AUXILIUM PHARMACEUTICALS INC - FORM 10-Q

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - AUXILIUM PHARMACEUTICALS INC	Financial_Report.xls
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - AUXILIUM PHARMACEUTICALS INC	dex32.htm
EX-10.1 - EMPLOYMENT AGREEMENT - AUXILIUM PHARMACEUTICALS INC	dex101.htm
EX-10.2 - FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT - AUXILIUM PHARMACEUTICALS INC	dex102.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - AUXILIUM PHARMACEUTICALS INC	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - AUXILIUM PHARMACEUTICALS INC	dex311.htm
EX-10.3 - FIRST AMENDMENT TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT - AUXILIUM PHARMACEUTICALS INC	dex103.htm
EX-10.4 - FORM OF NONQUALIFIED STOCK OPTION AGREEMENT - AUXILIUM PHARMACEUTICALS INC	dex104.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-50855

Auxilium Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware		23-3016883
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

40 Valley Stream Parkway, Malvern, PA 19355

(Address of principal executive offices) (Zip Code)

(484) 321-5900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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 definitions of “accelerated filer” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 1, 2010, the number of shares outstanding of the issuer’s common stock, $0.01 par value, was 47,714,394.


PART I FINANCIAL INFORMATION		3

Item 1.	Unaudited Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statement of Stockholders’ Equity	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II OTHER INFORMATION		25

Item 1A.	Risk Factors	25

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	26

SIGNATURES		27

EXHIBIT INDEX		28

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	September 30, 2010			December 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	142,442		$	181,977
Accounts receivable, trade, net		24,968			18,266
Accounts receivable, other		1,112			1,323
Inventories		40,302			19,554
Prepaid expenses and other current assets		2,503			3,670

Total current assets		211,327			224,790
Property and equipment, net		29,018			24,227
Long-term investments		2,796			3,118
Other assets		10,032			8,429

Total assets	$	253,173		$	260,564

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,876		$	6,711
Accrued expenses		52,933			51,571
Deferred revenue, current portion		6,079			4,211
Deferred rent, current portion		961			883

Total current liabilities		62,849			63,376

Deferred revenue, long-term portion		80,145			69,703

Deferred rent, long-term portion		6,556			6,966

Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.01 par value per share; authorized 120,000,000 shares; issued 47,789,059 and 47,317,602 shares at September 30, 2010 and December 31, 2009, respectively		478			473
Additional paid-in capital		465,477			446,876
Accumulated deficit		(358,746	)		(323,912	)
Treasury stock at cost: 123,539 and 84,373 shares at September 30, 2010 and December 31, 2009, respectively		(3,065	)		(2,137	)
Accumulated other comprehensive income		(521	)		(781	)

Total stockholders’ equity		103,623			120,519

Total liabilities and stockholders’ equity	$	253,173		$	260,564

See accompanying notes to consolidated financial statements.

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net revenues	$	53,633		$	42,143		$	149,600		$	116,012
Operating expenses*:
Cost of goods sold		11,573			9,545			32,561			26,662
Research and development		14,429			12,754			34,050			40,022
Selling, general and administrative		40,337			34,685			117,668			90,471

Total operating expenses		66,339			56,984			184,279			157,155

Loss from operations		(12,706	)		(14,841	)		(34,679	)		(41,143	)
Interest income		53			75			127			400
Interest expense		(101	)		(200	)		(282	)		(201	)

Loss before income taxes		(12,754	)		(14,966	)		(34,834	)		(40,944	)
Provision for income taxes		—			(17	)		—			614

Net loss	$	(12,754	)	$	(14,949	)	$	(34,834	)	$	(41,558	)

Basic and diluted net loss per common share	$	(0.27	)	$	(0.35	)	$	(0.74	)	$	(0.98	)

Weighted average common shares outstanding		47,592,975			42,761,821			47,346,119			42,521,641

*includes the following amounts of stock-based compensation expense:
Cost of goods sold	$	7		$	—		$	10		$	—
Research and development		58			1,136			1,415			4,021
Selling, general and administrative		3,427			3,001			10,489			9,516

See accompanying notes to consolidated financial statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(34,834	)	$	(41,558	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		11,914			13,537
Depreciation and amortization		4,282			2,890
Changes in operating assets and liabilities:
Increase in accounts receivable, trade and other		(6,491	)		(1,729	)
Increase in inventories		(19,214	)		(1,862	)
Increase in prepaid expenses and other current assets		(725	)		(413	)
Decrease in accounts payable and accrued expenses		(2,473	)		(1	)
Increase (decrease) in deferred revenue		12,310			(219	)
Decrease in deferred rent		(332	)		(2,586	)

Net cash used in operating activities		(35,563	)		(31,941	)

Cash flows from investing activities:
Purchases of property and equipment		(8,784	)		(8,412	)
Redemptions of long-term investments		600			100

Net cash used in investing activities		(8,184	)		(8,312	)

Cash flows from financing activities:
Proceeds from common stock offering, net of transaction costs		—			115,714
Borrowings under Revolving Line of Credit		—			30,000
Payments on Revolving Line of Credit		—			(30,000	)
Proceeds from exercise of common stock options		3,972			3,096
Employee Stock Purchase Plan purchases		1,082			715
Payments in common stock		104			113
Purchase of treasury shares		(928	)		(1,056	)

Net cash provided by financing activities		4,230			118,582

Effect of exchange rate changes on cash		(18	)		38

Decrease in cash and cash equivalents		(39,535	)		78,367
Cash and cash equivalents, beginning of period		181,977			113,943

Cash and cash equivalents, end of period	$	142,442		$	192,310

See accompanying notes to consolidated financial statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2010

(In thousands, except share amounts)

(Unaudited)


