of operations.

U.S. generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations. In addition, the consolidation of Horizon Pharma AG and Horizon Pharma USA adds additional complexity to the application of U.S. generally accepted accounting principles. Changes in the application of existing rules or guidance applicable to us or our wholly-owned subsidiaries could significantly affect our consolidated financial position and results of operations.

Risks Related to Our Intellectual Property

If we are unable to obtain or protect intellectual property rights related to our products and product candidates, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our products and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover the products in the U.S. or in other foreign countries. If this were to occur, early generic competition could be expected against HZT-501, LODOTRA and other product candidates in development. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing based on a pending patent application. In particular, because the active pharmaceutical ingredients in HZT-501 and LODOTRA have been on the market as separate products for many years, it is possible that these products have previously been used off-label in such a manner that such prior usage would affect the validity of our patents or our ability to obtain patents based on our patent applications. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications, may not adequately protect our intellectual property or prevent others from designing around our claims. If the patent applications we hold with respect to HZT-501 and LODOTRA fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from collaborating with us to develop them, and threaten our ability to commercialize, our product candidates. We cannot offer any assurances about which, if any, patents will issue or whether any issued patents will be found not invalid and not unenforceable or will go unthreatened by third parties. Further, if we encounter delays in regulatory approvals, the period of time during which we could market HZT-501 and LODOTRA under patent protection could be reduced. Since patent applications in the U.S. and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file any patent application related to HZT-501 and LODOTRA or our other product candidates. Furthermore, if third parties have filed such patent applications, an interference proceeding in the U.S. can be provoked by a third party or instituted by us to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we expect all of our employees to assign their inventions to us, and

 

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all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the U.S. and Canada. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the U.S. and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the U.S., involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter party reexamination proceedings before the U.S. PTO. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of HZT-501 and LODOTRA and/or our other product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do not exist which might be enforced against our products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.

 

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

We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we hold an exclusive license to SkyePharma’s proprietary technology and know-how covering the delayed release of corticosteroids relating to LODOTRA. If we fail to comply with our obligations under our agreement with SkyePharma or our other license agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license, including LODOTRA.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the U.S.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors that control the prosecution and maintenance of our licensed patents fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used

 

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or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

Risks Related to this Offering and Ownership of our Common Stock

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no market for shares of our common stock. Although we expect that our common stock will be approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering, which may vary. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The price of our stock is likely to be highly volatile, and you could lose all or part of your investment.

The trading price of our common stock following the completion of this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

   

any adverse development or perceived adverse development with respect to the FDA’s review of the NDA for HZT-501 currently under FDA review, including a request for additional information;

 

   

any delay in filing our NDA for LODOTRA or delay in filing our MAA for HZT-501 in the European Union through the Decentralized Procedure, and any adverse development or perceived adverse development with respect to the FDA’s review of the NDA or the Medicines and Healthcare products Regulatory Agency’s review of an MAA, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

   

our failure to successfully execute our commercialization strategy with respect to our approved products;

 

   

disputes or other developments relating to intellectual property and other proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products and product candidates;

 

   

unanticipated serious safety concerns related to the use of HZT-501, LODOTRA or any of our other product candidates;

 

   

adverse regulatory decisions;

 

   

changes in laws or regulations applicable to our products or product candidates, including but not limited to clinical trial requirements for approvals;

 

   

inability to obtain adequate commercial supply for any approved product or inability to do so at acceptable prices;

 

   

developments concerning our commercial partners, including but not limited to those with our sources of manufacturing supply;

 

   

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

   

adverse results or delays in clinical trials;

 

   

our failure to successfully develop additional product candidates;

 

   

introduction of new products or services offered by us or our competitors;

 

   

our inability to effectively manage our growth;

 

   

overall performance of the equity markets and general political and economic conditions;

 

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failure to meet or exceed revenue and financial projections we provide to the public;

 

   

actual or anticipated variations in quarterly operating results;

 

   

failure to meet or exceed the estimates and projections of the investment community;

 

   

publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

our inability to successfully enter new markets;

 

   

the termination of a collaboration or the inability to establish additional collaborations;

 

   

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

   

our inability to maintain an adequate rate of growth;

 

   

ineffectiveness of our internal controls;

 

   

additions or departures of key scientific or management personnel;

 

   

issuances of debt or equity securities;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

changes in the market valuations of similar companies;

 

   

sales of our common stock by us or our stockholders in the future;

 

   

trading volume of our common stock;

 

   

effects of natural or man-made catastrophic events or other business interruptions; and

 

   

other events or factors, many of which are beyond our control.

In addition, the stock market in general, and The NASDAQ Global Market and the stocks of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of our debt facilities, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.

Our directors and principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our directors, five percent or greater stockholders and their respective affiliates owned in the aggregate approximately 80.5% of our outstanding voting stock and, upon completion of this offering, that same group will hold in the aggregate approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ overallotment option). Therefore, even after this offering these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of

 

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our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $             per share, based on an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover of this prospectus. Further, investors purchasing common stock in this offering will contribute approximately     % of the total amount invested by stockholders since our inception, but will own only approximately     % of the shares of common stock outstanding after giving effect to this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less than the price offered to the public in this offering when they purchased their shares and the exercise of stock options granted to our employees. As of June 30, 2010, there were 3,115,855 shares of our common stock issuable upon the exercise of outstanding options having a weighted average exercise price of $5.82 per share and 821,564 shares of our common stock issuable upon the exercise of outstanding warrants to purchase preferred stock (assuming the conversion of all such preferred stock to common stock), having a weighted average exercise price of $3.92 per share. The exercise of any of these options or warrants would result in additional dilution. Additionally, in July 2010, we sold $10.0 million in aggregate principal amount of subordinated convertible promissory notes, or the 2010 notes, in a private placement to certain of our existing investors. The 2010 notes may convert into shares of our Series B preferred stock prior to the closing of this offering or our common stock in connection with or after this offering at the lesser of the price offered to the public in this offering or $7.968 per share. Assuming the price offered to the public in this offering is greater than $7.968 per share, the conversion of the 2010 notes into our common stock would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the NASDAQ Stock Market, Inc., or NASDAQ, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations will make it more difficult and more expensive for us to obtain and maintain director and officer liability insurance. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report, commencing in our annual report on Form 10-K for the year ending December 31, 2011, on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Unless we qualify for an exemption as a non-accelerated filer under the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts, particularly because of our holding company structure and international operations. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner or if we or our

 

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independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our common stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and rules adopted by the SEC and by NASDAQ, would likely result in increased costs to us as we respond to their requirements.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares of common stock outstanding as of June 30, 2010, upon completion of this offering, we will have outstanding a total of              shares of common stock, assuming no exercise of the underwriters’ overallotment option and no exercise of outstanding options and warrants. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ overallotment option, will be freely tradable, without restriction, in the public market immediately following this offering. Our underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus (subject to extension upon the occurrence of specified events). After the lock-up agreements expire, up to an additional 29,771,443 shares of common stock will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, with respect to shares held by directors, executive officers and other affiliates. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering.

Pursuant to our 2010 equity incentive plan, our management is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under our 2010 equity incentive plan will automatically increase each year by an amount equal to the lesser of 5% of our capital stock outstanding as of January 1 of each year or              shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year.

 

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Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

   

limiting the removal of directors by the stockholders;

 

   

creating a staggered board of directors;

 

   

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders;

 

   

eliminating the ability of stockholders to call a special meeting of stockholders;

 

   

permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. We are also subject to certain anti-takeover provisions under Delaware law which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We may become involved in securities class action litigation that could divert management’s attention and harm our business and could subject us to significant liabilities.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Even if we are successful in defending against any such claims, litigation could result in substantial costs and be a distraction to management, and may result in unfavorable results that could adversely impact our financial condition and prospects.

 

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Special Note Regarding Forward-Looking Statements

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

 

   

our ability to obtain and maintain regulatory approvals for HZT-501 and LODOTRA;

 

   

our ability to successfully execute our sales and marketing strategy, including the development of our sales and marketing capabilities in the U.S.;

 

   

the rate and degree of market acceptance of, and our ability and our distribution and marketing partners’ ability to obtain reimbursement for, any products for which we obtain regulatory approval;

 

   

our ability to obtain additional financing;

 

   

the accuracy of our estimates regarding expenses, future revenues and capital requirements;

 

   

our ability to successfully integrate the operations of Horizon Pharma USA, Inc. and Horizon Pharma AG and realize any expected benefits of our acquisition of Nitec Pharma AG;

 

   

our ability to manage our anticipated future growth;

 

   

the ability of our products to compete with generic products, especially those representing the active pharmaceutical ingredients in HZT-501 and LODOTRA, as well as new products that may be developed by our competitors;

 

   

our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products and product candidates;

 

   

the performance of our third-party distribution partners and manufacturers, over which we have limited control;

 

   

our ability to obtain and maintain intellectual property protection for our products and our product candidates;

 

   

our ability to operate our business without infringing the intellectual property rights of others;

 

   

the success and timing of our preclinical and clinical development efforts;

 

   

the loss of key scientific or management personnel;

 

   

regulatory developments in the U.S. and foreign countries;

 

   

our ability to develop and commercialize other product candidates in addition to HZT-501 and LODOTRA; and

 

   

our use of the net proceeds from this offering.

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

We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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Use of Proceeds

We estimate that the net proceeds from the sale of the shares of common stock we are 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 estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or 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 or decrease, respectively, the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters fully exercise their overallotment option, we estimate that the net proceeds to us from this offering will be approximately $             million.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We intend to use the net proceeds of this offering as follows:

 

   

approximately $             million to fund development and regulatory approval for HZT-501 and LODOTRA;

 

   

approximately $             million to fund U.S. commercialization activities for HZT-501 and LODOTRA; and

 

   

the remainder for working capital, capital expenditures and general corporate purposes.

Pending their use, we plan to invest the net proceeds 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.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months, including our initial commercial launch activities in the U.S., assuming we receive marketing approval.

Dividend 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 and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, unless waived, the terms of our existing debt facilities prohibit us from paying dividends on our common stock.

Industry and Market Data

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. In addition, while we believe our internal company research is reliable and the market definitions we use are appropriate, neither our internal research nor these definitions have been verified by any independent source.

