Pozen (POZN) 10-Q 2004 Q0 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2003

OR

¨ 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 000-31719

POZEN Inc.

(Exact name of registrant as specified in its charter)

Delaware	62-1657552
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1414 Raleigh Road

Suite 400

Chapel Hill, North Carolina 27517

(Address of principal executive offices, including zip code)

(919) 913-1030

(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.x Yes¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).x Yes¨ No

The number of shares outstanding of the registrant’s common stock as of October 15, 2003 was 28,486,655.

POZEN Inc.

(A Development Stage Company)

FORM 10-Q

For the Three and Nine Months Ended September 30, 2003

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Balance Sheets as of September 30, 2003 and December 31, 2002	1
	Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 and Period From Inception (September 26, 1996) Through September 30, 2003	2
	Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 and Period From Inception (September 26, 1996) Through September 30, 2003	3
	Notes to Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters for a Vote of Security Holders	18
Item 6.	Exhibits and Reports on Form 8-K	19
Signatures		20
Exhibit Page		21

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POZEN Inc.

(A Development Stage Company)

BALANCE SHEETS

(Unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	65,362,275		$	50,056,251
Prepaid expenses and other current assets		79,739			553,371
Total current assets		65,442,014			50,609,622
Equipment, net of accumulated depreciation		354,991			425,369
Total assets	$	65,797,005		$	51,034,991
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	451,170		$	179,374
Accrued expenses		2,540,716			1,657,074
Total current liabilities		2,991,886			1,836,448
Long-term liabilities:
Deferred revenue		25,612,980			—
Total liabilities		28,604,866			1,836,448
Common stock, $0.001 par value, 90,000,000 shares authorized; 28,482,655 and 28,147,039 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively		28,483			28,147
Additional paid-in capital		144,786,724			144,036,491
Deferred compensation		(21,687	)		(510,130	)
Deficit accumulated during the development stage		(107,601,381	)		(94,355,965	)
Total stockholders’ equity		37,192,139			49,198,543
Total liabilities and stockholders’ equity	$	65,797,005		$	51,034,991

See accompanying Notes to Financial Statements.

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POZEN Inc.

(A Development Stage Company)

Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Period From Inception (September 26, 1996) Through September 30,
	2003			2002			2003			2002			2003
Revenue:
Licensing revenue	$	1,886,998			—		$	1,886,998			—		$	1,886,998
Operating expenses:
General and administrative		2,527,858			1,454,558			7,312,061			4,895,463			30,327,588
Research and development		3,219,415			4,024,353			8,215,224			14,827,078			85,152,106
Total operating expenses		5,747,273			5,478,911			15,527,285			19,722,541			115,479,694
Other Revenue:
Interest income		128,309			244,982			394,871			843,591			6,925,793
Net loss		(3,731,966	)		(5,233,929	)		(13,245,416	)		(18,878,950	)		(106,666,903	)
Non-cash preferred stock charge		—			—			—			—			27,617,105
Preferred stock dividends		—			—			—			—			934,478
Net loss attributable to common stockholders	$	(3,731,966	)	$	(5,233,929	)	$	(13,245,416	)	$	(18,878,950	)	$	(135,218,486	)
Basic and diluted net loss per common share	$	(0.13	)	$	(0.19	)	$	(0.47	)	$	(0.67	)
Shares used in computing basic and diluted net loss per common share		28,407,093			28,100,495			28,276,105			28,072,252

See accompanying Notes to Financial Statements.

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POZEN Inc.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,						Period from Inception (September 26, 1996) Through September 30,
	2003			2002			2003
Operating activities
Net loss	$	(13,245,416	)	$	(18,878,950	)	$	(106,666,903	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		102,602			83,089			498,371
Loss on disposal of equipment		—			—			27,495
Amortization of deferred compensation		488,443			2,197,991			10,853,594
Noncash financing charge		—			—			450,000
Changes in operating assets and liabilities:
Prepaid expenses, accrued interest receivable, and other assets		473,632			2,655			(79,739	)
Accounts payable and accrued expenses		1,155,438			(1,464,565	)		2,991,886
Deferred revenue		25,612,980						25,612,980
Net cash provided by (used in) operating activities		14,587,679			(18,059,780	)		(66,312,316	)
Investment activities
Purchase of equipment		(32,224	)		(417,074	)		(880,857	)
Net cash used in investing activities		(32,224	)		(417,074	)		(880,857	)
Financing activities
Proceeds from issuance of preferred stock		—			—			48,651,850
Proceeds from issuance of common stock		750,569			193,989			80,061,583
Proceeds from notes payable		—			—			3,000,000
Proceeds from stockholders’ receivables		—			—			1,004,310
Payment of dividends		—			—			(162,295	)
Net cash provided by financing activities		750,569			193,989			132,555,448
Net increase (decrease) in cash and cash equivalents		15,306,024			(18,282,865	)		65,362,275
Cash and cash equivalents at beginning of period		50,056,251			73,958,724			—
Cash and cash equivalents at end of period	$	65,362,275		$	55,675,859		$	65,362,275
Supplemental schedule of cash flow information
Cash paid for interest	$	—		$	—		$	190,790
Supplemental schedule of noncash investing and financing activities
Conversion of notes payable to preferred stock	$	—		$	—		$	3,000,000
Preferred stock dividend	$	—		$	—		$	772,183
Forfeiture of common stock options and warrants	$	—		$	—		$	314,379
Conversion of preferred stock warrants to common stock	$	—		$	—		$	1,080,001

See accompanying Notes to Financial Statements.

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POZEN Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization

POZEN Inc. (“POZEN” or the “Company”) was incorporated in the state of Delaware on September 25, 1996. We are a pharmaceutical company developing therapeutic advancements in a cost effective manner. Our product development efforts are focused on diseases with unmet medical needs where we can improve efficacy, safety, and/or patient convenience. Since our inception, we have developed the largest and most advanced product pipeline in the field of migraine.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Statements—The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments necessary to present fairly the balance sheets, statements of operations and statements of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. It is presumed that users of this interim financial information have read or have access to the audited financial statements and footnote disclosure for the preceding fiscal year contained in the Company’s Annual Report on Form 10-K. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Revenue Recognition—The Company’s licensing agreements have terms that include up-front payments upon contract signing, additional payments if and when certain milestones in the product’s development or commercialization are reached, and royalty payments based on future product sales. These agreements are accounted for in accordance with SEC Staff Accounting Bulletin 101, “Revenue Recognition” (“SAB 101”), and Emerging Issues Task Force 00-21 (“EIFT 00-21”), “Revenue Arrangements with Multiple Deliverables.”

Under SAB 101, recognition of revenue from non-refundable up-front payments is deferred by the Company upon receipt and recognized over the period ending on the anticipated date of regulatory approvals, as specified in the agreements relating to the product candidates.

Milestone payments are recognized as revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement and (ii) the fees are non-refundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.