	Common stock					Additional paid-in			Accumulated			Treasury Stock					Accumulated other comprehensive
	Shares			Amount		capital			deficit			Shares		Cost			loss			Total
Balance, January 1, 2010		47,317,602		$	473	$	446,876		$	(323,912	)		84,373	$	(2,137	)	$	(781	)	$	120,519
Cashless exercise of warrants		78,875			1		(1	)		—			—		—			—			—
Exercise of common stock options		355,312			4		3,968			—			—		—			—			3,972
Employee Stock Purchase Plan purchases		54,210			—		1,082			—			—		—			—			1,082
Stock-based compensation		—			—		13,448			—			—		—			—			13,448
Payments in common stock		4,066			—		104			—			—		—			—			104
Cancellation of restricted stock		(21,006	)		—		—			—			—		—			—			—
Treasury stock acquisition		—			—		—			—			39,166		(928	)		—			(928	)
Other comprehensive income		—			—		—			—			—		—			260			260
Net loss		—			—		—			(34,834	)		—		—			—			(34,834	)

Balance, September 30, 2010		47,789,059		$	478	$	465,477		$	(358,746	)		123,539	$	(3,065	)	$	(521	)	$	103,623

See accompanying notes to consolidated financial statements.

AUXILIUM PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Auxilium Pharmaceuticals, Inc. and its wholly owned subsidiaries (the Company), and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) pertaining to Form 10-Q. Certain disclosures required for complete annual financial statements are not included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The information at September 30, 2010 and for the respective three and nine month periods ended September 30, 2010 and 2009 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of the Company’s management, are necessary to state fairly the financial information set forth herein. The December 31, 2009 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2009 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the SEC.

(b)

Net Loss Per Common Share

The basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period reduced, where applicable, for unvested outstanding restricted shares.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Numerator:
Net loss	$	(12,754	)	$	(14,949	)	$	(34,834	)	$	(41,558	)

Denominator:
Weighted-average common shares outstanding		47,651,114			42,937,278			47,458,975			42,713,689
Weighted-average unvested restricted common shares subject to forfeiture		(58,139	)		(175,457	)		(112,856	)		(192,048	)

Shares used in calculating net loss per common share		47,592,975			42,761,821			47,346,119			42,521,641

Basic and diluted net loss per common share	$	(0.27	)	$	(0.35	)	$	(0.74	)	$	(0.98	)

Diluted net loss per common share is computed giving effect to all potentially dilutive securities, including stock options and warrants. For all periods presented, diluted net loss per common share is the same as basic net loss per common share because the potential common stock is anti-dilutive. Anti-dilutive common shares not included in diluted net loss per common share are summarized as follows:


	September 30,
	2010		2009
Common stock options		6,205,530		5,368,023
Warrants		—		102,524
Unvested restricted common stock		40,828		168,500

		6,246,358		5,639,047

(c)

XIAFLEX Revenue Recognition

Milestone payments- On January 21, 2010, the Company and Pfizer Inc. (Pfizer), its European partner, announced that the European scientific/technical review procedure for the Marketing Authorization Application (MAA) for XIAFLEX^® (collagenase clostridium histolyticum) for the treatment of Dupuytren’s contracture (Dupuytren’s) commenced. As a result of accomplishing this milestone, the Company received a $15 million payment from Pfizer and made a payment of approximately $1.3 million to BioSpecifics Technologies Corp. (BioSpecifics), both of which have been deferred and are being recognized as revenue and cost of sales, respectively, on a straight-line basis over the remaining estimated life of the agreement with Pfizer.

Product sales- On February 2, 2010, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord. In March 2010, the Company began shipping XIAFLEX to its specialty distributor and specialty pharmacy customers and launched its marketing program for this new product. Under the Company’s agreements with its customers, they have the right to return XIAFLEX for any reason for up to six months after product expiration. As XIAFLEX is new to the marketplace, the Company is currently assessing the flow of product through its distribution channel. Since current authoritative guidance precludes revenue recognition until a reasonable estimate of returns can be made, the Company

is deferring the recognition of revenues, and related product costs, on XIAFLEX product shipments to its specialty distributor and specialty pharmacy customers until an estimate of returns can be made. However, the Company is recognizing XIAFLEX product sale revenues, and related product costs, at the time the product is shipped to physicians for administration to patients. Such revenues have been reduced for estimated discounts and allowances based on the contractual terms of such sales. As of September 30, 2010, the amount of deferred XIAFLEX revenues was approximately $1.1 million.

(d)

New Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) that revises the authoritative guidance for revenue arrangements with multiple deliverables that contain more than one unit of accounting. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. For the Company, the guidance is effective for revenue arrangements entered into or materially modified after December 31, 2010, although early adoption and/or retroactive application are permitted. The Company is currently assessing the impact that this guidance may have on its consolidated financial statements.

In January 2010, the FASB issued guidance that amends the disclosure guidance with respect to fair value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. These new disclosures are included in Note 2.

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Under this guidance, consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones, and each milestone must be evaluated individually to determine if it is substantive. This guidance is one alternative of revenue recognition for milestones meeting its criteria and is effective, for the Company, on a prospective basis for milestones achieved after September 30, 2010. Through September 30, 2010, the Company has not received milestone payments that meet the criteria of this guidance.

2.	FAIR VALUE MEASUREMENTS

The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

As of September 30, 2010, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of September 30, 2010 and December 31, 2009 (in thousands):


	September 30, 2010
	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	142,442	$	142,442	$	—	$	—
Long-term investments:
Auction rate securities		2,796		—		—		2,796

Total financial assets	$	145,238	$	142,442	$	—	$	2,796


	December 31, 2009
	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	181,977	$	181,977	$	—	$	—
Long-term investments:
Auction rate securities		3,118		—		—		3,118

Total financial assets	$	185,095	$	181,977	$	—	$	3,118

The following table summarizes the changes in the financial assets measured at fair value using Level 3 inputs for the three and nine months ended September 30, 2010 (in thousands):


Long -term Investments	Three Months Ended September 30, 2010		Nine Months Ended September 30, 2010
Beginning balance	$	2,653	$	3,118
Transfers into Level 3		—		—
Settlements		—		(600	)
Unrealized gain included in other comprehensive income		143		278

Ending balance	$	2,796	$	2,796

The securities classified as Level 3 are auction rate securities that are not actively traded. The Company determined the fair value of these securities based on a discounted cash flow model which incorporated a discount period, coupon rate, liquidity discount and coupon history. In determining the fair value, the Company also considered the rating of the securities by investment rating agencies and whether the securities were backed by the United States government.