 

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Capitalization

The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2010:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

  (1) our issuance in July 2010 of convertible promissory notes in the aggregate principal amount of $10.0 million, or the 2010 notes, and our issuance of 1,271,520 shares of common stock upon the completion of this offering upon an assumed conversion of the 2010 notes (plus interest accrued thereon), assuming a conversion price of $7.968 per share and assuming a conversion date of August 29, 2010; and

 

  (2) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 24,961,340 shares of common stock upon the completion of this offering (and the adjustment of our outstanding warrants to purchase convertible preferred stock into warrants to purchase common stock); and

 

   

on a pro forma as adjusted basis to additionally give effect to the sale of              shares of common stock in this offering, assuming an initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

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     As of June 30, 2010
     Actual     Pro Forma     Pro Forma
as Adjusted
     (in thousands, except share and per share
data)
     (unaudited)

Cash and cash equivalents

   $ 13,266      $ 23,266      $
                      

Long-term debt, less current portion

     7,576        7,576       
                      

Stockholders’ equity (deficit):

      

Convertible preferred stock, $0.0001 par value; 27,400,000 shares authorized, 24,961,340 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     2              

Preferred stock, $0.0001 par value; no shares authorized, no shares issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                  

Common stock, $0.0001 par value; 35,400,000, shares authorized, 3,538,583 shares issued and outstanding, actual;              shares authorized, 29,771,443 shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted

            3       

Additional paid-in-capital

     204,420        214,419       

Accumulated other comprehensive income

     370        370     

Accumulated deficit

     (85,826     (85,826    
                      

Total stockholders’ equity

     118,966        128,966       
                      

Total capitalization

   $ 126,542      $ 136,542      $
                      

  

 

The number of shares of our common stock to be outstanding after this offering is based on 3,538,583, shares of common stock outstanding as of June 30, 2010 on an actual basis, and excludes:

 

   

3,115,855 shares of common stock issuable upon the exercise of outstanding options under our 2005 Stock Plan, as of June 30, 2010, having a weighted average exercise price of $5.82 per share;

 

   

             shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering (including              shares of common stock reserved for future issuance under our 2005 stock plan which will be added to the shares reserved under our 2010 equity incentive plan upon its effectiveness); and

 

   

821,564 shares of common stock issuable upon the exercise of outstanding warrants, as of June 30, 2010, having a weighted average exercise price of $3.92 per share.

 

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Dilution

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 upon completion of this offering.

Our historical net tangible book value (deficit) of our common stock as of June 30, 2010 was approximately $(34.2) million, or approximately $(9.67) per share, based on the number of shares of common stock outstanding as of June 30, 2010. Historical net tangible book value (deficit) per share is determined by dividing the number of shares of common stock outstanding as of June 30, 2010 into our total tangible assets (total assets less intangible assets) less total liabilities.

After giving effect to (1) our issuance in July 2010 of convertible promissory notes in the aggregate principal amount of $10.0 million, or the 2010 notes, and our issuance of 1,271,520 shares of common stock upon the completion of this offering upon an assumed conversion of the 2010 notes (plus interest accrued thereon), assuming a conversion price of $7.968 per share and assuming a conversion date of August 29, 2010 and (2) the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 24,961,340 shares of common stock upon the completion of this offering, our pro forma net tangible book value (deficit) per share as of June 30, 2010 would have been approximately $(24.2) million, or approximately $(0.81) per share.

Investors participating in this offering will incur immediate, substantial dilution. 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 of the price range set forth on the cover page of this prospectus, net of estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2010 would have been approximately $             million, or approximately $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to existing stockholders, and an immediate dilution of $             per share to investors participating in this offering. The following table illustrates this per share dilution:

 

 

 

Assumed initial public offering price per share

  

Historical net tangible book value (deficit) per share as of June 30, 2010

   $ (9.67

Pro forma increase in net tangible book value per share attributable to the issuance and assumed conversion of the 2010 notes and the conversion of convertible preferred stock

   $ 8.86   

Pro forma net tangible book value (deficit) per share as of June 30, 2010

   $ (0.81

Pro forma increase in net tangible book value per share attributable to investors participating in this offering

  

Pro forma as adjusted net tangible book value per share after this offering

  

Dilution per share to investors participating in this offering

  

 

 

A $1.00 increase or 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 or decrease, respectively, our pro forma as adjusted net tangible book value as of June 30, 2010 by approximately $             million, the pro forma as adjusted net tangible book value per share after this offering by $             and the dilution in pro forma as adjusted net tangible book value to new investors in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

 

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The following table summarizes, on a pro forma as adjusted basis as of June 30, 2010, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid to us by existing stockholders and by investors participating in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses, 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:

 

 

 

     Shares purchased     Total consideration     Average price
         Number            Percent             Amount            Percent             per share    

Existing stockholders before this offering

                     $                                $             

Investors participating in this offering

                         
                              

Total

        $                     $  
                              

 

 

A $1.00 increase or 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 or decrease, respectively, the total consideration paid to us by investors participating in this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ overallotment option or any outstanding options or warrants. If the underwriters’ overallotment option is exercised in full, the number of shares of common stock held by existing stockholders will be 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             , or             % of the total number of shares of common stock to be outstanding after this offering.

The number of shares of common stock outstanding as of June 30, 2010 on an actual basis excludes:

 

   

3,115,855 shares of common stock issuable upon the exercise of outstanding options under our 2005 stock plan, as of June 30, 2010, having a weighted average exercise price of $5.82 per share;

 

   

             shares of common stock reserved for future issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, each of which will become effective upon the signing of the underwriting agreement for this offering (including              shares of common stock reserved for future issuance under our 2005 stock plan which will be added to the shares reserved under our 2010 equity incentive plan upon its effectiveness); and

 

   

821,564 shares of common stock issuable upon the exercise of outstanding warrants, as of June 30, 2010, having a weighted average exercise price of $3.92 per share.

Effective immediately upon the signing of the underwriting agreement for this offering, an aggregate of              shares of our common stock will be reserved for issuance under our 2010 equity incentive plan and 2010 employee stock purchase plan, which includes              shares of common stock reserved for future issuance under our 2005 stock plan that will be allocated to our 2010 equity incentive plan, 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 options 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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Unaudited Pro Forma Condensed Consolidated Financial Information

Introductory Note

Prior to April 1, 2010, we operated as Horizon Therapeutics, Inc. On April 1, 2010, we effected a recapitalization pursuant to which we formed a holding company, Horizon Pharma Inc., and all of the shares of capital stock of Horizon Therapeutics, Inc. were converted into shares of Horizon Pharma, Inc. Horizon Therapeutics, Inc. survived as our wholly-owned subsidiary and changed its name to Horizon Pharma USA, Inc. Also on April 1, 2010, we acquired all of the shares of Nitec Pharma AG, or Nitec, in exchange for newly-issued shares of our capital stock. As a result of the acquisition, Nitec became our wholly-owned subsidiary and changed its name to Horizon Pharma AG. Following the recapitalization and acquisition of Nitec, we are organized as a holding company that operates through our wholly-owned subsidiaries, Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec). Immediately following the acquisition, the former shareholders of Horizon Therapeutics, Inc. and Nitec own 51% and 49%, respectively, of Horizon Pharma, Inc. on a fully diluted basis. The preliminary total purchase price we paid for Nitec was approximately $119.3 million ($112.9 million, net of cash received of $6.4 million) and consisted of the following: 2.0 million shares of our common stock valued at $11.1 million, 11.2 million shares of our Series A convertible preferred stock valued at $88.9 million, a discount of $2.0 million on the sale of 1.2 million shares of Series B convertible preferred stock, warrants to purchase 0.1 million shares of Series A convertible preferred stock valued at $0.9 million, options to purchase 0.8 million shares of our common stock valued at $2.1 million, and $14.3 million in assumed current liabilities and long-term debt (including $6.8 million of debt under a credit facility between Nitec and Kreos Capital III (UK) Limited). The financial position and results of operations of Horizon Pharma AG have been included in our financial position and results of operations from the date of the acquisition. Concurrently with our recapitalization and acquisition of Nitec, we issued 2.5 million shares of our Series B convertible preferred stock for gross proceeds of $20.0 million.

Basis of Presentation

The following unaudited pro forma condensed consolidated financial information were prepared in accordance with Securities and Exchange Commission Regulation S-X, Article 11, giving effect to the acquisition of Nitec through the exchange of all of Nitec’s outstanding shares of capital stock for shares our capital stock, as well as certain reclassifications and pro forma adjustments, all of which are described in the notes accompanying this unaudited pro forma condensed consolidated financial information.

The determination of the accounting acquirer was based on a review of all pertinent facts and circumstances. The identification of the acquiring entity in this instance is subjective and was based on a number of factors outlined in ASC Topic 805-10-55-12, which are as follows:

   

the relative voting rights in the combined entity after the business combination;

 

   

the existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest;

 

   

the composition of the governing Board of the combined entity;

 

   

the composition of the senior management of the combined entity;

 

   

the terms of the exchange of equity interests;

 

   

relative size of each entity; and

 

   

which party initiated the transaction and other qualitative factors.

After consideration of the factors outlined above, it was determined that Horizon Therapeutics, Inc. was the accounting acquirer in this transaction based on the following:

 

   

immediately following the consummation of the recapitalization and acquisition transaction, Horizon Therapeutics, Inc. security holders had a 51% stake on a fully-diluted basis in the combined company, and had a greater than 50% ownership in the combined entity after giving consideration to the exercise of vested, in-the-money options, leading to the conclusion that this criterion favored Horizon Therapeutics, Inc.;

 

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immediately following the consummation of the recapitalization and acquisition transaction, no significant minority stockholder could exert influence over the combined company’s operations in a manner that influences the accounting acquirer analysis, leading to the conclusion that this was a neutral criterion;

 

   

immediately following the consummation of the recapitalization and acquisition transaction former Horizon Therapeutics, Inc. board members comprised four of the seven board seats on the combined company’s board, leading to the conclusion that this criterion favored Horizon Therapeutics, Inc.;

 

   

immediately following the consummation of the acquisition, Horizon Therapeutics, Inc. management team members comprised seven out of eight senior management positions of the combined company, leading to the conclusion that this criterion favored Horizon Therapeutics, Inc.;

 

   

ownership interests received by the parties in the combined company were the result of a value-for-value exchange, and given both companies were private, any valuation would have been inherently subjective and may not have provided a clear indication as to a premium being paid by either party, leading to the conclusion that this was a neutral criterion;

 

   

while certain current financial criteria such as income statement and book value of assets may have indicated that Nitec was more significant, others such as business enterprise value indicated Horizon Therapeutics, Inc., leading to the conclusion that this was a neutral criterion; and

 

   

Horizon Therapeutics, Inc. initiated the transaction discussions, led the transaction negotiations, and the combined company’s operations were anticipated to be headquartered at Horizon Therapeutics, Inc.’s U.S. location going forward, leading to the conclusion that this criterion favored Horizon Therapeutics, Inc.