Royalty revenue will be recognized with respect to the manufacture, sale or use of the Company’s products or technology. For those arrangements where royalties are reasonably estimable, the Company will recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following period. For those arrangements where royalties are not reasonably estimable, the Company will recognize revenue upon receipt of royalty statements from the licensee.

Stock-based Compensation—The Company accounts for non-cash stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” which states that no compensation expense is recognized for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the estimated fair value of the Company’s common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair market value of the Company’s common stock at the grant date, the difference between the fair market value of the Company’s common stock and the exercise price of the stock option is recorded as deferred compensation.

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In connection with the grant of stock options to employees, the Company recorded no deferred compensation in the nine months ended September 30, 2003. Deferred compensation recognized in prior periods was recorded as a component of stockholders’ equity and is being amortized as charges to operations over the vesting period of the options using the straight-line method. The vesting period of the options is generally three or four years. The Company recorded amortization of deferred compensation of $67,000 and $717,000 for the three-month periods, and $488,000 and $2,198,000 for the nine-month periods, ended September 30, 2003 and 2002, respectively.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	Nine Months Ended September 30,
	2003			2002
Net loss attributed to common stockholders as reported	$	(13,245,416	)	$	(18,878,950	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		488,443			2,197,992
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects		(2,531,820	)		(4,445,430	)
Pro forma net loss attributed to common stockholders	$	(15,288,793	)	$	(21,126,388	)
Earnings per share
Net loss per common share as reported – basic and diluted	$	(0.47	)	$	(0.67	)
Net loss per common share pro forma – basic and diluted	$	(0.54	)	$	(0.75	)
Weighted-average shares used in computing basic and diluted net loss per common share		28,276,105			28,072,252

Net Loss Per Share—Basic and diluted net loss per common share amounts are presented in conformity with Statement of Financial Accounting Standards No. (“SFAS”) 128, “Earnings per Share,” for all periods presented. In accordance with SFAS 128, basic and diluted net loss per common share amounts have been computed using the weighted-average number of shares of common stock outstanding for the nine months ended September 30, 2003 and 2002.

3. License Agreements

The Company has entered into various license agreements to further develop, sell and manufacture its product candidates.

In June 2003, the Company entered into an agreement with Nycomed Danmark ApS (“Nycomed”) for MT 100. The Company received an upfront licensing fee from Nycomed of $500,000. The non-refundable portion of the payment has been deferred and is being amortized over the 30 months beginning in July 2003 and ending in December 2005, representing the anticipated period during which marketing approval will be sought in the four Nordic countries covered under the agreement. Upon the approval in the United Kingdom of the Company’s Marketing Authorization Application, the remaining portion of the payment, deferred upon receipt, will be amortized through December 2005. Potential milestone payments totaling $1.0 million will be due upon the occurrence of certain regulatory approvals. In addition, Nycomed will pay a royalty on sales of MT 100. Milestone payments and royalty revenue will be recognized as described in Note 2 above.

In June 2003, the Company entered into an agreement with GlaxoSmithKline (“GSK”) for certain triptan combinations developed using the MT 400 technology. The Company received from GSK non-refundable initial licensing and patent-issuance milestone fees totaling $25.0 million. Recognition of this revenue has been deferred and is being amortized over 42 months beginning in July 2003. The 42 months represent the period during which the Company will be engaged in research and development and the regulatory submission and approval process for the MT 400 technology. Milestone payments and royalty

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revenue will be recognized as described in Note 2 above. Potential milestone payments totaling $55.0 million will be due relating to MT 400 development progress, regulatory submissions and approvals. GSK will also pay the Company royalties on sales of marketed products as well as potential sales performance milestones of up to $80.0 million, if certain sales thresholds are achieved. Milestone payments and royalty revenue will be recognized as described in Note 2 above.

In September 2003, the Company entered into an agreement with Xcel Pharmaceuticals, Inc. (“Xcel”) for MT 300. The Company received a non-refundable upfront licensing fee from Xcel of $2.0 million for development and commercialization rights of MT 300, which has been deferred and is being amortized over 22 months. The 22 months represents the period during which the Company expects to be engaged in further research and development and efforts relating to the regulatory submission for related approvals of MT 300. Under certain circumstances, if we elect not to seek approval of the NDA for MT 300, we would be required to pay to Xcel a termination fee of $1.0 million. Potential milestone payments totaling $8.0 million will be due upon certain future regulatory approvals and upon the achievement of a predetermined MT 300 sales threshold. Xcel will also pay a royalty on the combined sales of MT 300 and Xcel’s D.H.E. 45^® (dihydroergotamine mesylate) Injection. Milestone payments and royalty revenue will be recognized as described in Note 2 above.

Management believes current assumptions and other considerations used to estimate the period for revenue recognition are appropriate. However, if regulatory approvals relating to MT 100, MT 300 or MT 400 are accelerated, delayed or not ultimately obtained, then the amortization of revenues for these products will be accelerated or reduced accordingly.

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

This discussion of our financial condition and the results of operations should be read together with the financial statements, including the notes contained elsewhere in this Form 10-Q, and the financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2002, as filed on March 28, 2003.

This report includes “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual results, events and performance could differ materially from those in the forward-looking statements. The forward-looking statements are subject to a number of risks and uncertainties including those discussed herein under “Factors That May Affect Our Results.” We do not intend to update any of these factors or to publicly announce the results of any revisions to these forward-looking statements.

Overview

We are a pharmaceutical company developing therapeutic advancements in a cost effective manner. Our product development efforts are focused on diseases with unmet medical needs where we can improve efficacy, safety and/or patient convenience. Since our inception, we have developed the largest and most advanced product pipeline in the field of migraine. We have development and commercial alliances with GlaxoSmithKline, Xcel Pharmaceuticals, Inc. and Nycomed Danmark ApS.

Our business activities since inception have included:

Ø product candidate research and development;

Ø the design and funding of clinical trials for our product candidates;

Ø regulatory and clinical affairs;

Ø intellectual property prosecution and expansion; and

Ø business development, including product acquisition and/or licensing activities.

MT 100, a combination of metoclopramide hydrocloride and naproxen sodium, is being developed as an oral, first-line treatment for migraine pain and associated symptoms. We have completed all planned Phase 3 pivotal clinical trials for MT 100, which consistently demonstrated MT 100’s effectiveness in treating migraine pain. In July 2003, we submitted a New Drug Application (“NDA”) to the U.S. Food and Drug Administration (“FDA”) for MT 100. The NDA was accepted for filing by the FDA in October 2003. The FDA has agreed to review the NDA and accept our filing of the results of a rat carcinogenicity study in early 2004. In October 2002, we submitted a Marketing Authorization Application (“MAA”) in the

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United Kingdom (“UK”) for MT 100 to the Medicines and Healthcare Products Regulatory Agency (“MHRA”), which was formerly known as the Medicines Control Agency (“MCA”). If approved in the UK, we will seek approval in selected European countries through the European Union Mutual Recognition Procedure. In September 2003, we received a letter of comments from an advisory group to the MHRA relating to the MAA for MT 100. We intend to submit a response to the comments raised by the advisory group. We will need to satisfactorily address the issues raised by the advisory group, including providing additional support for the benefits of the combination, in order to obtain approval.