3.	INVENTORIES

Inventories consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
Commercial:
Raw materials	$	9,053	$	4,420
Work-in-process		19,535		1,777
Finished goods		11,714		5,986

Total Commercial		40,302		12,183

Pre-approval:
Raw materials		—		903
Work-in-process		—		6,468

Total Pre-approval		—		7,371

	$	40,302	$	19,554

On February 2, 2010, the FDA approved XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord. Pre-approval inventory at December 31, 2009 represented raw materials and work-in-process inventories of XIAFLEX capitalized as inventory based on management’s judgment of the probable future use and net realizable value of these inventories.

It is the Company’s policy to continually evaluate and provide reserves for inventory on hand that is in excess of expected future demand. In making this evaluation, the Company must make judgments concerning future product demand and monitor the expiration dates of its products. Finished goods inventory at September 30, 2010 includes $4,922,000 of XIAFLEX inventory that will expire in 2011. Given the limited historical information with the recent launch of XIAFLEX, it is not currently possible to reasonably predict the future demand pattern for XIAFLEX. However, it is possible that some portion of this inventory could expire prior to its sale.

4.	ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
Payroll and related expenses	$	11,416	$	13,013
Royalty expenses		5,768		5,206
Research and development expenses		2,715		2,498
Sales and marketing expenses		10,371		9,827
Rebates, discounts and returns accrual		18,681		16,218
Other expenses		3,982		4,809

	$	52,933	$	51,571

5.	REVOLVING CREDIT AGREEMENT

The financial covenants in the Company’s revolving credit agreement with Silicon Valley Bank (SVB) include a quarterly and cumulative profitability and loss restriction. The Company has obtained a waiver agreement from SVB with respect to the application of these covenants to the quarters ended June and September 30, 2010. As of September 30, 2010, there were no outstanding borrowings under the revolving credit agreement.

6.	EMPLOYEE STOCK BENEFIT PLANS

Under the Company’s 2006 Employee Stock Purchase Plan, as approved by the stockholders of the Company, employees may purchase shares of the Company’s common stock at a 15% discount through payroll deductions. In June 2010, the stockholders authorized the increase of shares authorized for issuance under the plan to 800,000 shares and employees purchased 54,210 shares of common stock at a price of $19.9750 per share, representing 85% of the closing price of the common stock on June 30, 2010, the purchase price for the last day of the purchase period. At September 30, 2010, there were 331,158 shares available for future grants under the plan.

Under the Company’s 2004 Equity Compensation Plan (the 2004 Plan), as approved by the stockholders of the Company, qualified and nonqualified stock options and stock awards may be granted to employees, non-employee directors and consultants and advisors who provide services to the Company. As of September 30, 2010, the Company has granted non-qualified stock options and restricted stock under this plan. At September 30, 2010, there were 1,169,259 shares available for future grants under the 2004 Plan.

(a)

Stock Option Information

During the nine months ended September 30, 2010, the Company granted standard non-qualified stock options to purchase 1,703,809 shares of the Company’s common stock pursuant to the 2004 Plan. These options expire ten years from date of grant. Their exercise prices represent the closing price of the common stock of the Company on the respective dates that the options were granted and they generally vest rateably over four years at one year intervals from the grant date, assuming continued employment of the grantee.

The following tables summarize stock option activity for the nine month period ended September 30, 2010:


Stock options	Shares			Weighted average exercise price		Weighted average remaining contractual life (in years)		Aggregate intrinsic value
Options outstanding:
Outstanding at December 31, 2009		5,359,110		$	21.16
Granted		1,703,809			29.73
Exercised		(355,312	)		11.18
Forfeited		(502,077	)		28.99

Outstanding at September 30, 2010		6,205,530			23.45		7.46	$	30,071,931

Exercisable at September 30, 2010		2,942,842			17.82		6.15		27,161,340

The aggregate intrinsic values in the preceding table represent the total pre-tax intrinsic value, based on the Company’s stock closing price of $24.78 as of September 30, 2010, that would have been received by the option holders had all option holders exercised their options as of that date. During the nine months ended September 30, 2010, total intrinsic value of options exercised was $7,253,230. As of September 30, 2010, exercisable options to purchase 1,885,730 shares were in-the-money.

(b)

Stock Awards

During the nine months ended September 30, 2010, the Company granted performance-based restricted stock awards to certain officers. A total of 88,000 shares of restricted stock are subject to these awards and the amount of restricted stock ultimately earned (subject to vesting) is based on U.S. net sales of XIAFLEX in the year ending December 31, 2010. The number of shares of restricted stock earned will vest 33^1/3% on the date the performance goal is achieved with the balance vesting in two equal instalments thereafter on the first and second anniversary of the date the performance goal is achieved, assuming continued employment of the grantee. As of September 30, 2010, 11,000 of these awards have been cancelled.

In addition, during the nine months ended September 30, 2010, the Company granted performance stock awards to certain employees instrumental in the preparation of the XIAFLEX product launch under which 15,405 shares of common stock will be issued to them if a certain level of U.S. net sales of XIAFLEX in the year ending December 31, 2010 is attained, assuming continued employment of the grantee. As of September 30, 2010, 1,734 of these awards have been cancelled.