The Nitec acquisition was accounted for using the “acquisition method” of accounting. Under the acquisition method of accounting, the purchase price is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values. Any purchase price in excess of the fair market value of the acquired tangible and intangible assets is required to be allocated to goodwill in our condensed consolidated balance sheet as of the end of the period in which the acquisition closed. Conversely, to the extent the fair market value of the acquired tangible and intangible assets exceeds the purchase price, the excess is required to be reflected as a bargain purchase gain in other income in our condensed consolidated statement of operations during the period in which the acquisition closed. The bargain purchase gain resulting from the Nitec acquisition is reflected within other income (expense), net, in our statement of operations for the six months ended June 30, 2010. We performed appraisals necessary to derive preliminary fair values of the tangible and intangible assets acquired and liabilities assumed, the amounts of assets and liabilities arising from contingencies, and the amount of goodwill or bargain purchase gain to be recognized as of the acquisition date, and the related preliminary allocation of the purchase price. We believe the bargain purchase resulted in part from the unprecedented credit crisis and constrained capital markets which made it extremely difficult for small private, pre-commercial biotechnology companies, particularly those located in Europe such as Nitec, to access capital to execute their business plans. We believe these economic circumstances, along with limited other potential acquirers of Nitec due to the financial crisis, the opportunity to diversify Nitec’s product portfolio with our product candidates to enable the combined company to better access the capital markets, and gaining access to our management team with significant commercial experience in the arthritis, pain and inflammatory diseases therapeutic areas provided motivation for Nitec to sell to Horizon Therapeutics, Inc.

The unaudited pro forma condensed consolidated statement of operations information for the year ended December 31, 2009, and for the six months ended June 30, 2010, is based on the historical consolidated statements of operations of Horizon Pharma, Inc. and Nitec, giving effect to our acquisition of Nitec as if it had occurred on January 1, 2009. The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2010 includes the results of operations for Nitec for the three months ended March 31, 2010.

The historical profit and loss accounts of Nitec have been prepared in accordance with International Financial Reporting Standards, or IFRS, as prescribed by the International Accounting Standards Board. For the purpose of presenting the unaudited pro forma condensed consolidated financial information, the profit and loss accounts relating to Nitec have been adjusted to conform with accounting principles generally accepted in the U.S., or U.S. GAAP, as described in Note 2 to this unaudited pro forma condensed consolidated financial information. In addition, certain adjustments have been made to the historical financial statements of Nitec to reflect reclassifications to conform with the presentation under U.S. GAAP. The historical financial statements of Nitec are presented in Swiss Francs (CHF). For the purposes of

 

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presenting the unaudited pro forma consolidated financial information, the adjusted statements of operations of Nitec for the year ended December 31, 2009 and for the three months ended March 31, 2010 have been translated into U.S. Dollars at the average rate of one Swiss Franc to 0.9236 and 0.9465 U.S. Dollars, respectively.

The unaudited pro forma condensed consolidated financial information was prepared using (1) the audited consolidated financial statements of Horizon Pharma, Inc. for the year ended December 31, 2009 and the unaudited consolidated financial statements of Horizon Pharma, Inc. for the six months ended June 30, 2010 included elsewhere in this prospectus, (2) the audited consolidated financial statements of Nitec for the fiscal year ended June 30, 2009 and the unaudited consolidated financial statements of Nitec for the six months ended December 31, 2009 included elsewhere in this prospectus and the unaudited consolidated financial statements of Nitec for the three months ended March 31, 2010 which are not required to be included in this prospectus, (3) the preliminary purchase price allocation of the Nitec acquisition, a summary of which is included in Note 1 to this unaudited pro forma condensed consolidated financial information and (4) the assumptions and adjustments described in the notes accompanying this unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information is preliminary and subject to change, is provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the acquisition of Nitec been completed as of the dates indicated or that may be achieved in future periods. The unaudited pro forma condensed consolidated statement of operations does not include the effects of any non-recurring costs or income/gains resulting from (1) professional fees and other direct or indirect costs incurred in relation to the acquisition, (2) restructuring or integration activities that we may implement during the 12 months subsequent to the closing of the acquisition and (3) the realization of any cost savings from operating efficiencies, synergies or other restructurings that may result from the acquisition.

This unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated audited and unaudited financial statements of Horizon Pharma, Inc. and Nitec and the related audited and unaudited notes thereto included elsewhere in this prospectus.

 

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HORIZON PHARMA, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION

SIX MONTHS ENDED JUNE 30, 2010

(in thousands, except share and per share data)

 

 

 

     Horizon Pharma, Inc.
Six Months Ended
June 30, 2010
    Nitec Pharma AG
Three Months Ended
March 31, 2010
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Revenues

        

Sales of goods

   $ 1,694      $ 278      $      $ 1,972   

Contract revenue

            175               175   
                                

Total revenues

     1,694        453               2,147   

Cost of goods sold

     2,519        355        1,208 (A)      4,082   
                                

Gross profit (loss)

     (825     98        (1,208     (1,935

Operating expenses

        

Research and development

     7,159        2,044               9,203   

Selling and marketing

     1,668        2,236               3,904   

General and administrative

     9,893        5,620               15,513   
                                

Total operating expenses

     18,720        9,900               28,620   
                                

Loss from operations

     (19,545     (9,802     (1,208     (30,555

Interest income

     13        290               303   

Interest expense

     (814     (853            (1,667

Other income (expense), net

     14,481                      14,481   

Foreign exchange gain

     40                      40   
                                

Loss before income tax

     (5,825     (10,365     (1,208     (17,398

Income tax expense

     (14     (17            (31
                                

Net loss

   $ (5,839   $ (10,382   $ (1,208   $ (17,429
                                

Net loss per share-basic and diluted

   $ (2.31       $ (4.93
                    

Weighted average common shares outstanding, basic and diluted

     2,526,459            3,538,583   
                    

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information.

(A) To record amortization associated with the estimated identifiable intangible assets acquired over a nine-year useful life.

The 3,538,583 pro forma weighted average common shares outstanding as of June 30, 2010 gives effect to the acquisition of Nitec and our recapitalization on April 1, 2010, as if they had occurred on January 1, 2009, including the issuance of 2,035,494 shares of our common stock in connection with the acquisition of Nitec, and the conversion of 510,920 shares of special convertible preferred stock into common stock and the conversion of 1,999,999 shares of common stock into 992,169 shares of common stock, each in connection with the recapitalization.

 

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HORIZON PHARMA, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION

FISCAL YEAR ENDED DECEMBER 31, 2009

(in thousands, except share and per share data)

 

 

 

     Horizon Pharma,
Inc.
    Nitec Pharma
AG
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Revenues

        

Sales of goods

   $      $ 2,694      $      $ 2,694   

Contract revenue

            429               429   
                                

Total revenues

            3,123               3,123   

Cost of goods sold

            3,500        4,833 (A)      8,333   
                                

Gross profit (loss)

            (377     (4,833     (5,210

Operating expenses

        

Research and development

     10,894        11,816               22,710   

Selling and marketing

     2,072        3,717               5,789   

General and administrative

     5,823        5,374               11,197   
                                

Total operating expenses

     18,789        20,907               39,696   
                                

Loss from operations

     (18,789     (21,284     (4,833     (44,906

Interest income

     25        1,812          1,837   

Interest expense

     (2,214     (2,479            (4,693

Other income (expense), net

     478        (10            468   
                                

Loss before income tax

     (20,500     (21,961     (4,833     (47,294

Income tax expense

            (57            (57
                                

Net loss

   $ (20,500   $ (22,018   $ (4,833   $ (47,351
                                

Capital contribution

     3,489                      3,489   
                                

Net loss attributable to common stockholders

   $ (17,011   $ (22,018   $ (4,833   $ (43,862
                                

Net loss per share, basic and diluted

   $ (17.12       $ (12.40
                    

Weighted average common shares outstanding, basic and diluted

     993,569            3,538,583   
                    

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information.

(A) To record amortization associated with the estimated identifiable intangible assets acquired over a nine-year useful life.

The 3,538,583 pro forma weighted average common shares outstanding as of December 31, 2009 gives effect to the acquisition of Nitec and our recapitalization on April 1, 2010, as if they had occurred on January 1, 2009, including the issuance of 2,035,494 shares of our common stock in connection with the acquisition of Nitec, and the conversion of 510,920 shares of special convertible preferred stock into common stock and the conversion of 1,999,999 shares of common stock into 992,169 shares of common stock, each in connection with the recapitalization.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

NOTE 1 – PRELIMINARY PURCHASE PRICE—NITEC PHARMA AG

The unaudited pro forma condensed consolidated financial information reflects a preliminary total purchase price of approximately $119.3 million consisting of the following (in millions):

 

 

 

Horizon Common Stock

   $ 11.1

Horizon Convertible Preferred Stock (including sale at discount from fair value)

     90.9

Estimated Fair Value of Warrants

     0.9

Estimated Fair Value of Options

     2.1

Current Liabilities

     8.3

Long-Term Debt

     6.0
      

Preliminary Total Purchase Price

   $ 119.3
      

 

 

We engaged consultants to assist management in determining the fair value of our common stock and our Series A and B convertible preferred stock using an income approach.

The initial estimated purchase price resulted in a fair value of assets and liabilities which exceed the purchase price by approximately $14.5 million. This amount was recorded as a bargain purchase gain in other income (expense), net in our unaudited consolidated statements of operations for the six months ended June 30, 2010.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date. The preliminary total purchase price of approximately $119.3 million was allocated ($112.9 million, net of cash acquired of $6.4 million) over the fair value of the assets acquired and liabilities assumed as follows (in millions):

 

 

 

Net Tangible Assets (including cash acquired)

   $ 9.6   

Developed Technology

     43.5   

In-Process Research and Development (IPR&D)

     110.9   

Property, Plant and Equipment

     0.6   

Deferred Tax Liabilities

     (30.8

Bargain Purchase Gain

     (14.5
        

Preliminary Total Purchase Price

   $ 119.3   
        

 

 

Developed Technology. The valuation of the developed technology acquired, an identifiable intangible asset, was based on management’s estimates, currently available information and reasonable and supportable assumptions. The allocation was generally based on our estimated fair value of the rights to payments with respect to our developed product LODOTRA in Europe which were acquired in the acquisition of Nitec. This estimated fair value was determined using the income approach under the discounted cash flow method. Significant assumptions used in valuing the developed technology included revenue projections through 2026 based on existing partnerships in Europe and assumptions relating to pricing and reimbursement rates and market size and market penetration rates, cost of goods sold based on current manufacturing experience, allocated general and administrative expense without any sales and marketing expense as the product was fully out licensed in Europe, research and development expenses for clinical and regulatory support for obtaining reimbursement approval in Europe through 2010, a 39.3% blended tax rate, a 100% probability of cash flows as the product was already marketed in Europe, and a discount rate of 16%. Of the preliminary total purchase price, $43.5 million was allocated to developed technology, which is being amortized to cost of goods sold using a straight-line method over an estimated useful life of nine years.