In June 2003, we signed a licensing agreement with Nycomed Danmark ApS (“Nycomed”) for the commercialization of MT 100 in four Nordic countries. Under the terms of the agreement, Nycomed will have exclusive rights in Denmark, Sweden, Norway and Finland to commercialize MT 100 upon its approval in these countries. Upon execution of the agreement, Nycomed paid us an upfront fee of $500,000. Potential milestone payments totaling $1.0 million will be paid upon the occurrence of certain regulatory approvals. In addition, Nycomed will pay us a royalty on sales of MT 100. Assuming satisfactory resolution of the issues raised in the September 2003 MAA comment letter discussed above, we intend to seek approval in Denmark, Sweden, Norway and Finland through the European Union Mutual Recognition Procedure.

Results from a recent Phase IIIb study showed that early treatment with MT 100 improves efficacy. The rate of sustained pain relief for migraine patients taking MT 100 in the study nears 50%. In addition, data was presented at the September 2003 XI Congress of the International Headache Society showing that a two-tablet dose of MT 100 appears to be more effective in providing pain relief at two hours than a single tablet dose of Imitrex^®50mg in migraine patients with nausea or severe pain at baseline. MT 100 was also shown to be well-tolerated in a long-term safety study.

MT 300, a proprietary formulation of injectable dihydroergotamine mesylate (“DHE”) in a pre-filled syringe, is being developed to provide long-lasting pain relief for patients needing a convenient injectable therapy for severe migraine attacks. We have completed all planned Phase 3 pivotal clinical trials for MT 300, which consistently demonstrated MT 300’s effectiveness in treating migraine pain. In December 2002, we submitted an NDA to the FDA for MT 300. The NDA was accepted for filing by the FDA in February 2003. In October 2003, we received a not-approvable letter from the FDA related to our MT 300 NDA. The letter was issued based on the FDA’s conclusion that MT 300 failed to achieve statistical significance versus placebo for the relief at two hours of the ancillary symptoms of migraine (nausea, sensitivity to light, and sensitivity to sound). The FDA did acknowledge, however, that MT 300 provided a statistically significant improvement over placebo on the pre-defined primary endpoint of sustained pain relief (defined as relief of migraine pain at two hours that is maintained throughout the next 22 hours) as well as relief of pain at two hours post dose. No clinical safety issues were identified in the letter, nor were any non-clinical issues cited as impacting the FDA’s decision to issue the not-approvable letter.

The sustained relief of the ancillary symptoms (defined as relief of ancillary symptoms at two hours that is maintained throughout the next 22 hours) was a secondary endpoint in both of the Phase 3 trials. The FDA had previously agreed to consider relying on the sustained relief analysis for the ancillary symptoms but ultimately concluded that relief of these symptoms, especially nausea, should be obtained at two hours post dose. The data we submitted indicated that MT 300 provided statistically significant sustained relief of the ancillary symptoms of migraine with the exception of sustained nausea relief in one of the two Phase 3 trials. We are committed to working with the FDA to seek to resolve the issues raised in the letter as soon as possible.

In September 2003, we signed an agreement with Xcel Pharmaceuticals, Inc. (“Xcel”) for the further development and commercialization of MT 300. Under the terms of the agreement, Xcel will have exclusive rights in the United States to commercialize MT 300. Pursuant to the terms of the agreement, Xcel paid us an upfront fee of $2.0 million. Under certain circumstances, if we elect not to seek approval of the NDA for MT 300, we would be required to pay to Xcel a termination fee of $1.0 million. Potential milestone payments of up to $8.0 million will be due upon certain future regulatory approvals and the achievement of a predetermined sales threshold on MT 300. Xcel will also pay us royalties on combined sales of MT 300 and Xcel’s D.H.E. 45^® (dihydroergotamine mesylate) Injection, once MT 300 is commercialized. A redacted copy of this agreement is included in this quarterly report as Exhibit 10.1.

Our MT 400 technology, which we refer to as MT 400, is being developed as a co-active acute migraine therapy, combining the activity of a triptan with that of a long-lasting non-steroidal anti-inflammatory drug (“NSAID”). In 2002, we completed a 972-patient Phase 2 clinical trial in which MT 400, using a marketed triptan and an NSAID, provided a greater than 50% improvement for sustained pain relief over triptan monotherapy with a similar side effect profile. Sustained pain relief is defined as patients achieving pain relief within two hours of dosing and neither relapsing nor using rescue medicine over the next 22 hours.

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In June 2003, we signed an agreement with GlaxoSmithKline (“GSK”) for the development and commercialization of proprietary combinations of a triptan (5-HT_1B/1D agonist) and a long-acting NSAID. The combinations covered by the agreement are among the combinations of MT 400. Under the terms of the agreement, GSK will have exclusive rights in the United States to commercialize all combinations which combine GSK’s triptans, including Imitrex^® (sumatriptan succinate) or Amerge^® (naratriptan hydrochloride), with a long-acting NSAID. We will be responsible for development of the combination product, while GSK will provide formulation development and manufacturing. Pursuant to the terms of the agreement, we received $25.0 million in initial payments from GSK following termination of the waiting period under the Hart-Scott-Rodino notification program and the issuance of a specified patent. Additionally, GSK will pay us potential milestone payments over the next several years of $55.0 million relating to development progress and regulatory submissions and approvals. GSK will also pay us royalties on sales of marketed products, and in addition, potential sales performance milestones of up to $80.0 million if certain sales thresholds are achieved. We plan to commence Phase 3 clinical trials in 2004.

In July 2003, the United States Patent Trademark Offices issued a patent for MT 400, which we believe strengthened our claims relating to pharmaceutical treatment methods that can be used for migraine patients. Rights under this newly issued patent are included in the licensing agreement with GSK.

In July 2003, we signed an exclusive option agreement with Nycomed, under which we may acquire a license to certain rights related to lornoxicam, an NSAID. We intend to explore the development of novel product candidates containing lornoxicam alone or in combination with other active ingredients for pain or other indications.

Historically, we have financed our operations and internal growth primarily through private placements of preferred stock and our initial public offering rather than through collaborative or partnership agreements. As described above, we have received $25.0 million in upfront payments from GSK and $2.0 million from Xcel under licensing agreements. These payments are not refundable or subject to future performance milestones. In July 2003, we received a $500,000 upfront payment from Nycomed as partial payment for the rights and license to commercialize MT 100 in the European Nordic countries. The receipt is subject to certain payments by us to Nycomed if, among other circumstances, the European MAA is permanently removed from consideration by the regulatory authorities in the UK.