In 2009, the Company granted 79,500 performance-based restricted stock awards to certain officers. On February 28, 2010, 70,998 of these restricted shares were awarded with 23,666 shares vesting immediately. The 8,502 restricted shares that were not awarded were cancelled on February 28, 2010, and an additional 12,504 restricted shares were cancelled in connection with the termination of certain officers of the Company. The remaining 34,828 shares of the performance-based restricted stock awards vest in equal amounts on February 28, 2011 and February 28, 2012, assuming continued employment of the grantee.

The following table summarizes the restricted stock activity for the nine-month period ended September 30, 2010:


	Shares			Weighted average grant-date fair value
Nonvested at December 31, 2009		168,500		$	17.87
Vested		(106,666	)		12.56
Cancelled		(21,006	)		28.50

Nonvested at September 30, 2010		40,828			26.28

(c)

Valuation Assumptions and Expense Information

Total stock-based compensation costs charged against income for the nine months ended September 30, 2010 and 2009 amounted to $11,914,000 and $13,537,000, respectively. Stock-based compensation costs capitalized as part of inventory amounted to $1,544,000 for the nine months ended September 30, 2010, and were insignificant for the nine months ended September 30, 2009.

The fair value of each stock option award was estimated on the date of grant using the Black-Scholes model and applying the assumptions in the following table.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Weighted average assumptions:
Expected life of options (in years)		6.25			6.25			6.18			6.17
Risk-free interest rate		1.99	%		2.88	%		2.68	%		2.51	%
Expected volatility		50.83	%		50.47	%		50.02	%		50.27	%
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

During the nine months ended September 30, 2010, the weighted-average grant-date fair value of options granted was $15.14. As of September 30, 2010, there was approximately $30,302,992 of total unrecognized stock-based compensation cost related to all share-based payments that will be recognized over the weighted-average period of 2.52 years.

7.	INCOME TAXES

During the third quarter of 2010, the Company completed a study to calculate the amount of Orphan Drug Credit it may claim for research and development expenditures related to XIAFLEX during the 2005 through 2009 periods. As a result of the study, the Company’s federal credit carryforwards increased from $6,513,000 to $38,008,000 as of December 31, 2009. Under the rules of the Internal Revenue Code, the Company’s net operating loss is reduced by the amount of the Orphan Drug Credits claimed. Accordingly, as a result of the study, the Company’s deferred tax asset related to net operating loss carryforwards was reduced by $12,804,000. Consequently, the increase in gross deferred tax assets in connection with the study was $18,691,000, which has been fully offset by a valuation allowance in the consolidated financial statements.

8.	OTHER COMPREHENSIVE LOSS

Total comprehensive loss was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net loss	$	(12,754	)	$	(14,949	)	$	(34,834	)	$	(41,558	)
Other comprehensive income (loss):
Unrealized gain on available for sale securities		143			—			279			—
Foreign currency translation		6			(1	)		(19	)		7

Comprehensive loss	$	(12,605	)	$	(14,950	)	$	(34,574	)	$	(41,551	)

The unrealized gain on available for sale securities relates to the Company’s long-term investments. The foreign currency translation amounts relate to the Company’s foreign subsidiary.

Item 2.

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

The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in the consolidated financial statements and the notes thereto appearing elsewhere in this report.

Special Note Regarding Forward-Looking Statements

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements made with respect to our strategy, progress and timing of development programs and related trials, the timing of actions to be taken by regulatory authorities, the efficacy, market acceptance and commercial viability of our products and product candidates, third-party coverage and reimbursement for XIAFLEX, the commercial benefits available to us as a result of our agreements with third parties, future operations, future financial position, future revenues, projected costs, the size of addressable markets, prospects, plans and objectives of management and other statements regarding matters that are not historical facts.

In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “seem,” “seek,” “future,” “continue,” or “appear” or the negative of these terms or similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed in or implied by such forward-looking statements. Such risks and uncertainties include, among other things:

•

the successful launch in the United States (U.S.) of XIAFLEX^® (collagenase clostridium histolyticum) for the treatment of adult Dupuytren’s contracture (Dupuytren’s) patients with a palpable cord;

•

achieving market acceptance of XIAFLEX by physicians and patients;

•

obtaining and maintaining third-party payor coverage and reimbursement for XIAFLEX, Testim^® and our product candidates;

•

the size of addressable markets for XIAFLEX, Testim and our other product candidates;

•

achieving market acceptance of Testim by physicians and patients and competing effectively with other Testosterone Replacement Therapy (TRT) products;

•

growth in sales of Testim;

•

growth of the overall androgen market;

•

the ability to manufacture or have manufactured XIAFLEX, Testim and other product candidates in commercial quantities at reasonable costs and compete successfully against other products and companies;

•

the availability of and ability to obtain additional funds through public or private offerings of debt or equity securities;

•

obtaining and maintaining all necessary patents or licenses;

•

purchasing ingredients and supplies necessary to manufacture XIAFLEX, Testim and our product candidates at terms acceptable to us;

•

the costs associated with acquiring and the ability to acquire additional product candidates or approved products;

•

the ability to enroll patients in clinical trials for XIAFLEX in the expected timeframes;

•

the ability to obtain authorization from U.S. Food and Drug Administration (FDA) or other regulatory authority to initiate clinical trials of XIAFLEX within the expected timeframes;

•

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

•

results of clinical trials;

•

meeting applicable regulatory standards, filing for and receiving required regulatory approvals;

•

complying with the terms of our licenses and other agreements;

•

changes in industry practice;

•

changes in the markets for, acceptance by the medical community of, and exclusivity protection for, our products and product candidates as a result of the Patient Protection and Affordable Care Act and the associated reconciliation bill or any amendments thereto or any full or partial repeal thereof; and

•

one-time events.