In-process research and development. We also recorded $110.9 million for acquired in-process research and development, or IPR&D, related to the U.S. rights to LODOTRA which were acquired from Nitec. The value of acquired IPR&D

 

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was determined using an income approach. Significant assumptions used in valuing the IPR&D included revenue projections from 2012 through 2026 based on our experience with products in the same category and the overall market size, cost of goods sold based on then-current manufacturing experience with the product in Europe, allocated general and administrative expense and sales and marketing expense based on our intention to market the product directly in the U.S., estimated research and development expenses to complete submissions and approvals and for ongoing clinical and regulatory maintenance costs, a 39.3% blended tax rate, our estimated probability of cash flows based on similar products that have completed Phase 3 trials, and a discount rate of 17%. IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. We may not be able to successfully obtain FDA approval for LODOTRA. As a result of this uncertainty, we are unable to amortize IPR&D at this time.

Deferred tax liabilities. The deferred tax liability is primarily associated with the valuation of the IPR&D related to LODOTRA, recorded at the Swiss statutory tax rate of 27.5% as the intellectual property related to LODOTRA has been developed and is located in Switzerland.

Bargain purchase gain. After a preliminary reassessment of (1) whether all of the assets acquired and liabilities assumed had been identified and recognized and (2) the consideration transferred in the Nitec acquisition, we have recognized a bargain purchase gain within other income (expense), net, in our statement of operations for the six months ended June 30, 2010, representing the amount by which the fair value of the identifiable net assets exceeds the purchase price, of approximately $14.5 million. We believe the bargain purchase resulted in part from the unprecedented credit crisis and constrained capital markets which made it extremely difficult for small private, pre-commercial biotechnology companies, particularly those located in Europe such as Nitec, to access capital to execute their business plans. We believe these economic circumstances, along with limited other potential acquirers of Nitec due to the financial crisis, the opportunity to diversify Nitec’s product portfolio with our product candidates to enable the combined company to better access the capital markets, and gaining access to our management team with significant commercial experience in the arthritis, pain and inflammatory diseases therapeutic areas provided motivation for Nitec to sell to Horizon Therapeutics, Inc.

 

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NOTE 2 – IFRS TO U.S. GAAP ADJUSTMENTS

The following tables show a reconciliation of the historical unaudited profit and loss accounts of Nitec for the year ended December 31, 2009 and the three months ended March 31, 2010, prepared in accordance with IFRS and in Swiss Francs, to the unaudited statements of operations of Nitec under U.S. GAAP and in U.S. Dollars included in the unaudited pro forma condensed consolidated statement of operations information.

The IFRS to U.S. GAAP adjustments represent the significant adjustments that are required to present the statement of operations of Nitec under U.S. GAAP. These adjustments and the descriptions of the nature of each adjustment are as follows (in thousands):

 

 

 

    For the Three Month Period Ended March 31, 2010 (unaudited)  
    Nitec Pharma AG
IFRS
    IFRS to U.S. GAAP
Presentation
Adjustments (1)
    U.S. GAAP
Presentation
    IFRS to U.S.
GAAP
Adjustments
    Nitec Pharma AG
U.S. GAAP
    Nitec Pharma AG
US GAAP (2)
 

Sales of goods

  CHF        294      CHF         —      CHF        294      CHF         —      CHF        294      $ 278   

Contract revenue

  125           125      60 (3)    185        175   
                                     

Revenue

  419           419                  60      479                    453   

Raw material and consumables used

                               

Toll manufacturing and other supply chain cost

  6      (6                      

Change in inventories of finished goods and work in progress

                               

Cost of goods sold

  678      (303   375           375        355   

Write down of inventories

  (350   350                         

Royalties for goods sold

  73      (73                      

Royalties related to contract revenue

  (32   32                         
                                     

Cost of sales

  375           375           375        355   
                                     

Gross profit

  44           44      60      104        98   
                                     

Other income

                               

Employee benefit expense

  5,971      (5,971                      

Other operating expense

           

Development expense

  1,785      1,230      3,015      (856 ) (4)    2,159        2,044   

Administrative expense

  3,471      2,722      6,193      (255 ) (4)    5,938        5,620   

Marketing expense

  362      2,071      2,433      (71 ) (4)    2,362        2,236   
                                     

Operating result before depreciation and amortization

  (11,545   (52   (11,597   1,242      (10,355     (9,802
                                     

Depreciation and amortization

  (52   52                         
                                     

Operating result

  (11,597        (11,597   1,242      (10,355     (9,802
                                     

Financial income

  306           306           306        290   

Financial expenses

  (901        (901        (901     (853
                                     

Result before taxes

  (12,192        (12,192   1,242      (10,950     (10,365
                                     

Income tax expense

  (18        (18        (18     (17
                                     

Net loss for the period

  CHF (12,210   CHF         —      CHF (12,210   CHF    1,242      CHF (10,968   $ (10,382
                                     

 

 

 

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     For the Twelve Month Period Ended December 31, 2009 (unaudited)  
     Nitec Pharma AG
IFRS
    IFRS to U.S.
GAAP
Presentation
Adjustments  (1)
    U.S. GAAP
Presentation
    Total IFRS to
U.S. GAAP
Adjustments
    Nitec Pharma AG
U.S. GAAP
    Nitec Pharma AG
U.S. GAAP (2)
 

Sales of goods

   CHF     2,917      CHF         —      CHF   2,917      CHF       —      CHF    2,917      $ 2,694   

Contract revenue

   3,900           3,900      (3,195 )(3)    705        429   
                                      

Revenue

   6,817           6,817      (3,195   3,622        3,123   
                                      

Raw material and consumables used

   348      (348                      

Toll manufacturing and other supply chain cost

   2,571      (2,571                      

Change in inventories of finished goods and work in progress

   (142   142                         

Cost of goods sold

        3,789      3,789           3,789        3,500   

Write down of inventories

   353      (353                      

Royalties for goods sold

   184      (184                      

Royalties related to contract revenue

   475      (475                      
                                      

Cost of sales

   3,789           3,789           3,789        3,500   
                                      

Gross profit

   3,028           3,028      (3,195   (167     (377
                                      

Other income

   20           20           20        18   

Employee benefit expense

   6,882      (6,882                      

Other operating expense

            

Development expense

   11,435      1,499      12,934      (141 )(4)    12,793        11,816   

Administrative expense

   3,089      3,276      6,365      (547 )(4)    5,818        5,374   

Marketing expense

   1,642      2,429      4,071      (47 )(4)    4,024        3,717   
                                      

Operating result before depreciation and amortization

   (20,000   (322   (20,322   (2,460   (22,782     (21,266
                                      

Depreciation and amortization

   322      (322                      
                                      

Operating result

   (20,322        (20,322   (2,460   (22,782     (21,266
                                      

Financial income

   1,962           1,962           1,962        1,812   

Financial expenses

   (2,684        (2,684        (2,684     (2,479

Foreign exchange loss

   (30        (30        (30     (28
                                      

Result before taxes

   (21,074        (21,074   (2,460   (23,534     (21,961
                                      

Income tax expense

   (62     (62     (62     (57
                                      

Net loss for the period

   CHF (21,136)      CHF         —      CHF (21,136)      CHF (2,460)      CHF (23,596)      $       (22,018)   
                                      

 

 

 

(1) Reclassification of Nitec’s profit and loss account presentation under IFRS to statement of operations presentation under U.S. GAAP. These reclassifications include conforming adjustments to make the presentation for cost of sales, employee benefit expense and depreciation and amortization consistent with the presentation of Horizon Pharma, Inc.’s financial statement line items.
(2) Results are converted to U.S. Dollars using the average exchange rate for the period presented. The exchange rate used for the year ended December 31, 2009 was one Swiss Franc to 0.92362 U.S. Dollars and for the three months ended March 31, 2010 was one Swiss Franc to 0.94652 U.S. Dollars.
(3) Adjustment to defer the milestone payments received from Mundipharma related to achieving regulatory milestones in specific European Union countries. Under IFRS, revenue was recognized upon receipt of milestone payments. Under U.S. GAAP, milestone payments (which are considered to be additional upfront license fees) are recognized over the expected relationship period, which is 15 years.
(4) Adjustment to record stock-based compensation expense under U.S. GAAP. Under IFRS, an entity treats each installment of a graded vesting award as a separate share option grant. This means that each installment is separately measured and attributed to expense, resulting in accelerated recognition of total expense. Under U.S. GAAP, in accordance with ASC Topic 718 Compensation-Stock Compensation, stock-based compensation expense is accounted for under the straight-line method for allocating compensation costs and the fair value of each stock option is recognized on a straight-line basis over the requisite service period.

 

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Selected Consolidated Financial Data

The following tables set forth selected consolidated financial data for the periods and as of the dates indicated. The selected financial data should be read in conjunction with, and are qualified by reference to, our financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Condensed Consolidated Financial Information” appearing elsewhere in this prospectus. The selected financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

The selected balance sheet data as of December 31, 2008 and 2009 and the selected statement of operations data for the years ended December 31, 2007, 2008 and 2009 are derived from our audited financial statements appearing elsewhere in this prospectus. The selected balance sheet data as of December 31, 2005, 2006 and 2007 and the selected statement of operations from June 22, 2005 (date of inception) to December 31, 2005 and the year ended December 31, 2006 are derived from our audited financial statements which are not included in this prospectus. The selected statement of operations data for the six months ended June 30, 2009 and 2010, for the period from June 22, 2005 (date of inception) to June 30, 2010 and the selected balance sheet data as of June 30, 2010 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial information in those statements.