We have incurred significant losses since our inception and have not generated any product revenue. As of September 30, 2003, our accumulated deficit was $107.6 million. Our historical operating losses have resulted principally from our research and development activities, including Phase 3 clinical trial activities for our product candidates MT 100 and MT 300, Phase 2 clinical trial activities using MT 400, and general and administrative expenses. We may continue to incur operating losses over the next several years as we complete our development of MT 100, MT 300 and MT 400 and apply for regulatory approval, develop other potential product candidates, and acquire and develop product portfolios in other therapeutic areas.

Our results may vary depending on many factors, including:

Ø the progress of MT 100, MT 300 and MT 400 in the clinical and regulatory process;

Ø the establishment and maintenance of collaborations for the development and commercialization of any of our migraine product candidates; and

Ø the acquisition and/or in-licensing, and development, of other therapeutic product candidates.

Our ability to generate revenue is dependent upon our ability, alone or with others, to successfully develop our migraine and other product candidates, obtain regulatory approvals and, alone or with others, successfully manufacture and market our future products.

Critical Accounting Policies

Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the United States in the preparation of our financial statements. Our accounting for revenue recognition is a critical accounting policy that requires management to make significant judgments, estimates and assumptions. The development and selection of the critical accounting policies, and the related disclosure for revenue recognition have been reviewed by the Audit Committee of the Board of Directors. The following presents information regarding any addition of or changes to our critical accounting assumptions, as well as the effect of changes in the material assumptions used to develop each estimate.

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Revenue Recognition: The Company’s licensing agreements have terms that include up-front payments upon contract signing, additional payments if and when certain milestones in the product’s development are reached, and royalty payments based on future product sales. These agreements are accounted for in accordance with SEC SAB 101, “Revenue Recognition”, and EITF 00-21, “Revenue Arrangements with Multiple Deliverables”.

Under SAB 101, recognition of revenue from non-refundable up-front payments is deferred by the company upon receipt and recognized over the period ending on the anticipated dates of regulatory approvals, as specified in the agreements relating to the product candidates.

Milestone payments are recognized as revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement and (ii) if the fees are non-refundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.

Royalty revenue will be recognized related to the manufacture, sale or use of the Company’s products or technology. For those arrangements where royalties are reasonably estimable, the Company will recognize revenue based on estimates of royalties earned during the applicable period and adjust for differences between the estimated and actual royalties in the following period. For those arrangements where royalties are not reasonably estimable, the Company will recognize revenue upon receipt of royalty statements from the licensee.

Effect if Different Assumptions Used: Management believes current assumptions and other considerations used to estimate the period for revenue recognition are appropriate. However, if regulatory approvals relating to MT 100, MT 300 or MT 400 are accelerated, delayed or not ultimately obtained, then the amortization of revenues for these products will be accelerated or reduced accordingly.

Three months ended September 30, 2003 compared to the three months ended September 30, 2002

Net loss per share: Net loss attributable to common stockholders for the quarter ended September 30, 2003 was $3,732,000 or $0.13 per share, as compared to a net loss of $5,234,000, or $0.19 per share, for the quarter ended September 30, 2002.

Revenue: We amortized $1,887,000 of licensing revenue for the quarter as compared to no revenue for the same period of 2002. Revenue resulted from development and commercialization agreements for MT 100, MT 300 and MT 400. Our agreements have terms that include up-front payments upon contract signing and additional payments if and when certain milestones in the product development or related milestones are reached. All up-front payments are being deferred and amortized over the period ending on the anticipated date of regulatory approvals, as specified in the agreements relating to the product candidates.

Research and development: Research and development expenses decreased by 20% to $3,219,000 as compared to the same period of 2002. The $805,000 decrease was due primarily to a decrease in development costs for MT 300. Costs associated with the development of MT 300 decreased by $880,000 primarily due to a reduction in Phase 3 clinical trial activities as compared to the same period of 2002. Additional research and development expenses, including departmental and other exploratory development, increased by $384,000, offset by a decrease of $309,000 in the amortization of deferred stock compensation. Total amortization of deferred stock compensation included in research and development expenses was $12,000 and $321,000 for the quarters ended September 30, 2003 and 2002, respectively. We have included in our research and development expenses the personnel costs related to our research activities and costs related to product development, clinical trial and toxicology activities and regulatory matters.

General and administrative: General and administrative expenses increased by 74% to $2,528,000 as compared to the same period of 2002. The $1,073,000 increase was due primarily to increased costs related to administrative, business development and public company activities. The cost of administrative activities increased by $750,000, which included a $666,000 compensation payment to our chief executive officer pursuant to a performance-based award issued under POZEN’s 2001 Long Term Incentive Plan. Business development activities increased by $319,000 due to pre-marketing activities and consulting costs for MT 100 and MT 300, and fees associated with the licensing of our products. Public company activities increased by $221,000 due to an increase in insurance, director compensation and compliance with securities regulations. Other departmental expense increased $125,000, offset by a decrease of $342,000 in the amortization of deferred compensation. Total amortization of deferred stock compensation included in general and administrative expenses was $55,000 and $396,000 for the quarters ended September 30, 2003 and 2002, respectively. General and administrative expenses consisted primarily of the costs of administrative personnel, facility infrastructure, business development expenses and public company activities.

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Interest income: Interest income decreased by 48% to $128,000 as compared to the same period of 2002. Interest income decreased due to a decrease in levels of cash and cash equivalents available for investing along with a decline in interest rates during the quarter ended September 30, 2003, as compared to the same period of 2002.

Nine months ended September 30, 2003 compared to the nine months ended September 30, 2002

Net loss per share: Net loss attributable to common stockholders for the nine-month period ended September 30, 2003 was $13,245,000, or $0.47 per share, as compared to $18,879,000, or $0.67 per share, for the same period of 2002.

Revenue: We amortized $1,887,000 of licensing revenue for the nine-month period ended September 30, 2003 as compared to no revenue for the same period of 2002. Revenue resulted from development and commercialization agreements for MT 100, MT 300 and MT 400. These agreements have terms that include up-front payments upon signing and additional payments if and when certain milestones in product development or other milestones are reached. All up-front payments are being deferred and amortized over the period ending on the anticipated date of regulatory approvals, as specified in the agreements relating to the product candidates.

Research and development: Research and development expenses decreased by 45% to $8,215,000 for the nine-month period ended September 30, 2003, as compared to the same period of 2002. The $6,612,000 decrease was due primarily to decreased costs associated with the development of MT 300 and MT 400, offset by an increase in the formulation development and clinical trial costs associated with exploratory research and development relating to potential new product candidates. MT 300 costs decreased by $3,372,000, primarily due to decreased cost associated with Phase 3 clinical trial activities. Costs associated with the development of MT 400 decreased by $3,105,000, primarily due to a decrease in the cost of obtaining drug substance, manufacturing and toxicology activities. Additional research and development expenses, including departmental expenses and other exploratory development, increased by $704,000, offset by a decrease of $839,000 in the amortization of deferred stock compensation. Total amortization of deferred stock compensation included in research and development expenses was $129,000 and $968,000 for the nine months ended September 30, 2003 and 2002, respectively. We have included in our research and development expenses the personnel costs related to our research activities and costs related to product development, clinical trial and toxicology activities, and regulatory matters.