These risks and uncertainties are not exhaustive. For a more detailed discussion of risks and uncertainties, see “Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 and “Item 1A – Risk Factors” of Part II of this Quarterly Report. Other sections of this Quarterly Report and our other SEC filings, verbal or written statements and presentations may include additional factors which could materially and adversely impact our future results, performance, achievements and prospects. Moreover, we operate in a very competitive and rapidly changing environment. Given these risks and uncertainties, we cannot guarantee that the future results, performance, achievements and prospects reflected in forward-looking statements will be achieved or occur. Therefore, you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly any forward-looking statement other than as required under the federal securities laws. We qualify all forward-looking statements by these cautionary statements.

Special Note Regarding Market and Clinical Data

We obtained the market data used throughout this Quarterly Report from our own research, surveys and/or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data. Similarly, we believe our internal research is reliable but it has not been verified by any independent sources.

This Quarterly Report may include discussion of certain clinical studies relating to our products and/or product candidates. These studies typically are part of a larger body of clinical data relating to such products or product candidates, and the discussion herein should be considered in the context of the larger body of data.

Overview

We are a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences, such as urologists, endocrinologists, certain targeted primary care physicians, hand surgeons, subsets of orthopedic, general, and plastic surgeons who focus on the hand, and rheumatologists. We currently have approximately 560 employees, including a sales and marketing organization of approximately 300 people.

We currently market two products in the U.S.:

•

Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. Testim has been approved in the U.S. by the FDA.

•

XIAFLEX is a proprietary, injectable collagenase enzyme for the treatment of Dupuytren’s. XIAFLEX received approval from the FDA in February 2010 for the treatment of adult Dupuytren’s patients with a palpable cord. Dupuytren’s is a condition that affects the connective tissue that lies beneath the skin in the palm. The disease is progressive in nature. Typically, nodules develop in the palm as collagen deposits accumulate. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient’s fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment.

We also have received marketing approval for Testim in Belgium, Canada, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. Ferring International Center S.A. and Paladin Labs Inc. commercialize Testim on our behalf in certain European countries and Canada, respectively.

Our current product pipeline includes:

Phase III:

•

XIAFLEX for the treatment of Peyronie’s disease (Peyronie’s)

Phase II

•

XIAFLEX for the treatment of Adhesive Capsulitis (Frozen Shoulder syndrome)

Phase I:

•

AA4010, treatment for overactive bladder using our transmucosal film delivery system

•

A Fentanyl pain product candidate using our transmucosal film delivery system.

In addition to the above, we have the rights to develop other compounds for the treatment of pain using our transmucosal film delivery system and other products using our transmucosal film technology for treatment of urologic disease and for hormone replacement. We also have the option to license additional indications for XIAFLEX other than dermal products for topical administration.

We have never been profitable and have incurred an accumulated deficit of $358.7 million as of September 30, 2010. We anticipate that commercialization expenses, development costs, and in-licensing milestone payments related to existing and new product candidates and costs related to enhancing our core technologies will continue to increase in the near term. In particular, we expect to incur increased costs for selling and marketing as we continue to market Testim and XIAFLEX, and to incur additional development and pre-commercialization costs for existing and new product opportunities, acquisition costs for new product opportunities and general and administration expense to support the infrastructure required for operational growth. We expect that quarterly and annual results of operations will fluctuate for the foreseeable future due to several factors, including launch of, market acceptance and pricing of XIAFLEX, the overall growth of the androgen market, patient and insurer response to current economic conditions, the timing and extent of research and development efforts and the outcome and extent of clinical trial activities.

Recent Developments

On October 11, 2010, we announced that the first subject had been dosed in what we plan to be the largest ever global phase III program of XIAFLEX for the treatment of Peyronie’s disease, a devastating disease that is estimated to affect approximately 5% of adult men. We anticipate completing enrollment for these double-blind studies in the first quarter of 2011 and reporting top-line results in first half of 2012.

On October 12, 2010, the United States Patent and Trademark Office (“USPTO”) issued U.S. Patent No. 7,811,560 with independent claims that recite a drug product (XIAFLEX), a process for producing the drug product, and pharmaceutical formulations comprising the drug product. We expect the pharmaceutical formulation of XIAFLEX to have patent protection through 2028.

It is our policy to continually evaluate and provide reserves for inventory on hand that is in excess of expected future demand. In making this evaluation, we must make judgments concerning future product demand and monitor the expiration dates of our products. Prior to the approval and launch of XIAFLEX, we produced finished packaged inventories sufficient to meet a significant demand. As a result, finished goods inventory at September 30, 2010 includes $4.9 million of XIAFLEX inventory that will expire in 2011. Given the limited historical information with the recent launch of XIAFLEX, it is not currently possible to reasonably predict the future demand pattern for XIAFLEX. However, it is possible that some portion of this inventory could expire prior to its sale.

Results of Operations

Three Months Ended September 30, 2010 and 2009

Net revenues. Net revenues for the three months ended September 30, 2010 and 2009 comprise the following:


	Three months ended September 30,
	2010			2009			Change			% Change
	(in millions)
Testim revenues-
Net U.S. revenues	$	47.4		$	40.2		$	7.2			17.9	%
International product shipments		0.4			0.2			0.2			100.0	%
International contract revenues		0.1			0.9			(0.8	)		-88.9	%

		47.9			41.3			6.7			16.3	%

XIAFLEX revenues-
Net U.S. revenues		4.6			—			4.6			n/a
International contract revenues		1.1			0.9			0.2			22.1	%

		5.7			0.9			4.8			536.0	%

Total net revenues	$	53.6		$	42.1		$	11.5			27.3	%

Revenue allowances as a percentage of
gross U.S. revenues		22.3	%		23.9	%		-1.6	%

The increase in Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing. According to National Prescription Audit data from IMS Health, a pharmaceutical market research firm (IMS), Testim total prescriptions for the third quarter of 2010 grew 7.9 % over the comparable period of 2009. We believe that Testim prescription growth in

the 2010 period over the 2009 period was driven by physician and patient acceptance that Testim provides better patient outcomes compared to competing products, the shift in prescriptions away from the testosterone patch product and the other gel product to Testim, and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim revenues in the third quarter of 2010 benefited from price increases having a cumulative impact of 8% over the comparable 2009 period. International contract revenues shown in the above table represent the amortization of deferred up-front and milestone payments we previously received under our out-licensing agreements. Testim international contract revenue for the third quarter of 2010 decreased compared to 2009 as a result of the termination of the license and distribution agreement with Ipsen Pharma GmbH (Ipsen) in late 2009. During 2009, the remaining balance of milestone payments previously received from Ipsen was recognized as revenue in connection with this contract termination.

