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 March 31, 2002
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 (I.R.S. Employer
incorporation or organization) 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

The number of shares outstanding of the registrant's common stock as of April
15, 2002 was 28,077,945.

POZEN Inc.
(A Development Stage Company)
FORM 10-Q

For the Three Months Ended March 31, 2002

INDEX

PART I. FINANCIAL INFORMATION Page

Item 1. Financial Statements (unaudited)

Balance Sheets as of March 31, 2002 and December 31, 2001................................. 1

Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 and Period From
Inception (September 26, 1996) Through March 31, 2002..................................... 2

Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 and Period From
Inception (September 26, 1996) Through March 31, 2002..................................... 3

Notes to Financial Statements............................................................. 4

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 5

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 13

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.......................................................... 13

Signature Page............................................................................................ 14

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POZEN Inc.
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)

March 31, December 31,
2002 2001
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 68,332,825 $ 73,958,724
Prepaid expenses ........................................................... 149,332 67,498
Other current assets ....................................................... 8,000 8,688
------------- -------------
Total current assets .................................................... 68,490,157 74,034,910
Equipment, net of accumulated depreciation of $96,308 and $82,055 ............. 185,423 109,014
------------- -------------
Total assets ............................................................ $ 68,675,580 $ 74,143,924
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 115,117 $ 194,138
Accrued expenses ........................................................... 4,068,113 3,328,881
------------- -------------
Total current liabilities ............................................... 4,183,230 3,523,019

Common stock, $0.001 par value, 90,000,000 shares authorized;
28,077,945 and 27,969,435 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively ......................... 28,078 27,969
Additional paid-in capital .................................................... 143,659,834 143,512,559
Common stock warrants ......................................................... 310,808 310,808
Deferred compensation ......................................................... (2,685,042) (3,429,376)
Deficit accumulated during the development stage .............................. (76,821,328) (69,801,055)
------------- -------------
Total stockholders' equity ................................................. 64,492,350 70,620,905
------------- -------------
Total liabilities and stockholders' equity ................................. $ 68,675,580 $ 74,143,924
============= =============

See accompanying Notes to Financial Statements.

POZEN Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)

Period from
Inception
Three Months (September 26,
Ended 1996) Through
March 31, March 31,
------------------------------- -------------
2002 2001 2002
------------- ------------- -------------

Operating expenses:
General and administrative ........................... $ 1,757,501 $ 1,502,518 $ 17,939,692
Research and development ............................. 5,579,444 4,256,634 63,754,696
------------- ------------- -------------
Total operating expenses ................................ 7,336,945 5,759,152 81,694,388
Interest income, net .................................... 316,672 1,225,692 5,807,538
------------- ------------- -------------
Net loss ................................................ (7,020,273) (4,533,460) (75,886,850)
------------- ------------- -------------

Non-cash preferred stock charge ......................... -- -- 27,617,105
Preferred stock dividends ............................... -- -- 934,478
------------- ------------- -------------

Net loss attributable to common stockholders ............ $ (7,020,273) $ (4,533,460) $(104,438,433)
============= ============= =============

Basic and diluted net loss per common share ............. $ (0.25) $ (0.16)
============= =============

Shares used in computing basic and diluted
net loss per common share ............................ 28,038,315 27,838,577
============= =============

See accompanying Notes to Financial Statements.

POZEN Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)

Period from
Inception
(September 26,
Three Months Ended 1996)
March 31, Through March 31,
-------------------------------- ----------------
2002 2001 2002
------------- ------------- ----------------

Operating activities
Net loss ................................................................ $ (7,020,273) $ (4,533,460) $ (75,886,850)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ...................................................... 14,253 17,203 296,509
Loss on disposal of equipment ..................................... -- -- 24,769
Amortization of deferred compensation ............................. 744,334 802,373 8,201,406
Noncash financing charge .......................................... -- -- 450,000
Changes in operating assets and liabilities:
Prepaid expenses, accrued interest receivable, and other assets ... (81,146) (11,749) (157,332)
Accounts payable and accrued expenses ............................. 660,211 (974,658) 4,183,230
------------- ------------- -------------
Net cash used in operating activities ............................. (5,682,621) (4,700,291) (62,888,268)