General and administrative: General and administrative expenses increased by 49% to $7,312,000 for the nine-month period ended September 30, 2003 as compared to the same period of 2002. The $2,416,000 increase was due primarily to increased costs related to our administrative, business development and public company activities. The cost of administrative activities increased by $1,382,000, which included a $1.0 million compensation payment to our chief executive officer pursuant to a performance-based award issued under POZEN’s 2001 Long Term Incentive Plan. Marketing and business development activities increased by $1,296,000 due to pre-marketing activities and consulting costs for MT 100 and MT 300 and fees associated with the licensing of our products. Public company activities increased by $631,000 due to an increase in costs for insurance, director compensation and compliance with securities regulations. All other costs decreased by $23,000, offset by a decrease of $870,000 in the amortization of deferred compensation. Total amortization of deferred compensation included in general and administrative expenses was $360,000 and $1,230,000 for the nine months ended September 30, 2003 and 2002, respectively. General and administrative expenses consisted primarily of the costs of administrative personnel, facility infrastructure, marketing expenses and public reporting.

Interest income: Interest income decreased by 53% to $395,000 for the nine-month period ended September 30, 2003 from $844,000 for the same period of 2002. Interest income decreased due to decreased levels of cash and cash equivalents available for investing along with a decline in interest rates during the nine-month period ended September 30, 2003 as compared to the same period of 2002.

Income Taxes

As of September 30, 2003, we had federal and state net operating loss carryforwards of approximately $65,699,000 and research and development credit carryforwards of approximately $5,235,000. These federal and state net operating loss carryforwards and research and development credit carryforwards begin to expire in 2012. The utilization of the loss carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the net loss carryforwards. In addition, the maximum annual use of net loss carryforwards is limited in certain situations where changes occur in our stock ownership.

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Liquidity and Capital Resources

Since our inception, we have financed our operations and internal growth primarily through private placements of preferred stock and our initial public offering, resulting in aggregate net proceeds to us of $132.6 million. Additionally, we have received $27.5 million in upfront fees related to various licensing agreements. As of September 30, 2003, cash and cash equivalents totaled $65.4 million, an increase of $15.3 million as compared to December 31, 2002. The increase in cash and cash equivalents resulted primarily from licensing fees offset by expenses associated with our operating activities.

Cash used in operations of $14,588,000 during the nine months ended September 30, 2003 represented a net loss of $13,245,000 offset by non-cash charges of $591,000, a decrease in prepaid and other assets of $474,000 and an increase in accounts payable and other liabilities of $26,768,000. The increase in accounts payable and other liabilities included $25,613,000 of deferred revenue and an increase in accrued expenses related to our product development activities.

Cash provided by financing activities during the nine months ended September 30, 2003, which totaled $751,000, was generated by the exercise of stock options.

We believe that our existing liquidity and capital resources, including the initial license fees we have received, along with future milestone payments, and the proceeds from our initial public offering, will be sufficient to complete our on-going and planned clinical trials, to conduct appropriate development studies, and to satisfy our other currently anticipated cash needs for operating expenses for at least the next two years.

Factors That May Affect Our Results

Our business is subject to certain risks and uncertainties, each of which could materially adversely affect our business, financial condition, cash flows and results of operations. Additional risks that are not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

We depend heavily on the success of our product candidates, which may never be approved for commercial use. If we are unable to develop, gain approval of or commercialize those product candidates, we may never be profitable.

We anticipate that for the foreseeable future our ability to achieve profitability will be dependent on the successful development, approval and commercialization of our current product candidates, particularly MT 100 and MT 400. Many factors could negatively affect the success of our efforts to develop and commercialize our product candidates, including:

Ø negative, inconclusive or otherwise unfavorable results from any studies or clinical trials;

Ø an inability to obtain, or delay in obtaining, regulatory approval for the commercialization of our product candidates;

Ø an inability to establish and/or maintain collaborative arrangements with third parties for the manufacture and commercialization of our product candidates, or any disruption of any of these arrangements;

Ø a failure to achieve market acceptance of our product candidates;

Ø significant delays in any required studies or clinical trials;

Ø any demand by the FDA that we conduct additional clinical trials or other studies and the expenses relating thereto; and

Ø significant increases in the costs of any of our studies or clinical trials.

We have incurred losses since inception and we may continue to incur losses for the foreseeable future. We do not have a current source of product revenue.

We have incurred losses in each year since our inception and our only sources of current revenue are the payments we received pursuant to the agreements entered into with Nycomed for MT 100, Xcel for MT 300 and GSK for MT 400. As of September 30, 2003, we had an accumulated deficit of approximately $107.6 million. We expect to incur significant and increasing operating losses and do not know when or if we will generate product revenue.

We expect that the amount of our operating losses will fluctuate significantly from quarter to quarter as a result of increases and decreases in development efforts, the timing of payments that we may receive from others, and other factors. Our ability to achieve profitability is dependent on a number of factors, including our ability to:

Ø develop and obtain regulatory approvals for our product candidates;

Ø successfully commercialize our product candidates, which includes maintaining existing, and entering into new and maintaining new, collaborative agreements;

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Ø achieve milestones and earn royalties under our collaborative agreements; and

Ø secure contract manufacturing and distribution services.

If we, or our collaborators, do not obtain and maintain required regulatory approvals, we will be unable to commercialize our product candidates.

Our product candidates under development are subject to extensive domestic and foreign regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertisement, promotion, sale and distribution of pharmaceutical products. If we market our products abroad, they are also subject to extensive regulation by foreign governments. None of our product candidates have been approved for sale in the United States or any foreign market.

A separate NDA or supplement must be filed with respect to each indication for which marketing approval of a product is sought. Each NDA, in turn, requires the successful completion of preclinical, toxicology, genotoxicity and carcinogenicity studies, as well as clinical trials demonstrating the safety and efficacy of the product for that particular indication. We may not receive regulatory approval of any of the NDAs that we file with the FDA. If we are unable to obtain and maintain FDA and foreign governmental approvals for our product candidates, we, alone or through our collaborators, will not be permitted to sell them.

Approval of a product candidate may be conditioned upon certain limitations and restrictions as to the drug’s use, or upon the conduct of further studies, and is subject to continuous review. The FDA may also require us to conduct additional post-approval studies. These post-approval studies may include carcinogenicity studies in animals or further human clinical trials. The later discovery of previously unknown problems with the product, manufacturer or manufacturing facility may result in criminal prosecution, civil penalties, recall or seizure of products, or total or partial suspension of production, as well as other regulatory action against our product candidates or us. If approvals are withdrawn for a product, or if a product is seized or recalled, we would be unable to sell that product and our revenues would suffer.