Net revenues for the three months ended September 30, 2010 include $4.6 million of U.S. product sales of XIAFLEX for Dupuytren’s which was launched late in the first quarter of this year. Under our agreements with our specialty distributor and specialty pharmacy customers, they have the right to return XIAFLEX for any reason for up to six months after product expiration. Since XIAFLEX is new to the marketplace, we are currently assessing the flow of product through our distribution channel. Because current authoritative guidance precludes revenue recognition until a reasonable estimate of returns can be made, we are deferring the recognition of revenue, and related product costs, of XIAFLEX product shipments to our specialty distributor and specialty pharmacy customers until an estimate of returns can be made. However, we are recognizing XIAFLEX product sale revenues, and related product costs, at the time the product is shipped to physicians for administration to patients. Such revenues have been reduced for estimated discounts and allowances based on the contractual terms of sales. As of September 30, 2010, the amount of deferred XIAFLEX revenues was approximately $1.1 million. The increase in XIAFLEX international contract revenue for the third quarter of 2010 over the comparable period in 2009 is due to the $15 million European MAA milestone payment we received from Pfizer during the first quarter of 2010 which is being amortized to revenue over the estimated remaining contract life of the December 2008 development, commercialization and supply agreement with Pfizer (the Pfizer Agreement).

Revenue allowances as a percentage of gross U.S. revenues for third quarter of 2010 compared to that of 2009 decreased principally as a result of a lower revenue allowance percentage on XIAFLEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold was $11.6 million and $9.5 million for the three months ended September 30, 2010 and 2009, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the three months ended September 30, 2010 over the comparable period in 2009 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 78.4% in the third quarter of 2010 compared to 77.4% in the comparable 2009 period. The increase in the gross margin rate is the result of the contribution of high margin XIAFLEX product sales and the impact of year-over-year price increases on U.S. Testim revenues, partially offset by a decline in Testim international contract revenues.

Research and development expenses. Research and development spending for the quarter ended September 30, 2010 was $14.4 million, compared to $12.8 million for the quarter ended September 30, 2009. The increase in expense results principally from the commencement of start-up activities related to the Phase III XIAFLEX clinical trials for Peyronie’s and costs related to development of a larger scale production process.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $40.3 million for the quarter ended September 30, 2010 compared with $34.7 million for the year-ago quarter. The increase was primarily due to the addition of the sales and reimbursement field force and infrastructure, and promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense in 2010 relates primarily to the costs associated the Company’s two year $30 million revolving credit line which was secured in August 2009.

Nine Months Ended September 30, 2010 and 2009

Net revenues. Net revenues for the nine months ended September 30, 2010 and 2009 comprise the following:


	Nine months ended September 30,
	2010			2009			Change			% Change
	(in millions)
Testim revenues-
Net U.S. revenues	$	137.8		$	109.7		$	28.1			25.7	%
International product shipments		1.3			1.1			0.2			20.3	%
International contract revenues		0.5			2.6			(2.1	)		-81.5	%

		139.6			113.3			26.3			23.2	%

XIAFLEX revenues-
Net U.S. revenues		6.7			—			6.7			n/a
International contract revenues		3.3			2.7			0.6			22.1	%

		10.0			2.7			7.3			274.0	%

Total net revenues	$	149.6		$	116.0		$	33.6			29.0	%

Revenue allowance as a percentage of :
gross U.S. revenues		22.2	%		22.5	%		-0.3	%

The increase in gross Testim net U.S. revenues resulted primarily from growth in Testim demand resulting from increased prescriptions and increases in pricing. According to National Prescription Audit data from IMS, Testim total prescriptions for the first nine months of 2010 grew 11.3% over the comparable period of 2009. We believe that Testim prescription growth in the 2010 period over the 2009 period was driven by physician and patient acceptance that Testim provides better patient outcomes compared to competing products, the shift in prescriptions away from the testosterone patch product and the other gel product to Testim, and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim revenues for the first nine months of 2010 benefited from price increases having a cumulative impact of 9% over the comparable 2009 period. International contract revenues shown in the above table represent the amortization of deferred up-front, milestone and royalty payments we previously received under our out-licensing agreements. Testim international contract revenue for the first nine months of 2010 decreased compared to 2009 as a result of the termination of the license and distribution agreements with Ipsen in late 2009. During 2009, the remaining balance of milestone payments previously received from Ipsen was recognized as revenue in connection with this contract termination.

Net revenues for the nine months ended September 30, 2010 include $6.7 million of initial U.S. product sales of XIAFLEX for Dupuytren’s which was launched late in the first quarter of this year. Under our agreements with our specialty distributor and specialty pharmacy customers, they have the right to return XIAFLEX for any reason for up to six months after product expiration. Since XIAFLEX is new to the marketplace, we are currently assessing the flow of product through our distribution channel. Because current authoritative guidance precludes revenue recognition until a reasonable estimate of returns can be made, we are deferring the recognition of revenue, and related product costs, of XIAFLEX

product shipments to our specialty distributor and specialty pharmacy customers until an estimate of returns can be made. However, we are recognizing XIAFLEX product sale revenues, and related product costs, at the time the product is shipped to physicians for administration to patients. Such revenues have been reduced for estimated discounts and allowances based on the contractual terms of sales. As of September 30, 2010, the amount of deferred XIAFLEX revenues was approximately $1.1 million. The increase in XIAFLEX international contract revenue for the first nine months of 2010 over the comparable period in 2009 is due to the $15 million European MAA milestone payment we received from Pfizer during the first quarter of 2010 which is being amortized to revenue over the estimated remaining contract life of the Pfizer Agreement.