 

 

 

    Period from
June 22,
2005
(inception) to
December  31,

2005
    Actual     Pro Forma     Actual     Pro Forma     Cumulative
Period from
June 22,
2005
(inception) to
June 30,
2010
 
      Year Ended December 31,     Six Months Ended June 30,    
      2006     2007     2008     2009     2009     2009     2010     2010    
    (in thousands, except share per share data)  

Statement of Operations Data:

                   

Sales of goods

  $      $      $      $      $      $ 2,694      $      $ 1,694      $ 1,972      $ 1,694   

Contract revenue

                                       429                      175          
                                                                               

Total revenues

                                       3,123               1,694        2,147        1,694   

Cost of goods sold

                                       8,333               2,519        4,082        2,519   
                                                                               

Gross profit (loss)

                                       (5,210            (825     (1,935     (825

Operating expenses:

                   

Research and development

    123        4,368        24,483        22,295        10,894        22,710        5,085        7,159        9,203        69,322   

Sales and marketing

    53        409        617        1,337        2,072        5,789        969        1,668        3,904        6,156   

General and administrative

    144        984        1,640        3,235        5,823        11,197        2,905        9,893        15,513        21,719   
                                                                               

Total operating expenses

    320        5,761        26,740        26,867        18,789        39,696        8,959        18,720        28,620        97,197   
                                                                               

Loss from operations

    (320     (5,761     (26,740     (26,867     (18,789     (44,906     (8,959     (19,545     (30,555     (98,022

Interest income

    45        300        934        340        25        1,837        23        13        303        1,657   

Interest expense

                  (6     (869     (2,214     (4,693     (1,048     (814     (1,667     (3,903

Other income (expense), net

           (5     (35     (503     478        468        209        14,481        14,481        14,416   

Foreign exchange gain

                                                     40        40        40   
                                                                               

Loss before income tax

    (275     (5,466     (25,847     (27,899     (20,500     (47,294     (9,775     (5,825     (17,398   $ (85,812

Income tax expense

                                       (57            (14     (31     (14
                                                                               

Net loss

  $ (275   $ (5,466   $ (25,847   $ (27,899   $ (20,500   $ (47,351   $ (9,775   $ (5,839   $ (17,429   $ (85,826
                                                                               

Capital contribution

                                3,489        3,489                          
                                                                         

Net loss attributable to common stockholders

  $ (275   $ (5,466   $ (25,847   $ (27,899   $ (17,011   $ (43,862   $ (9,775   $ (5,839   $ (17,429  
                                                                         

Net loss per share, basic and diluted

  $ (0.33   $ (6.28   $ (27.92   $ (28.51   $ (17.12   $ (12.40   $ (9.85   $ (2.31   $ (4.93  
                                                                         

Weighted average number of shares outstanding

    831,401        870,564        925,685        978,439        993,569        3,538,583        992,169        2,526,459        3,538,583     
                                                                         

Pro forma net loss per share, basic and diluted (unaudited)(1)

          $ (2.15       $ (0.28    
                               

Weighted average pro forma shares outstanding, basic and diluted (unaudited)(1)

            8,148,259            20,787,563       
                               

 

(1) Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate the pro forma basic and diluted net loss per share and the number of shares used in the computation of the per share amounts.

 

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     Actual     Pro Forma  
     As of Year Ended December 31,     As of
June 30,
2010
    As of
June 30,
2010
 
     2005     2006     2007     2008     2009      
     (in thousands)  

Balance Sheet Data:

              

Cash and cash equivalents

   $ 5,742      $ 16,317      $ 20,824      $ 14,067      $ 7,160      $ 13,266      $ 23,266   

Working capital (deficit)

     5,778        16,112        21,044        (628     (905     1,703        11,703   

Total assets

     5,790        16,403        23,404        14,955        8,213        170,822        180,822   

Long-term debt, net of current portion

                   1,604        7,749        3,133        7,576        7,576   

Convertible preferred stock warrant liabilities

                   181        657                        

Accumulated deficit

     (275     (5,741     (31,588     (59,487     (79,987     (85,826     (85,826

Total stockholder's equity (deficit)

     5,729        15,229        19,275        (8,454     (3,177     118,966        128,966   

 

 

The selected unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2009 and the six months ended June 30, 2010 are based on the historical statements of operations of Horizon Pharma USA, Inc. and Nitec Pharma AG, giving effect to our acquisition of Nitec Pharma AG as if the acquisition and related transactions had occurred on January 1, 2009. The unaudited pro forma condensed consolidated statement of operations data for the six months ended June 30, 2010 include the results of operations for Nitec for the three months ended March 31, 2010. The selected unaudited pro forma condensed consolidated balance sheet data as of June 30, 2010 give effect to our issuance of the 2010 notes and accrued interest thereon as well as 1,271,520 shares of common stock upon the completion of this offering upon an assumed conversion of the 2010 notes and accrued interest, assuming a conversion price of $7.968 per share and assuming a conversion date of August 29, 2010. The unaudited pro forma condensed consolidated statement of operations data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. See “Unaudited Pro Forma Condensed Consolidated Financial Information” beginning on page 44 of this prospectus. These estimates and assumptions are preliminary and subject to change, and have been made solely for the purposes of developing such pro forma information. The selected unaudited pro forma condensed consolidated statement of operations data are presented for illustrative purposes only and are not necessarily indicative of the combined results of operations to be expected in any future period or the results that actually would have been realized had the entities been a single entity during these periods.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a biopharmaceutical company that is developing and commercializing innovative medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases. We have two lead product candidates, HZT-501 and LODOTRA, which have both successfully completed multiple Phase 3 clinical trials. We submitted a new drug application, or NDA, for HZT-501, a novel tablet formulation containing a fixed-dose combination of ibuprofen and high-dose famotidine in a single pill, to the U.S. Food and Drug Administration, or FDA, in March 2010. The FDA notified us in May 2010 that it had accepted the NDA for HZT-501 for review and subsequently assigned a Prescription Drug User Fee Act goal date of January 21, 2011 for its review of the NDA. We intend to submit a Marketing Authorization Application, or MAA, for HZT-501 to the Medicines and Healthcare products Regulatory Agency in the United Kingdom, the Reference Member State, through the Decentralized Procedure in the fourth quarter of 2010. LODOTRA is a proprietary programmed release formulation of low-dose prednisone that is currently marketed in Europe by Merck Serono GmbH, or Merck Serono, and Mundipharma International Corporation Limited, or Mundipharma. We intend to submit an NDA for LODOTRA to the FDA in the fourth quarter of 2010. We have worldwide marketing rights for HZT-501 and have retained exclusive marketing rights for all of our products in the U.S.

On April 1, 2010, we effected a recapitalization and acquisition pursuant to which Horizon Pharma, Inc. became a holding company that operates through its wholly-owned subsidiaries Horizon Pharma USA, Inc. (formerly Horizon Therapeutics, Inc.) and Horizon Pharma AG (formerly Nitec Pharma AG, or Nitec). Our LODOTRA product was developed and is owned by Horizon Pharma AG, and our historical financial statements and results of operations do not reflect the results of operations of Nitec for any period prior to the recapitalization and acquisition in April 2010. As a result of the acquisition of Nitec, our organization has grown from 12 full-time employees as of March 31, 2010 to 41 full-time employees as of September 15, 2010 and our development efforts have expanded significantly through the acquisition of LODOTRA. Consequently, we expect our expenses to increase from prior periods. As a result of the recapitalization and acquisition, our future operations will be impacted by both the operations of our U.S. subsidiary Horizon Pharma USA and our Swiss subsidiary Horizon Pharma AG.

We market LODOTRA in Europe through two separate agreements. Merck Serono has exclusive rights to distribute and market LODOTRA in Germany and Austria, and Mundipharma has exclusive rights to distribute and market LODOTRA in the rest of Europe. We also have a manufacturing and supply agreement with Jagotec AG, or Jagotec, under which Jagotec or its affiliates manufacture and supply LODOTRA exclusively to us as bulk tablets. We have committed to certain minimum orders under the agreement, and we also supply the active ingredient to Jagotec for use in the manufacture of LODOTRA.

We are focusing our efforts and capital resources on obtaining approval for and commercializing HZT-501 and LODOTRA. In addition to these product candidates, we have a pipeline of earlier stage product candidates to treat pain-related diseases and chronic inflammation. We are currently evaluating the development pathway for these product candidates, but do not intend to develop them further until such time as we generate sufficient cash from our operations or other sources.

We are subject to risks common to biopharmaceutical companies in the development stage, including, but not limited to, obtaining regulatory approval for our product candidates, dependence upon market acceptance of our products, risks associated with intellectual property, pricing and reimbursement, intense competition, development of markets and distribution channels and dependence on key personnel. We have a limited operating history and have yet to generate significant revenues. To date, we have been funded predominantly by convertible preferred stock and debt financings.

 

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Our ultimate success is dependent upon our ability to successfully develop, obtain approval for and market our products. We anticipate we will continue to incur net losses for at least the next several years as we:

 

   

incur expenses for the regulatory approval of our two lead product candidates, HZT-501 and LODOTRA;

 

   

establish sales and marketing capabilities for the anticipated U.S. commercial launches of HZT-501 and LODOTRA;

 

   

expand our corporate infrastructure to support our growth and our commercialization activities;

 

   

evaluate the potential use of LODOTRA for the treatment of other diseases and conduct additional clinical trials with respect to the same; and

 

   

advance the clinical development of other product candidates either currently in our pipeline or that we may in-license or acquire in the future.

As of June 30, 2010, we had cash and cash equivalents of $13.3 million. We borrowed an additional $5.0 million under a debt facility in September 2010.

We believe that the net proceeds from this offering and our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations for at least the next 12 months. However, we may need additional financing in the event that we do not obtain regulatory approval for our product candidates when expected, or if approved, the future sales of our product candidates do not generate sufficient revenues to fund our operations. Our failure to raise capital if and when needed would have a negative impact on our financial condition and our ability to pursue our business strategies. In its report on our financial statements for the year ended December 31, 2009, our independent registered public accounting firm included an explanatory paragraph regarding our ability to continue as a going concern.

Unless otherwise indicated, historical amounts presented with respect to Nitec are presented under U.S. GAAP. With respect to certain amounts that are set forth in Swiss francs, we have included a corresponding amount in U.S. Dollars. Where the amounts relate to a specific date, the exchange rate between the Swiss franc and U.S. Dollar on such date was used to effect the conversion. Where the amounts relate to a period, the average exchange rate between the Swiss franc and U.S. Dollar during such period was used to effect the conversion.

Financial Overview

Prior to our acquisition of Nitec we had no revenues and incurred significant operating losses since inception. Before our acquisition of Nitec, as of March 31, 2010, we had an accumulated deficit of $87.9 million. After our acquisition of Nitec, as of June 30, 2010, we had an accumulated deficit of $85.8 million, after giving effect to the $14.5 million bargain purchase gain we recognized in connection with the Nitec acquisition.