Investment activities
Purchase of equipment ................................................... (90,662) (32,978) (506,701)
------------- ------------- -------------
Net cash used in investing activities ................................... (90,662) (32,978) (506,701)
------------- ------------- -------------

Financing activities
Proceeds from issuance of preferred stock ............................... -- -- 48,651,850
Proceeds from issuance of common stock .................................. 147,384 83,841 79,233,929
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 ............................... 147,384 83,841 131,727,794
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents .................... (5,625,899) (4,649,428) 68,332,825
Cash and cash equivalents at beginning of period ........................ 73,958,724 92,350,583 --
------------- ------------- -------------
Cash and cash equivalents at end of period .............................. $ 68,332,825 $ 87,701,155 $ 68,332,825
============= ============= =============

Supplemental schedule of cash flow information
Cash paid for interest ............................................... $ -- $ -- $ 186,576
============= ============= =============

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 ................................... $ -- $ -- $ 42,213
============= ============= =============
Conversion of preferred stock warrants to common stock ............... $ -- $ -- $ 1,030,192
============= ============= =============

See accompanying Notes to Financial Statements.

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. The Company is a pharmaceutical development company
committed to building a portfolio of products with significant commercial
potential in select therapeutic areas. The Company's initial focus is on
developing products for migraine therapy.

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 quarter ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.

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.

In connection with the grant of stock options to employees, the Company recorded
no deferred compensation in the three months ended March 31, 2002 or for the
same period of 2001. Deferred compensation is 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 $744,334 and $802,373 for the period
ended March 31, 2002 and 2001, respectively.

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 three months ended March 31, 2002 and 2001. Potentially dilutive
securities, consisting of stock options and warrants, have been excluded from
the diluted earnings per share calculations since their effect is antidilutive.

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, as filed on April 1, 2002.

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 development company committed to building a portfolio of
products with significant commercial potential in select therapeutic areas. Our
initial focus is on developing products for migraine therapy, a global market
expected to exceed $2.8 billion in 2002.

Specifically, our business activities have included:

. product candidate research and development;

. designing and funding clinical trials for our product candidates;

. regulatory and clinical affairs;

. intellectual property prosecution and expansion; and

. business development including product acquisition or in-licensing.

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. Therefore, we have
no research funding or collaboration payments payable to us nor have we received
any payments that are refundable or subject to performance milestones.

Our results include non-cash compensation expense as a result of the issuance of
stock option grants. Compensation expense for options granted to employees
represents the difference between the fair value of our common stock and the
exercise price of the options at the date of grant. We account for stock-based
employee compensation arrangements in accordance with the provisions of APB 25,
"Accounting for Stock Issued to Employees," and comply with the disclosure
provisions of SFAS 123, "Accounting for Stock-Based Compensation." Compensation
for options granted to consultants has been determined in accordance with SFAS
123 as the fair value of the equity instruments issued. APB 25 has been applied
in accounting for fixed and milestone-based stock options to employees and
directors as allowed by SFAS 123. Any expense is being recorded over the
respective vesting periods of the individual stock options and is reflected in
the respective categories of expense in the statements of operations.

We have incurred significant losses since our inception and we have not
generated any revenue. As of March 31, 2002, our accumulated deficit was
$76,821,329. 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, and Phase 2 clinical trial
activities for our product candidate MT 400, and general and administrative
expenses. We expect to continue to incur operating losses over the next several
years as we complete our development of MT 100, MT 300 and MT 400, apply for
regulatory approval, and acquire and develop product candidates in other
therapeutic areas. Our results may vary depending on many factors, including:

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

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

. the acquisition or in-licensing of other therapeutic product
candidates.