Revenue allowances as a percentage of gross U.S. revenues for the first nine months of 2010 compared to that of 2009 decreased as a result of a lower revenue allowance percentage on XIAFLEX gross U.S. revenues, a decrease in the rate of Testim coupon usage and favorable adjustments in the percentage of revenue allowance for Testim wholesaler service fees, partially offset by an increase in Testim rebates due principally to contract changes.

Cost of goods sold. Cost of goods sold was $32.6 million and $26.7 million for the nine months ended September 30, 2010 and 2009, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to the Company’s licensors, and the amortization of the deferred costs associated with the Pfizer Agreement. The increase in cost of goods sold for the nine months ended September 30, 2010 over the comparable period in 2009 was principally attributable to the increase in Testim units sold. Gross margin on our net revenues was 78.2% in the first nine months of 2010 compared to 77.0% in the comparable 2009 period. The increase in the gross margin rate is the result of the contribution of high margin XIAFLEX product sales and the impact of year-over-year price increases on U.S. Testim revenues, partially offset by a decline in international contract revenues.

Research and development expenses. Research and development spending for the nine months ended September 30, 2010 was $34.1 million, compared to $40.0 million for the nine months ended September 30, 2009. The reduction in expense was the result of the shift of XIAFLEX production activity from manufacturing development to commercial inventory production that commenced in the fourth quarter of 2009, partially offset by commencement of start-up activities related to the Phase III XIAFLEX clinical trials for Peyronie’s and costs related to development of a larger scale production process.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $117.7 million for the nine months ended September 30, 2010 compared with $90.5 million for the year-ago comparable period. The increase was primarily due to the addition of the sales and reimbursement field force and infrastructure, and promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S.

Interest income. Interest income relates primarily to interest earned on cash, cash equivalents and short-term investments.

Interest expense. Interest expense in 2010 relates primarily to the costs associated the Company’s two-year $30 million revolving credit line which was secured in August 2009.

Provision for income taxes. Given our history of taxable losses, we have not to date incurred income taxes. The provision for income taxes of $0.6 million for the first nine months of 2009 related to the federal alternative minimum tax regulations which were amended in late 2009 to eliminate the requirement for this tax provision.

Liquidity and Capital Resources

We had $142.4 million and $182.0 million in cash and cash equivalents as of September 30, 2010 and December 31, 2009, respectively. We believe that our current financial resources and sources of liquidity will be adequate for the Company to fund our anticipated operations beyond reaching profitability based on our current plans and expectations. We may, however, elect to raise additional funds prior to that time in order to enhance our sales and marketing efforts for additional products we may acquire, commercialize any product candidates that receive regulatory approval, acquire or in-license approved products, product candidates or technologies for development and to maintain adequate cash reserves to minimize financial market fundraising risks. Insufficient funds may cause us to delay, reduce the scope of, or eliminate one or more of our development, commercialization or expansion activities. Our future capital needs and the adequacy of our available funds will depend on many factors, including:

•

our ability to successfully launch and increase sales in the U.S. of XIAFLEX for Dupuytren’s;

•

obtaining and maintaining third-party payor coverage and reimbursement for our products;

•

the cost of manufacturing, distributing, marketing and selling our products;

•

the scope, rate of progress and cost of our product development activities;

•

the costs of supplying and commercializing our products and product candidates;

•

the effect of competing technological and market developments;

•

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, including costs associated with the matter of Auxilium Pharmaceuticals, Inc. and CPEX Pharmaceuticals, Inc. vs. Upsher-Smith Laboratories, Inc. filed on December 4, 2008 in the United States District Court for the District of Delaware and the outcome thereof;

•

the extent to which we acquire or invest in businesses and technologies, although we currently have no commitments or agreements relating to any of these types of transactions; and

•

entry into the marketplace of competitive products.

If additional funds are required, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially and adversely impact our growth plans and our financial condition or results of operations. Additional equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

The financial covenants contained in our $30.0 million revolving credit agreement with Silicon Valley Bank (SVB) include a quarterly and cumulative profitability and loss restriction. The Company has obtained waivers from SVB with respect to the application of these covenants to the quarters ended June 30 and September 30, 2010. As of September 30, 2010, we had no outstanding borrowing under this agreement.

Sources and Uses of Cash

Cash used in operations was $35.6 million and $31.9 million for the nine months ended September 30, 2010 and 2009, respectively. Cash used in operations for the nine months ended September 30, 2010 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges. This cash usage reflects the build of inventory supporting the launch of XIAFLEX and an offsetting net cash receipt of approximately $13.7 million in the first quarter of 2010 under our XIAFLEX license agreements, representing the $15 million European MAA milestone payment received from Pfizer and the associated payment of approximately $1.3 million to BioSpecifics Technologies Corp. for their share of this milestone. Cash used in operations for the nine months ended September 30, 2009 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges, and the payment of $9.4 million of costs accrued in 2008 in connection with the Pfizer Agreement.

Cash used in investing activities was $8.2 million for the nine months ended September 30, 2010 compared to $8.3 million for the nine months ended September 30, 2009. The cash impact of investing activities relates primarily to our investments in property and equipment, net of redemptions of long-term investments. Our investments in property and equipment related primarily to improvements made to our Horsham biological manufacturing facility and our information technology infrastructure.