We and our contract manufacturers are required to comply with the applicable FDA current Good Manufacturing Practices (“cGMP”) regulations, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation.

Further, manufacturing facilities must be approved by the FDA before they can be used to manufacture our product candidates, and are subject to additional FDA inspection. We, or our third-party manufacturers, may not be able to comply with cGMP regulations or other FDA regulatory requirements, resulting in a delay or an inability to manufacture the products.

Labeling and promotional activities are subject to scrutiny by the FDA and state regulatory agencies and, in some circumstances, the Federal Trade Commission. FDA enforcement policy prohibits the marketing of unapproved products as well as the marketing of approved products for unapproved, or off-label, uses. These regulations and the FDA’s interpretation of them may impair our ability to effectively market products for which we gain approval. Failure to comply with these requirements can result in regulatory enforcement action by the FDA. Further, we may not obtain the labeling claims we believe are necessary or desirable for the promotion of our product candidates.

With respect to MT 100, although we intend to submit a response to the comments raised in the letter from the advisory group to the MHRA, no assurance can be given that we will be able to satisfactorily address these issues, including providing additional support for the benefits of the MT 100 combination. Similarily, although we hope to work with the FDA to revisit the determination made in its not-approvable letter for MT 300, no assurance can be given that regulatory approval will be received.

Our need to collaborate with third parties to develop and commercialize our products may result in delays in product development and lost revenues, restricting our ability to commercialize our products.

Under our current strategy, and for the foreseeable future, we expect to depend upon collaborations with third parties to develop our product candidates and we expect to depend completely upon third parties to commercialize our products. As a result, our ability to develop, obtain regulatory approval of, manufacture and commercialize our existing and any future product candidates depends upon our ability to maintain existing, and enter into and maintain new, contractual and collaborative arrangements with others. We also engage, and intend in the future to continue to engage, contract manufacturers and clinical trial investigators. In addition, the identification of new compounds or product candidates for development has led us, and may continue to require us, to enter into licensing or other collaborative agreements with others, including pharmaceutical companies and research institutions. Collaborative agreements for the acquisition of new compounds or product candidates may require us to pay license fees, make milestone payments and/or pay royalties. Furthermore, these agreements may result in our revenues being lower than if we developed our product candidates ourselves and in our loss of control over the development of our product candidates.

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In addition, we currently have a collaboration with GSK for the development and commercialization of certain triptan combinations using our MT 400 technology in the U.S. and collaborations with Nycomed in the Nordic countries and Xcel in the U.S. for the development and commercialization of MT 100 and MT 300, respectively. In all three licensing arrangements, our licensees have termination rights under certain provisions in the agreements. If we do not maintain these collaborations, or if we are not able to establish additional research and development collaborations or licensing arrangements, it will be difficult for us to develop and commercialize these and our other products. Any future collaborations or licensing arrangements may not be on terms favorable to us.

Our current or any future collaborations or licensing arrangements ultimately may not be successful. Our agreements with collaborators typically allow them some discretion in electing whether to pursue such activities. If any collaborator were to breach or terminate its agreement with us or otherwise fail to conduct collaborative activities in a timely and successful manner, the pre-clinical or clinical development or commercialization of our product candidates or research programs would be delayed or terminated. Any delay or termination in clinical development or commercialization would delay or eliminate potential product revenues. Other risks associated with contractual and collaborative arrangements with others include the following:

Ø We may not have day-to-day control over the activities of our contractors or collaborators.

Ø Third parties may not fulfill their regulatory or other obligations.

Ø We may not realize the contemplated or expected benefits from collaborative or other arrangements.

Ø Business combinations and changes in the contractors or their business strategy may adversely affect their willingness or ability to complete their obligations to us.

Ø The contractor or collaborator may have the right to terminate its arrangements with us on limited or no notice and for reasons outside of our control.

Ø The contractor or collaborator may develop or have rights to competing products or product candidates and withdraw support or cease to perform work on our products.

Ø Disagreements may arise regarding breach of the arrangement, ownership of proprietary rights, clinical results or regulatory approvals.

These factors could lead to delays in the development of our product candidates, and/or the commercialization of our products, and disagreements with our contractors or collaborators could require or result in litigation or arbitration, which would be time-consuming and expensive. Our ultimate success may depend upon the success and performance on the part of these third parties. If we fail to maintain these relationships or establish new relationships as required, development of our product candidates and/or the commercialization of our products will be delayed.

We need to maintain current and enter into additional agreements with third parties that possess sales, marketing and distribution capabilities, or establish internally the capability to perform these functions, in order to successfully market and sell our future drug products.

We have no sales or distribution personnel or capabilities. If we are unable to maintain or enter into additional collaborations with established pharmaceutical or pharmaceutical services companies to provide those capabilities, or alternatively, we are unable to develop internally sales and distribution capabilities, we will not be able to successfully commercialize our products. To the extent that we enter into marketing and sales agreements with third parties, our revenues, if any, will be affected by the sales and marketing efforts of those third parties. Further, we cannot guarantee that, should we elect to develop our own sales and distribution capabilities, we would have sufficient resources to do so, or would be able to hire the qualified sales and marketing personnel we would need.

We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity studies and clinical trials on our product candidates. Any unanticipated costs or delays in these studies or trials, or the need to conduct additional studies or trials or to seek to persuade the FDA to evaluate the results of a study or trial in a different manner, could reduce or delay our revenues and profitability.

Generally, we must demonstrate the efficacy and safety of our product candidates before approval to market can be obtained from the FDA or the regulatory authorities in other countries. Our existing and future product candidates are and will be in various stages of clinical development. Depending upon the stage of the development process of a product candidate, we will need to complete preclinical, toxicology, genotoxicity and carcinogenicity studies, as well as clinical trials, on these product candidates before we submit marketing applications in the United States and abroad. These studies and trials can be very costly and time-consuming. In addition, we rely on third parties to perform significant aspects of our studies and clinical trials, introducing additional sources of risk into our development programs. It should also be noted that results from preclinical testing and early clinical trials are not necessarily predictive of results obtained in later clinical trials involving large scale testing of patients in comparison to control groups.