Revenue

As of April 1, 2010, as a result of our acquisition of Nitec, we began recognizing revenues from the sale of LODOTRA. We anticipate recognizing revenues from out-licensing marketing and distribution rights to third parties and the sale of products. We expect these revenues to take the form of upfront fees, milestone payments and product sales. Upfront fees and payments for non-substantive milestones are recorded as deferred revenue when paid and recognized over the remaining life of the marketing and distribution agreement or manufacturing and supply agreement, as applicable. Milestone payments are considered non-substantive if any portion of the associated milestone payment is determined to not relate solely to past performance or if a portion of the consideration earned from achieving the milestone may be refunded. During the three months ended June 30, 2010, all revenues recognized were related to the sale of LODOTRA to our distribution partners. Cost of goods sold consists of raw materials, manufacturing and other supply chain costs for the manufacture of LODOTRA, and royalty amounts payable to SkyePharma AG on LODOTRA sales and upon receipt of certain milestone payments. In addition, cost of goods sold includes amortization of developed technology relating to our acquisition of Nitec. The use of material is charged applying the “first-in first-out” (FIFO) method on capitalized inventory stock.

The process of obtaining FDA approval and commercializing products is costly and time consuming. The probability of success may be affected by a variety of factors, including, among others, competition, pricing and reimbursement,

 

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manufacturing capabilities and commercial viability. As a result of these uncertainties, we are unable to determine when, or to what extent, we will generate significant revenues from the commercialization and sale of any of our product candidates. We are currently focused on obtaining U.S. regulatory approval of our most advanced product candidates, HZT-501 and LODOTRA. However, we will need to raise substantial additional capital in the future in order to complete the process of obtaining regulatory approval for and commercializing HZT-501 and LODOTRA, and to fund the development and commercialization of our other product candidates.

Research and Development Expenses

Research and development expenses consist of: (1) expenses incurred under agreements with contract research organizations, or CROs, and investigative sites, which conduct our clinical trials and our preclinical studies; (2) the cost of manufacturing clinical trial materials; (3) payments to consultants; (4) employee-related expenses, which include salaries and benefits and (5) stock-based compensation expense. All research and development expenses are expensed as incurred.

Conducting a significant amount of research and development has been central to our business model, which in the past had focused primarily on clinical research and trials and more recently has focused on development work, including regulatory approval and manufacturing activities. We expect that this trend will continue through 2011 as the result of our acquisition of Nitec. Through June 30, 2010, we had incurred approximately $69.3 million in research and development expenses since our inception in 2005. Through December 31, 2009, Nitec had incurred approximately CHF 44.2 million ($39.2 million) of research and development expenses. Our research and development expenses were $5.1 million and $7.2 million for the six months ended June 30, 2009 and 2010, respectively. The following table summarizes our research and development expenses for 2007, 2008, 2009, the six months ended June 30, 2009 and 2010, and since inception to June 30, 2010:

 

 

 

     Year Ended December 31,    Six Months Ended
June 30,
   Cumulative
Period

from
June 22,
2005

(date of
inception)

to June 30,
2010
     2007    2008    2009    2009    2010   
     (in thousands)

External Research and Development Expenses

                 

LODOTRA-RA

   $    $    $    $    $ 1,761    $ 1,761

LODOTRA-Asthma

                         173      173

HZT-501

     23,907      21,736      9,581      4,575      3,918      63,371

HZN-602

     305      278      116      84           727
                                         

Total External Research and Development Expenses

     24,212      22,014      9,697      4,659      5,852      66,032

Total Internal Research and Development Expenses

     271      281      1,197      426      1,307      3,290
                                         

Total Research and Development Expenses

   $ 24,483    $ 22,295    $ 10,894    $ 5,085    $ 7,159    $ 69,322
                                         

 

 

Substantially all of our research and development expenses prior to our acquisition of Nitec were attributable to development of HZT-501. A portion of our internal costs, including indirect costs relating to our product candidates, are not tracked on a project basis and are allocated based on management estimates of where the benefit accrues, or as a percentage of direct project costs. Following our acquisition of Nitec, we expect our research and development expenses during the next 12 months to increase and be primarily attributable to the development of HZT-501 and LODOTRA, including expenses related to obtaining regulatory approval for these product candidates.

We generally consider our development of a product to be complete when we receive approval from regulatory authorities to market the product in the applicable jurisdiction. As a result, we are unable to reasonably estimate our

 

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additional research and development costs to complete our development work with respect to HZT-501 and LODOTRA, including our regulatory approval and manufacturing activities. Such estimates depend on numerous factors that are outside of our control, such as whether regulatory authorities will change their approval criteria for products in the same class as HZT-501 or LODOTRA, whether our applications for marketing approval will be accepted for review by regulatory authorities, whether regulatory authorities will require that we complete additional studies before or after granting marketing approval, and when, if ever, regulatory authorities will approve any applications for marketing approval that we submit. For similar reasons, we are unable to reasonably estimate when, if ever, our development work with respect to HZT-501 and LODOTRA will be complete or when we may receive material net cash inflows related to our on-going development work with respect to HZT-501 and LODOTRA. While the FDA has assigned a PDUFA goal date of January 21, 2011 for its review of our NDA for HZT-501, there can be no assurance that the FDA will meet this goal or will grant marketing approval for HZT-501 following its review of the NDA. Similarly, while we anticipate submitting additional marketing applications for our products in the European Union and the U.S. in the fourth quarter of 2010, we cannot estimate when, if ever, the applicable regulatory authorities will grant marketing approvals based on these submissions.

If we experience delays in receiving approval of our marketing applications for HZT-501 or LODOTRA, our ability to generate significant revenues from these product candidates will also be delayed, which will negatively affect our financial position and liquidity. If the FDA or other regulatory authorities require that we complete additional studies prior to approving our marketing applications, the costs of such studies could have a further material adverse effect on our capital resources and financial position. We believe that if we experience delays in receiving marketing approval for our product candidates, our ability to raise additional funds to continue our operations would also be adversely affected.

Sales and Marketing Expenses

Sales and marketing expenses of Horizon Pharma USA and Horizon Pharma AG historically have consisted principally of business development expenses, trade show expenses and pre-launch marketing activities. We expect these expenses to increase significantly as we establish sales and marketing capabilities to commercialize HZT-501 and LODOTRA in the U.S.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, information technology and human resources functions. Other general and administrative expenses include facility costs, professional fees for legal, consulting and auditing and tax services. General and administrative expenses also consist of stock-based compensation expense. As a result of our acquisition of Nitec, our general and administrative headcount changed from six full-time equivalents as of March 31, 2010 to 13 full-time equivalents as of April 1, 2010. In connection with our acquisition of Nitec on April 1, 2010, we eliminated three redundant executive management positions in Europe. As of September 15, 2010, our general and administrative headcount was 14 full-time equivalents. We expect general and administrative expense to increase as we continue to build our corporate infrastructure in support of our activities relating to obtaining regulatory approval for and commercializing HZT-501 and LODOTRA, and as we begin to operate as a public company. These increases likely will include salaries and related expenses, legal and consultant fees, accounting fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services and enhanced business and accounting systems.

Interest Expense

Interest expense, both historically and prospectively, is related to interest expense and fees on certain debt facilities outstanding at both Horizon Pharma USA and Horizon Pharma AG. Historically, Horizon Pharma USA also had interest related to convertible promissory notes outstanding prior to the conversion of such notes to convertible preferred stock in December 2009.

Internal Control Over Financial Reporting

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial

 

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reporting. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting.

For the year ending December 31, 2011, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current Securities and Exchange Commission rules, our independent registered public accounting firm will also be required to deliver an attestation report on the effectiveness of our internal control over financial reporting beginning with the year ending December 31, 2011, unless we qualify for an exemption as a non-accelerated filer under the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reported period. We evaluate our estimates and judgments on an ongoing basis. Actual results could differ materially from those estimates.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Revenue Recognition

Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Some of our agreements contain multiple elements and in accordance with these agreements, we may be eligible for upfront license fees, marketing or commercial milestones and payment for product deliveries.

As of April 1, 2010, as a result of the acquisition of Nitec, we began recognizing revenues from the sale of LODOTRA. We anticipate recognizing revenues from distribution, marketing, manufacturing and supply agreements with third parties in Europe, including up-front license fees, milestone payments and product deliveries.

Revenue from up-front license fees

We expect to recognize revenues consisting of payments of non-refundable, up-front license fees. In situations where the licensee is able to obtain stand-alone value from the license and no further performance obligations exist on our part, revenues are recognized on the earlier of when payments are received or collection is assured. Where our continuing involvement is required in the form of technology transfer, product manufacturing or technical support, revenues are deferred and recognized over the term of the agreement.

Revenue from milestone receipts

Milestone payments will be recognized as revenue based on achievement of such milestones, as defined in the relevant agreements. Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from our partner, provided that (1) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (2) the milestone represents the culmination of an earnings process and (3) the milestone payment is non-refundable. If all of these criteria are not met, revenue from the milestone achievement is recognized over the remaining minimum period of our performance obligations under the agreement.

Revenue from product deliveries

Upon initial launch of a product, we recognize revenues based on an estimate of the amount of product sold through to the end user consumer until such time as a reasonable estimate of allowances for product returns, rebates and discounts can be made. Upon establishing the ability to reasonably estimate such allowances, we recognize revenue from the

 

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delivery of our products to our distribution partners when delivery has occurred, title has transferred to the partner, the selling price is fixed or determinable, collectability is reasonably assured and we have no further performance obligations. We record product sales net of allowances for product returns, rebates and discounts. We are required to make significant judgments and estimates in determining some of these allowances. If actual results differ from our estimates, we will be required to make adjustments to these allowances in the future.

Cost of Goods Sold

As of April 1, 2010, as a result of the acquisition of Nitec, we began recognizing cost of goods sold in connection with our sale of LODOTRA. Cost of goods sold includes all costs directly related to the manufacture and delivery of product and out-licensing of distribution and marketing rights to third parties. Cost of goods sold will also include amortization of developed technology related to our acquisition of Nitec.

The cost in connection with product delivery to our distribution partners consists of raw material costs, costs associated with third-party manufacturers who manufacture LODOTRA for us, supply chain costs, royalty payments to third parties for the use of certain licenses and patents, and applicable taxes.

Acquisitions, Goodwill and Other Intangible Assets

We account for acquired businesses using the acquisition method of accounting in accordance with GAAP accounting rules for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. Any excess of the fair value of assets acquired and liabilities assumed over the purchase price is recorded as a bargain purchase gain. The fair value of intangible assets, including developed product and in-process research and development, is based on significant judgments made by management. The valuations and useful life assumptions are based on information available near the acquisition date and are based on expectations and assumptions that are considered reasonable by management. In our assessment of the fair value of identifiable intangible assets acquired in the Nitec acquisition, management used valuation techniques and made various assumptions. Our analysis and financial projections are based on management’s prospective operating plans and the historical performance of the acquired business. In connection with our acquisition of Nitec on April 1, 2010, we engaged consultants to assist management in the following:

 

   

developing an understanding of the economic and competitive environment for the industry in which we and the acquired company participate;

 

   

identifying the intangible assets acquired;

 

   

reviewing the acquisition agreements and other relevant documents made available;

 

   

interviewing our employees, including the employees of the acquired company, regarding the history and nature of the acquisition, historical and expected financial performance, product lifecycles and roadmap, and other factors deemed relevant to our valuation analysis;

 

   

performing additional market research and analysis deemed relevant to our valuation analysis;

 

   

estimating the fair values and recommending useful lives of the acquired intangible assets; and

 

   

preparing a narrative report detailing methods and assumptions used in the valuation of the intangible assets.