Cash provided by financing activities was $4.2 million and $118.6 million for the nine months ended September 30, 2010 and 2009, respectively. Cash provided by financing activities for 2010 resulted primarily from cash receipts from stock option exercises, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers, and from Employee Stock Purchase Plan purchases. Cash provided by financing activities for 2009 represents primarily the $115.7 million in net proceeds provided by the September 2009 common stock offering and the cash receipts from stock option exercises, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers and employees, from Employee Stock Purchase Plan purchases.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

New Accounting Pronouncements

See Note 1(d) - New Accounting Pronouncements to the Company’s Consolidated Financial Statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks in the normal course of our business, including changes in interest rates and exchange rates. There have been no significant changes in our exposure to market risks since December 31, 2009. Refer to “Item 7 A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2009 for additional information.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their respective evaluations as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report are effective to provide reasonable assurance that the information required to be disclosed in the reports we file under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. A controls system cannot provide absolute assurances, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors.

In addition to the other information contained in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 in evaluating our business, financial position, future results and prospects. The information presented below updates and supplements those risk factors for the legislation identified below which was signed into law in March 2010 and should be read in conjunction with the risks and other information contained in that Form 10-K and this Quarterly Report. The risks described in our Form 10-K, as updated below, are not the only risks facing our company. Additional risks that we do not presently know or that we currently believe are immaterial could also materially and adversely affect our business, financial position, future results and prospects.

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably and increase competition.

In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the associated reconciliation bill (collectively, the Healthcare Reform Law), which include a number of healthcare reform provisions and requires most U.S. citizens to have health insurance. Effective January 1, 2010, the new law increases the minimum Medicaid drug rebates for pharmaceutical companies, expands the 340B drug discount program, and makes changes to affect the Medicare Part D coverage gap, or “donut hole.” The law also revises the definition of “average manufacturer price” for reporting purposes (effective October 1, 2010), which could increase the amount of the Company’s Medicaid drug rebates to states, once the provision is effective. The new law also imposes a significant annual fee on companies that manufacture or import branded prescription drug and biological products (beginning in 2011). Substantial new provisions affecting compliance also have been added, which may require us to modify our business practices with healthcare practitioners.

In addition, the new law includes provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the U.S. Food and Drug Administration (FDA). The new law also establishes an abbreviated licensure pathway for products that are biosimilar to FDA-approved biological products, such as XIAFLEX. As a result, we could face competition from other pharmaceutical companies that develop biosilimar versions of our biological product XIAFLEX that do not infringe our patents or other proprietary rights. Specifically, the Health Reform Law established an abbreviated licensure pathway for products that are “biosimilar” to or “interchangeable” with an FDA-approved biological product, such as XIAFLEX.

The reforms imposed by the new law will significantly impact the pharmaceutical industry; however, the full effects of Healthcare Reform Law cannot be known until these provisions are implemented and the Centers for Medicare & Medicaid Services and other federal and state agencies issue applicable regulations or guidance. Furthermore, legislation repealing or replacing all or part of the Healthcare Reform Law may be enacted or courts may issue rulings suspending or otherwise affecting all or part of the Healthcare Reform Law, and these changes could significantly alter any advantages or disadvantages to the Company currently stemming from the Healthcare Reform Law. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products.

The cost of pharmaceuticals continues to generate substantial governmental interests. We expect to experience pricing pressures in connection with the sale of our products due to the trend toward managed healthcare, the increasing influence of managed care organizations and additional legislative proposals. Our results of operations could be adversely affected by current and future healthcare reforms.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table summarizes the Company’s purchases of its common stock for the three months ended September 30, 2010:

Period

Total Number of
Shares (or Units)
Purchased

Average Price
Paid Per Share (or
Unit)

Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs

July 1, 2010 to July 31, 2010

32,080

22.22

Not applicable

Aug. 1, 2010 to Aug. 31, 2010

None

Not applicable

Sept. 1, 2010 to Sept. 30, 2010

None

Not applicable

Total

32,080

⁽¹⁾

22.22

Not applicable

(1)

Represents shares purchased from Armando Anido, Chief Executive Officer and President of the Company, pursuant to the Company’s 2004 Equity Compensation Plan to satisfy such individual’s tax liability with respect to the vesting of resticted stock issued in accordance with Rule 16 b-3 of the Securities Exchange Act of 1934.

Unregistered Sale of Equity Securities

None.

Use of Proceeds

None.

Item 6.

Exhibits.

The information required by this Item is set forth in the Exhibit Index hereto which is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


				AUXILIUM PHARMACEUTICALS, INC.

Date: November 8, 2010				/s/ Armando Anido
				Armando Anido
				Chief Executive Officer and President
				(Principal Executive Officer)

				AUXILIUM PHARMACEUTICALS, INC.

Date: November 8, 2010				/s/ James E. Fickenscher
				James E. Fickenscher
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

10.1*		Employment Agreement, dated October 25, 2010, by and between the Registrant and Alan Wills.

10.2*		First Amendment to the Employment Agreement by and between the Registrant and Edward J. Arcuri, Ph.D, dated November 1, 2010.

10.3*		First Amendment to the Amended and Restated Employment Agreement by and between the Registrant and Benjamin J. Del Tito, Jr., Ph.D., dated November 1, 2010.

10.4*		Form of Nonqualified Stock Option Agreement for awards to Non-Employee Directors under the Registrant’s 2004 Equity Compensation Plan, as amended.

31.1		Certification of Armando Anido, the Registrant’s Principal Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a).

32		Certification of Armando Anido, the Registrant’s Principal Executive Officer, and James E. Fickenscher, the Registrant’s Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

101.INS†		XBRL Instance Document

101.SCH†		XBRL Taxonomy Extension Schema Document

101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB†		XBRL Taxonomy Extension Label Linkbase Document

101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document

*	Indicates management contract or compensatory plan or arrangement.

†

XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company