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The completion of clinical trials depends upon many factors, including the rate of enrollment of patients. If we are unable to recruit sufficient clinical patients during the appropriate period, we may need to delay our clinical trials and incur significant additional costs. We also rely on the compliance of our clinical trial investigators with FDA regulatory requirements and noncompliance can result in disqualification of a clinical trial investigator and data that is unusable. In addition, the FDA or Institutional Review Boards may require us to conduct additional trials or delay, restrict or discontinue our clinical trials on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Even though we may have completed all planned clinical trials for a product candidate and submitted an NDA for such product candidate, as we have for MT 100 and MT 300, the FDA may require us to conduct additional clinical trials and studies to support our NDAs to the FDA. We may determine that it would be necessary to seek to persuade the FDA to evaluate the results of a study or trial in a manner that differs from the way the FDA usually evaluates results. For example, we hope to work with the FDA to revisit the determination made in its not-approvable letter for MT 300. In addition, we may have unexpected results that require us to reconsider the need for certain studies or trials. For example, results from a genotoxicity study involving MT 400 may require us to conduct chronic toxicology and carcinogenicity studies. Once submitted, an NDA requires FDA approval before we can distribute or commercialize the product described in the application. Even if we determine that data from our clinical trials, toxicology, genotoxicity and carcinogenicity studies are positive, we cannot assure you that the FDA, after completing its analysis, will not determine that the trials or studies should have been conducted or analyzed differently, and thus reach a different conclusion from that reached by us, or request that further trials, studies or analyses be conducted. For example, the FDA may require data in certain subpopulations, such as pediatric use, or may require long-term carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver to delay such studies. We face similar regulatory hurdles in other countries to those that we face in the United States. For example, no assurance can be given that we will be able to satisfactorily address the issues raised by the advisory group to the MHRA, including providing additional support for the benefits of the MT 100 combination.

Our costs associated with our human clinical trials vary based on a number of factors, including:

Ø the order and timing of clinical indications pursued;

Ø the extent of development and financial support from collaborative parties, if any;

Ø the need to conduct additional clinical trials or studies;

Ø the number of patients required for enrollment;

Ø the difficulty of obtaining sufficient patient populations and clinicians;

Ø the difficulty of obtaining clinical supplies of our product candidates; and

Ø governmental and regulatory delays.

Even if we obtain positive preclinical or clinical study results initially, future clinical trial results may not be similarly positive.

We currently depend and will in the future depend on third parties to manufacture our product candidates. If these manufacturers fail to meet our requirements or any regulatory requirements, the product development and commercialization of our product candidates will be delayed.

We do not have, and have no plans to develop, the internal capability to manufacture either clinical trial or commercial quantities of products that we may develop or have under development. We rely upon third-party manufacturers to supply us with our product candidates. We also need supply contracts to sell our products commercially. There is no guarantee that manufacturers that enter into commercial supply contracts with us will be financially viable entities going forward. If we do not have the necessary commercial supply contracts, or if our current manufacturer is, or any of our future manufacturers are, unable to satisfy our requirements or meet any regulatory requirements, and we are required to find alternative sources of supply, there may be additional costs and delays in product development and commercialization of our product candidates or we may be required to comply with additional regulatory requirements.

If our competitors develop and commercialize products faster than we do or if their products are superior to ours, our commercial opportunities will be reduced or eliminated.

Our product candidates will have to compete with existing and any newly developed migraine therapies or therapies for any newly developed product candidates for treatment of other diseases. There are also likely to be numerous competitors developing new products to treat migraine and the other diseases and conditions for which we may seek to develop products in the future, which could render our product candidates or technologies obsolete or non-competitive. Our primary competitors will likely include large pharmaceutical companies, biotechnology companies, universities and public and private research institutions. We face, and will continue to face, intense competition from other companies for securing collaborations with pharmaceutical companies, establishing relationships with academic and research institutions, and acquiring licenses to proprietary technology. These competitors, either alone or with collaborative parties, may succeed with technologies or products that are more effective than any of our current or future technologies or products. Many of our actual or potential

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competitors, either alone or together with collaborative parties, have substantially greater financial resources, and almost all of our competitors have larger numbers of scientific and administrative personnel than we do. Many of these competitors, either alone or together with their collaborative parties, also have significantly greater experience than we do in:

Ø developing product candidates;

Ø undertaking preclinical testing and human clinical trials;

Ø obtaining FDA and other regulatory approvals of product candidates; and

Ø manufacturing and marketing products.

Accordingly, our actual or potential competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. Our competitors may also develop products or technologies that are superior to those that we are developing, and render our product candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing and sales will suffer and we may not ever be profitable.

If we are unable to protect our patents or proprietary rights, or if we are unable to operate our business without infringing the patents and proprietary rights of others, we may be unable to develop our product candidates or compete effectively.

The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend, in part, on our ability, and the ability of our licensors, to obtain and to keep protection for our products and technologies under the patent laws of the United States and other countries, so that we can stop others from using our inventions.

Our success also will depend on our ability to prevent others from using our trade secrets. In addition, we must operate in a way that does not infringe, or violate, the patent, trade secret and other intellectual property rights of other parties.

We cannot know how much protection, if any, our patents will provide or whether our patent applications will issue as patents. The breadth of claims that will be allowed in patent applications cannot be predicted and neither the validity nor enforceability of claims in issued patents can be assured. If, for any reason, we are unable to obtain and enforce valid claims covering our products and technology, we may be unable to prevent competitors from using the same or similar technology or to prevent competitors from marketing identical products. In addition, due to the extensive time needed to develop and test our products, any patents that we obtain may expire in a short time after commercialization. This would reduce or eliminate any advantages that such patents may give us.

We may need to license rights to third party patents and intellectual property to continue the development and marketing of our product candidates. If we are unable to acquire such rights on acceptable terms, our development activities may be blocked and we may be unable to bring our product candidates to market.

We may enter into litigation to defend ourselves against claims of infringement, assert claims that a third party is infringing one or more of our patents, protect our trade secrets or know-how, or determine the scope and validity of others’ patent or proprietary rights. As a result of such litigation, our patent claims may be found to be invalid, unenforceable or not of sufficient scope to cover the activities of an alleged infringer.

If we are found to infringe the patent rights of others, then we may be forced to pay damages sufficient to irreparably harm the Company and/or be prevented from continuing our product development and marketing activities. Regardless of its eventual outcome, any lawsuit that we enter into may consume time and resources that will impair our ability to develop and market our product candidates.

We have entered into confidentiality agreements with our employees, consultants, advisors and collaborators. However, these parties may not honor these agreements and, as a result, we may not be able to protect our rights to unpatented trade secrets and know-how. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. Also, many of our scientific and management personnel were previously employed by competing companies. As a result, such companies may allege trade secret violations and similar claims against us.

If we fail to acquire, develop and commercialize additional products or product candidates, or fail to successfully promote or market approved products, we may never achieve profitability.

As part of our business strategy, we plan to identify and acquire product candidates or approved products in areas in which we possess particular knowledge. Because we do not directly engage in basic research or drug discovery, we must rely upon third parties to sell or license product opportunities to us. Other companies, including some with substantially greater financial, marketing and sales resources, are competing with us to acquire such products. We may not be able to acquire rights to

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additional products on acceptable terms, if at all. In addition, we may acquire new products with different marketing strategies, distribution channels and bases of competition than those of our current products. Therefore, we may not be able to compete favorably in those product categories.

None of our future products may be accepted by the market.