All work performed by consultants was discussed and reviewed in detail by management to determine the estimated fair values of the intangible assets. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

We will review indefinite-lived intangible assets for impairment at least annually, in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment, until such time as the research and development efforts are completed or abandoned. If the research and development efforts are completed successfully, we will reclassify the IPR&D to identified intangible assets and begin amortization of the fair value of the assets. We will amortize the cost of identified intangible assets using amortization methods that reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. We will review intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. We will review for impairment by facts or circumstances, either

 

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external or internal, indicating that we may not recover the carrying value of the asset. We will measure impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. We will measure fair value generally based on the estimated future cash flows. Our analysis will be based on available information and on assumptions and projections that we consider to be reasonable and supportable. If necessary, we will perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Preclinical Study and Clinical Trial Accruals

Our preclinical studies and clinical trials have been conducted by third-party CROs and other vendors. Preclinical study and clinical trial expenses are based on the services received from these CROs and vendors. Payments under some of the contracts we have with such parties depend on factors such as the milestones accomplished, successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual accordingly. Historically, our accruals have been within management’s estimates, and no material adjustments to research and development expenses have been recognized. Subsequent changes in estimates may result in a material change in our accruals.

Provision for Income Taxes

We have been subject to income taxes only in the U.S. through March 31, 2010, and beginning on April 1, 2010 in both the U.S. and foreign jurisdictions as a result of the acquisition of Nitec, and we use estimates in determining our provisions for income taxes. We use the asset and liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

As of December 31, 2009, we had net operating loss carryforwards of $76.4 million and $79.6 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal net operating loss carryforwards begin to expire in 2025 and state tax net operating loss carryforwards begin to expire in 2015.

As of December 31, 2009, we had research and development credit carryforwards of $2.5 million and $0.2 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal credits will expire beginning 2025 if not utilized. The state tax credit carryforwards have an unlimited carryforward period.

Utilization of the net operating loss carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986, as amended, or IRC, and similar state provisions. The annual limitation may result in the expiration of the net operating loss carryforwards before utilization. As a result of the acquisition of Nitec on April 1, 2010, we performed a study to determine if there had been an ownership change under Section 382 of the IRC. As a result of our Section 382 study, we concluded that there was an ownership change as of April 1, 2010, and that we will be subject to annual limits on our ability to utilize net operating loss carryforwards. We estimate that these annual limits will be $13.7 million, $18.1 million, $18.1 million, $18.1 million and $16.9 million for 2010, 2011, 2012, 2013 and 2014, respectively, and will be cumulative such that any use of the carryforwards below the limitation in one year will result in a corresponding increase in the limitation for the subsequent tax year.

We have provided a full valuation allowance for our deferred tax assets at December 31, 2009 due to the uncertainty surrounding the future realization of these assets.

On January 1, 2009, we adopted the provisions of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 740-10 Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The cumulative effect of adopting ASC 740-10 resulted in no adjustment to retained earnings as of January 1, 2009. As of December 31, 2009, we had

 

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gross unrecognized tax benefits of $0.4 million. It is unlikely that the amount of liability for unrecognized tax benefits will significantly change within the next 12 months. There was no interest or penalties accrued at January 1, 2009 and December 31, 2009.

We file income tax returns in the U.S. federal jurisdiction and the states of California and Illinois. As of December 31, 2009, all returns for the years ended 2005 through the current period remain open to examination. We are not currently subject to income tax examinations by any tax authorities.

Valuation of Stock-Based Compensation, Common Stock and Warrants

Stock-Based Compensation

We account for employee stock-based compensation by measuring and recognizing compensation expense for all stock-based payments based on estimated grant date fair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. Under ASC Topic 718 Compensation-Stock Compensation, we estimate the fair value of our share-based awards to employees using the Black-Scholes option pricing model. The Black-Scholes model requires the input of subjective assumptions, including the expected stock price, volatility, risk-free interest rate, the calculation of expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

The following table summarizes our weighted average assumptions used in the Black-Scholes option pricing model:

 

 

 

     December 31,    June 30, 2010
     2008    2009     

Expected volatility

   70%    98%    79%

Risk-free interest rate

   3.5%    2.7%    2.3%

Expected term (in years)

   6.25    6.25    5.09

Expected dividends

   0%    0%    0%

 

 

The replacement stock options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled. The substituted options were issued with the same vesting schedule and terms as the cancelled Nitec options, with continuous service with Nitec credited towards the original vesting period and share amounts adjusted in a manner consistent with the share exchange agreement. We estimated the fair value of the stock options using the Black-Scholes option pricing model with the following assumptions as of April 1, 2010: expected volatility of 75%, risk-free interest rate of 1.03%, expected term of 2.3 years and expected dividend yield of 0%.

Expected Volatility. We used an average historical stock price volatility of comparable publicly traded companies to be representative of future stock price volatility as we did not have any trading history for our common stock.

Risk-Free Interest Rate. We determined the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate as of the date of grant.

Expected Term. Given our limited historical exercise behavior, the expected term of options granted was determined using the “simplified” method. Under this approach, the expected term is presumed to be the average of the vesting term and contractual term.

Expected Dividends. We have never paid dividends and do not anticipate paying any dividends in the near future.

Forfeitures. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on our historical experience.

We recorded stock-based compensation expense of $0.1 million, $0.4 million and $0.7 million during the years ended December 31, 2008 and 2009, and the six months ended June 30, 2010, respectively. No stock-based compensation expense was recorded in 2007. As of June 30, 2010, we had $8.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 2.6 years. In

 

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future periods, our stock-based compensation expense is expected to increase materially as a result of our existing unrecognized stock-based compensation expense and as we issue additional stock-based awards to continue to attract and retain employees and non-employee directors.

We also account for stock options issued to non-employees based on the stock options’ estimated fair value determined using the Black-Scholes option pricing model. However, the fair value of the equity awards granted to non-employees is re-measured at each reporting date, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

Common Stock Valuation

Due to the absence of an active market for our common stock, the fair value of our common stock for purposes of determining the exercise price of stock option grants was determined by our board of directors, with the assistance of our management, in good faith based on a number of objective and subjective factors including:

 

   

the prices of our Series A, B, C and D convertible preferred stock sold to outside investors in arms-length transactions, and the rights, preferences and privileges of our convertible preferred stock as compared to those of our common stock, including the liquidation preference of our convertible preferred stock;

 

   

our results of operations, financial position and the status of our research and development efforts, including the release of our Phase 3 clinical trial data for HZT-501;

 

   

our stage of development and business strategy;

 

   

the composition of and changes to our management team;

 

   

the market value of a comparison group of publicly traded pharmaceutical and biotechnology companies that are in a stage of development similar to ours;

 

   

the lack of liquidity of our common stock as a private company;

 

   

contemporaneous valuations prepared in accordance with methodologies outlined in the American Institute of Certified Public Accountants, or AICPA, Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation;

 

   

the likelihood of achieving a liquidity event for the shares of our common stock and underlying stock options, such as an initial public offering, given prevailing market conditions;

 

   

the material risks related to our business; and

 

   

macro-economic events.

Based on these factors, our board of directors granted common stock options at exercise prices that ranged from $0.57 per share to $5.67 per share during the period between January 2006 to June 30, 2010. We estimated the fair value of our common stock at $5.67, $2.19, $5.45 and $7.15 per share as of December 31, 2008, December 31, 2009, April 1, 2010 and June 30, 2010, respectively.

In June 2010, in connection with the preparation of our consolidated financial statements included in this prospectus, we began performing a retrospective analysis to reassess the fair value of our common stock at certain option grant dates. We performed a retrospective valuation analysis with respect to the 12 months ended December 31, 2009, three months ended March 31, 2010 and three months ended June 30, 2010, because these periods encompass the time frame in which we began contemplating and planning our initial public offering. First, we estimated the Business Enterprise Value, or BEV, defined as the sum of the fair value of our total equity and interest-bearing debt. We utilized the estimated BEV and an option-based valuation model to estimate the fair value of the common stock in the context of our capital structure as of each valuation date. We then reviewed milestones accomplished and significant progress made during interim periods in our retrospective analysis to reassess fair value. Unless there were specific milestones, other achievements or specifically identified positive or adverse changes to general market conditions that suggested fair value changed, we assumed a pro rata change in fair value for options granted between the valuation dates of December 31, 2008, December 31, 2009, March 31, 2010, and June 30, 2010 to determine the fair value of our common stock during these periods.

 

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To determine the BEV, we evaluated the income approach and the prior sale of company stock approach to estimate our aggregate enterprise value at each valuation date: December 31, 2008, December 31, 2009, March 31, 2010 and June 30, 2010.

The income approach is an estimate of the present value of the future monetary benefits expected to flow to the owners of a business. It requires a projection of the cash flows that the business is expected to generate. These cash flows are converted to present value by means of discounting, using a rate of return that accounts for the time value of money and the appropriate degree of risks inherent in the business.

We applied consistent methodologies to arrive at BEV and common stock value. At each valuation date, we updated our financial projections, including cash flow projections. In preparing financial projections, we made certain assumptions relating to probability of successful approval and commercial launch of products and probable date of commercial launch, pricing and product adoption for products, capital required to achieve our forecasts, likelihood of securing the necessary capital, and capital market conditions. Between December 2008 and December 2009, we reduced our revenue projections to reflect constrained capital markets and our belief that it would be difficult to raise the amount of capital necessary to meet our 2008 projections. As a result of our anticipated acquisition of Nitec, on April 1, 2010, which would increase the number of products we were developing and expecting to commercialize, we increased our revenue projections at the March 2010 valuation date. Between the March 2010 and June 2010 valuation dates our projections were adjusted slightly to reflect updated product market information, including market size and pricing data. The projections were discounted to present value using rates of 43.5%, 43.5%, 18.5% and 16.5%, respectively for December 2008, December 2009, March 2010 and June 2010. The discount rates used for each valuation were based on weighted average cost of capital. We determined the weighted average cost of capital by weighting the required returns of capital required to obtain interest bearing debt, preferred equity capital, and common equity capital in proportion to their estimated percentages in an expected capital structure, using a capital asset pricing model. In addition, an analysis was performed to support the discount for lack of marketability applied in each valuation. We applied a lack of marketability discount of 40%, 35%, 18% and 8%, respectively for December 2008, December 2009, March 2010 and June 2010. Using this methodology, our BEV was $100 million, $71 million, $298 million and $333 million as of December 2008, December 2009, March 2010 and June 2010, respectively.