Even if our product candidates perform successfully in clinical trials and are approved by the FDA and other regulatory authorities, our future products may not achieve market acceptance and may not generate the revenues that we anticipate. The degree of market acceptance will depend upon a number of factors, including:

Ø the receipt and timing of regulatory approvals;

Ø the availability of third-party reimbursement;

Ø the indications for which the product is approved;

Ø the rate of adoption by health care providers;

Ø the rate of product acceptance by target patient populations;

Ø the price of the product relative to alternative therapies;

Ø the availability of alternative therapies;

Ø the extent and effectiveness of marketing efforts by us and third-party distributors and agents;

Ø the publicity regarding our products or similar products; and

Ø the extent and severity of side effects as compared to alternative therapies.

If we do not receive adequate third-party reimbursements for any of our future products, our revenues and profitability will be reduced.

Our ability to commercialize our product candidates successfully will depend, in part, on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the United States, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of a newly approved health care product, particularly for indications for which there is no current effective treatment or for which medical care is typically not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product research and development. If adequate coverage and reimbursement levels are not provided by government and third-party payors for use of our products, our products may fail to achieve market acceptance.

Our future revenues, profitability and access to capital will be affected by the continuing efforts of governmental and private third-party payors to contain or reduce the costs of health care through various means. We expect that a number of federal, state and foreign proposals will seek to control the cost of drugs through governmental regulation. We are unsure of the form that any health care reform legislation may take or what actions federal, state, foreign and private payors may take in response to the proposed reforms. Therefore, we cannot predict the effect of any implemented reform on our business.

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

The testing and marketing of pharmaceutical products entails an inherent risk of product liability. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our future products. If we cannot successfully defend ourselves against such claims, we may incur substantial liabilities or be required to limit the commercialization of our product candidates. We have obtained limited product liability insurance coverage only for our human clinical trials. However, insurance coverage is becoming increasingly expensive, and no assurance can be given that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We may not be able to obtain commercially reasonable product liability insurance for any products approved for marketing. If a plaintiff brings a successful product liability claim against us in excess of our insurance coverage, if any, we may incur substantial liabilities and our business may fail.

We may need additional funding and may not have access to capital. If we are unable to raise capital when needed, we may need to delay, reduce or eliminate our product development or commercialization efforts.

We may need to raise additional funds to execute our business strategy. We have incurred losses from operations since inception and we may continue to incur additional operating losses. Our actual capital requirements will depend upon numerous factors, including:

Ø the progress of our research and development programs;

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Ø the progress of preclinical studies, clinical and other testing;

Ø the time and cost involved in obtaining regulatory approvals;

Ø the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

Ø the effect of competing technological and market developments;

Ø the timing of our receipt, if any, of milestone payments and royalties under collaborative agreements;

Ø the effect of changes and developments in, or termination of, our collaborative, licensing and other relationships;

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

Ø our ability to arrange for the commercialization of our product candidates.

We may be unable to raise sufficient funds to execute our business strategy. In addition, we may not be able to find sufficient debt or equity funding on acceptable terms. If we cannot, we may need to delay, reduce or eliminate research and development programs.

The sale by us of additional equity securities or the expectation that we will sell additional equity securities may have an adverse effect on the price of our common stock. In addition, collaborative arrangements may require us to grant product development programs or licenses to third parties for products that we might otherwise seek to develop or commercialize ourselves.

We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our research and development efforts.

We are highly dependent on the efforts of our key management and scientific personnel, especially John R. Plachetka, Pharm.D., our Chairman, President and Chief Executive Officer. Dr. Plachetka signed an employment agreement with us on April 1, 1999, as amended and restated on July 25, 2001, for a three-year term with automatic one-year renewal terms. As of July 25, 2001, we also entered into employment agreements with certain of our other key management personnel, each of which provides for a two-year term with automatic one-year renewal terms. If we lose the services of Dr. Plachetka or the services of any of our other key personnel, or are unable to replace the services of our key personnel who may leave the Company, or if we fail to recruit other key scientific personnel, we may be unable to achieve our business objectives. There is intense competition for qualified scientific personnel. Since our business is very science-oriented, we need to continue to attract and retain such people. We may not be able to continue to attract and retain the qualified personnel necessary for developing our business. Furthermore, our future success will also depend in part on the continued service of our other key management personnel.

Factors That May Affect Our Stockholders

Our stock price is volatile, which may result in significant losses to stockholders.

There has been significant volatility in the market prices of biotechnology companies’ securities and in the market price of our common stock. Various factors and events may have a significant impact on the market price of our common stock including:

Ø fluctuations in our operating results;

Ø announcements of technological innovations, acquisitions or licensing of therapeutic products or product candidates by us or our competitors;

Ø published reports by securities analysts;

Ø positive or negative progress with our clinical trials;

Ø governmental regulation, including reimbursement policies;

Ø developments in patent or other proprietary rights;

Ø developments in our relationship with collaborative partners;

Ø public concern as to the safety and efficacy of our products; and

Ø general market conditions.

The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to these and other factors. From October 16, 2000, when our common stock began trading on the Nasdaq National Market, through September 30, 2003, the high and low closing prices of our common stock ranged from $2.25 to $21.75. Broad market fluctuations may also adversely affect the market price of our common stock.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Our proceeds from our initial public offering and private placements have been invested in money market funds that invest primarily in short-term, highly-rated investments, including U.S. Government securities, commercial paper and certificates of deposit guaranteed by banks. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. Because of the short-term maturities of our investments, we do not believe that a decrease in market rates would have a significant negative impact on the value of our investment portfolio. However, declines in interest rates reduced our interest income during the nine-month period ended September 30, 2003 as compared to the same period of 2002.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance 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.

(b) Change in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

On May 20, 2003, we held our annual meeting of stockholders. The results of the proposals submitted for vote at this meeting were as follows:

1. Election of two directors (there were no abstentions or broker non-votes in connection with the election of directors).

	For:	Withheld:
John R. Plachetka, Pharm.D.	18,106,178	2,425,896
Peter J. Wise, M.D.	18,017,236	2,514,838

2. Ratification of the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2003 (there were no broker non-votes in connection with the ratification of our independent auditor).

For:	Against:	Abstain:
20,462,235	68,769	1,070

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1	Collaboration and License Agreement dated September 3, 2003 between POZEN and Xcel Pharmaceuticals Inc. *
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.

(b) Reports on Form 8-K

None.

* Confidential treatment requested. Confidential materials omitted and filed separately with the Securities and Exchange Commission

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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.

	POZEN INC. (Registrant)
November 6, 2003	By:	/s/    JOHN R. PLACHETKA
		John R. Plachetka President and Chief Executive Officer

November 6, 2003	/s/    MATTHEW E. CZAJKOWSKI
	Matthew E. Czajkowski Chief Financial Officer (Principal Financial Officer)

November 6, 2003	/s/    JOHN E. BARNHARDT
	John E. Barnhardt Vice President, Finance and Administration (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Collaboration and License Agreement dated September 3, 2003 between POZEN and Xcel Pharmaceuticals Inc.*
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.

* Confidential treatment requested. Confidential materials omitted and filed separately with the Securities and Exchange Commission.

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