The prior sale of company stock approach considers any prior arm’s length sales of the company’s equity. Considerations factored into the analysis include: (1) the size and amount of equity sold; (2) the estimated volatility; (3) an estimated time to liquidity; (4) the relationship of the parties involved; (5) the timing compared to the common stock valuation date; and (6) the financial condition and structure of the company at the time of the sale. In estimating the volatility assumption, we considered the historical volatility over the anticipated time to liquidity for comparable publicly traded companies. Historical volatility was calculated based on the daily volatility of the comparable companies over the estimated time to liquidity of 1.5 years as of December 2008, one year as of December 2009, one year as of March 2010, and four months as of June 2010. The comparable companies selected at each valuation date were small biopharmaceutical companies, typically with a market capitalization of less than $500 million, that had similar product pipelines in terms of therapeutic focus, commercial sales force target physicians, and number of products. These included companies with products that focus on pain or issues associated with pain, gastrointestinal issues, and companies that would market products to the same medical specialists that we intend to target. While we considered the prior sale of company stock approach, we did not ultimately rely on these prior stock sale transactions to determine BEV as there were no new investors in the transactions during the periods being evaluated. Prior financial investors participated in financing transactions to keep their pro rata ownership and thus we determined that these financings were not a reliable indicator of fair value.

The indicated fair value calculated at each valuation date was then allocated to the shares of convertible preferred stock, warrants to purchase shares of convertible preferred stock, and common stock, using a contingent claim methodology. This methodology treats the various components of our capital structure as a series of call options on the proceeds expected from the sale of the company or the liquidation of our assets at some future date. These call options are then valued using the Black-Scholes option pricing model. This model defines the securities’ fair values as functions of the current fair value of the company and assumptions based on the securities’ rights and preferences. As a result, the option-pricing requires assumptions regarding the anticipated timing of a potential liquidity event, such as an initial public offering, and the estimated volatility of our equity securities. The anticipated timing of a liquidity event utilized in these valuations was based on then current plans and estimates of our board of directors and management regarding an initial

 

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public offering. The estimated time to liquidity at each valuation date was as follows: 1.5 years as of December 2008, one year as of December 2009, one year as of March 2010, and four months as of June 2010. The time to liquidity was based on our view of when we expected to complete an initial public offering or alternatively, a merger and acquisition process. In December of 2008, we had received positive Phase 3 data for HZT-501 but capital market conditions were difficult, leading to the expectation that a liquidity event could not be achieved in less than 1.5 years. In December 2009, we were very close to filing a NDA for U.S. approval of HZT-501 and capital market conditions were improving, but still not robust, leading us to estimate it would be one year to a liquidity event.

As of the April 1, 2010, the date we closed the acquisition of Nitec, we had not yet initiated an initial public offering or initial public offering process. In our view it was more likely than not that an initial public offering process would be initiated in the future, and that the initial public offering would occur sometime between the fourth quarter of 2010 and the fourth quarter of 2011. Therefore, it was assumed that a liquidity event would occur on April 1, 2011. An option pricing method was used given the difficulty in reliably estimating the likelihood of the liquidity event being completion of an initial public offering rather than a sale of the company through a merger or acquisition. We calculated the implied probability of an initial public offering event occurring by April 1, 2011, at approximately 60%.

As of June 30, 2010, we had initiated an initial public offering process. Accordingly, in our view, it had become more likely than not that an initial public offering would occur in the fourth quarter of 2010. Therefore, we assumed that a liquidity event would occur by October 31, 2010. An option pricing method was used given the difficulty in reliably estimating the likelihood of the liquidity event being an initial public offering rather than a merger or acquisition event. We calculated the implied probability of an initial public offering event occurring by October 31, 2010 at approximately 70%. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies.

We granted stock options with an exercise price of $5.67 on March 11, 2009, May 28, 2009, June 23, 2009 and September 29, 2009, and an exercise price of $2.19 and $5.45 per share in February and June 2010, respectively. Common stock fair value declined from December 31, 2008 to December 7, 2009 because our expectation of future cash flows declined during this period as we reduced our revenue projections to reflect constrained capital markets and our belief that it would be difficult to raise the amount of capital necessary to meet our 2008 projections. In addition, we sold Series D preferred shares with a liquidation preference of approximately $24 million in December 2009 and January 2010. This liquidation preference represented a significant portion of our $71 million BEV and had a dilutive impact on the value of our common stock.

Our December 7, 2009 valuation resulted in the allocation of approximately $5.21 per share to the Series D preferred shares. The Series D financing transaction was a very recent market transaction, resulting in a better indicator of value than the Series C financing transaction, which took place in mid-2007. The Series D financing transaction involved a sale to existing investors, with the price per share determined after negotiations and discussions with potential third-party investors as to price and other terms of the financing.

In determining the fair value of our common stock, we conducted retrospective valuations using the approach mentioned above. A brief narrative of estimated fair value as of the date of the grant and the option exercise price is set forth below:

Year ended December 31, 2009. During this period we did not complete any significant company milestones. Most of the activity during this twelve month period centered around the regulatory, manufacturing and clinical activities necessary to prepare the NDA filing for HZT-501, which was eventually filed in March 2010. Additionally, during this period macro-economic conditions continued to be difficult and deteriorate, making it very hard for private biotech companies to raise additional capital to fund their operations. Financings that closed during this period were at significant discounts to prior rounds of financing. In December 2009, we completed another convertible preferred stock financing at a significant discount to our prior round of financing to ensure we had the necessary capital resources to continue our regulatory filing activity. Options were granted in March, May, June and September of 2009, all with an exercise price of $5.67 per share. Our retrospective analysis indicates that the fair value on each of the grant dates was below the exercise price per share on date of grant due to lack of completion of significant milestones and the need to complete another convertible preferred stock financing to fund our operations at a valuation significantly below the prior convertible preferred stock financing.

Three months ended March 31, 2010. During this period, we filed an NDA with the FDA for HZT-501. During this period, we also consummated our recapitalization and acquisition of Nitec and completed a concurrent convertible

 

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preferred stock financing. The acquisition and financing were completed the day after the first quarter ended March 31, 2010. The option awards granted during this period had an exercise price of $2.19 per share. We conducted a retrospective valuation analysis because there was a material change in our business which created incremental value during the three months ended March 31, 2010. The fair value of our common stock as of December 31, 2009 and April 1, 2010 was estimated at $2.19 and $5.45 per share, respectively. Based on a pro rata change in the fair value of our common stock between these valuation dates, the fair value of our common stock of $3.42 per share as of February 3, 2010 was used for accounting purposes. The value of $3.42 per share was determined appropriate for accounting purposes based on the pro rata change in fair value between the December 2009 and March 2010 valuation dates as there were no significant milestones achieved during the intervening period, other than the filing of our NDA for HZT-501 which occurred at the end of March 2010, and because capital market conditions were relatively the same during the period.

Three months ended June 30, 2010. During this period, we completed the Nitec acquisition and our Series B preferred stock financing on April 1, 2010. In addition, we undertook preparations for our proposed public offering, including interviewing numerous investment banks, held an organization meeting, and began drafting a preliminary registration statement. In April 2010, we sold Series B preferred stock at $7.97 per share to existing investors. The Series B preferred stock has a liquidation preference of $7.97 per share, as well as a participation right feature that allows the preferred stock to receive both its liquidation preference and a pro-rata share of the remaining proceeds upon a sale of the company through a merger or acquisition. These two features make the preferred stock significantly more valuable than the common stock. As of April 1, 2010, if an initial public offering were completed, the preferred stock would be converted to common stock and have the same value per share as the common stock. However, if the company were sold prior to the completion of an initial public offering, the price per share paid for the Series B preferred stock could be up to $7.97 per share more than the price per share paid for common stock. The option awards granted during this period had an exercise price of $5.45 per share. In anticipation of a proposed initial public offering, and because we granted a significant amount of option awards during this period, we conducted a retrospective valuation analysis. The fair value of our common stock as of April 1, 2010 and June 30, 2010 was estimated at $5.45 and $7.15 per share, respectively. Based on a pro rata change in the fair value of our common stock between these valuation dates, the fair value of our common stock of $6.89 per share as of June 16, 2010 was used for accounting purposes.

The table below summarizes options granted from January 1, 2009 through September 15, 2010.

 

 

 

Grant Date

   Number of
Options
Granted
   Exercise Price    Reassessed Fair
Value
Per Share of
Common Stock
   Intrinsic
Value

(in  thousands)

March 11, 2009

   112,000    $ 5.67    $ 4.96    $ 166

May 28, 2009

   15,000      5.67      4.16      22

June 23, 2009

   115,000      5.67      3.89      170

September 29, 2009

   15,000      5.67      2.89      22

February 3, 2010 (unaudited)

   678,240      2.19      3.42      3,364

April 1, 2010 (unaudited)

   778,881      3.18-12.14      5.45      313

June 16, 2010 (unaudited)

   981,952      5.45      6.89      1,669

 

 

The options granted on April 1, 2010 were granted in substitution for Nitec options which were cancelled in connection with our acquisition of Nitec.

Warrants

Freestanding warrants to purchase shares of our convertible preferred stock that contain net share settlement features requiring us to settle the warrants based on a fixed monetary amount known at inception and that require us to issue a variable number of shares in the future are classified as liabilities on our consolidated balance sheets at fair value. Our warrants are also classified as liabilities when they conditionally obligate us to redeem the underlying convertible preferred stock at some point in the future. The fair value of the warrants is subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense), net in the consolidated

 

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statements of operations. We estimate the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model. We use a number of assumptions to estimate the fair value including the remaining contractual terms of the warrant, risk-free interest rates and expected dividend yield and expected volatility of the price of the underlying common stock. These assumptions are highly judgmental and could differ significantly in the future.

Between October 2008 and November 2009, in connection with our issuance of convertible promissory notes, we issued warrants to purchase our capital stock, or the bridge warrants. The bridge warrants were exercisable for a number of shares of our capital stock to be determined based on the number and type of shares into which the corresponding convertible promissory notes were converted in the future. At December 31, 2009, in connection with the issuance of Series D convertible preferred stock (upon which the bridge warrants became exercisable for shares of Series D convertible preferred stock at a known exercise price), the aggregate fair value of the bridge warrants was reclassified from liabilities to equity and we discontinued recording related periodic fair value adjustments. It is anticipated that upon the completion of this offering