Our ability to generate revenue is dependent upon our ability, alone or with
others, to successfully develop MT 100 or our other migraine product candidates,
obtain regulatory approvals and, alone or with others, successfully manufacture
and market our future products.

Three months ended March 31, 2002 compared to the three months ended March 31,
2001

Net loss per share: Net loss attributable to common stockholders for the quarter
ended March 31, 2002 was $7,020,273, or $0.25 per share, and for the quarter
ended March 31, 2001 was $4,533,460, or $0.16 per share.

Revenue: We generated no revenue during the quarter ended March 31, 2002 and the
quarter ended March 31, 2001.

Research and development: Research and development expenses increased 31% to
$5.6 million for the first quarter of 2002, as compared to $4.3 million for the
same period of 2001. A major portion of the $1.3 million increase was due to
increased clinical trial costs associated with MT 100 and MT 300 of $377,000 and
$667,000, respectively, as compared to the first quarter of 2001. In addition,
costs associated with obtaining drug substance for the MT 400 development
program increased $134,000. Additional research and development departmental
costs increased $122,000, net of a $40,000 decrease in the amortization of
deferred stock compensation. Total amortization of deferred stock compensation
included in research and development expenses was $325,852 and $365,778, for the
quarter ended March 31, 2002 and 2001, respectively. Research and development
departmental expenses increased primarily due to higher personnel costs related
to our research activities and regulatory affairs.

General and administrative: General and administrative expenses increased 17% to
$1.8 million for the first quarter of 2002, as compared to $1.5 million for the
same period of 2001. The $255,000 increase was due primarily to increased
advertising, promotions and marketing expenses related to our business
development activities, and costs related to our relocation. Total amortization
of deferred compensation included in general and administrative expenses was
$418,482 and $436,595 for the quarter ended March 31, 2002 and 2001,
respectively. General and administrative expenses consisted primarily of the
costs of administrative personnel, facility infrastructure, and public
reporting.

Interest income: Interest income decreased to $316,672 for the quarter ended
March 31, 2002 from $1,225,692 for the quarter ended March 31, 2001. Interest
income decreased due to decreased levels of cash and cash equivalents available
for investing and a decline in interest rates during the quarter ended March 31,
2002 as compared to the same period of 2001.

Income Taxes

As of March 31, 2002, we had federal and state net operating loss carryforwards
of approximately $57.6 million and research and development credit carryforwards
of approximately $3.7 million. 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.

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 $131,727,794. As of March
31, 2002, cash and cash equivalents totaled $68,332,825, a decrease of
$5,625,899 as compared to December 31, 2001. The decrease in cash and cash
equivalents resulted primarily from expenses associated with our operating
activities.

Cash used in operations of $5,682,621 during the quarter ended March 31, 2002
represented a net loss of $7,020,273 offset by non-cash charges of $758,587, an
increase in prepaid and other assets of $81,146 and an increase in accounts
payable and accrued liabilities of $660,211. The increase in accounts payable
and accrued expenses was primarily due to increased spending in our clinical
activities for MT 100 and MT 300 as compared to the year ended December 31,
2001.

Cash used in investing activities of $90,662 during the quarter ended March 31,
2002 reflected the purchase of furniture and equipment. Since inception through
March 31, 2002, approximately $506,701 was spent on furniture and equipment.

Cash provided by financing activities during the quarter ended March 31, 2002,
which totaled $147,384 was generated by the exercise of stock options.

Factors That May Affect Our Results

Our business is subject to certain risks and uncertainties. If any of these
risks eventuate, our business, financial condition, cash flows and results of
operations could be materially adversely affected.

We depend heavily on the success of our product candidate, MT 100, which may
never be approved for commercial use. If we are unable to develop, gain approval
of or commercialize MT 100, we may never be profitable.

Since our founding, we have invested a significant portion of our time and
financial resources in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be dependent on its
successful development, approval and commercialization. Many factors could
negatively affect the success of our efforts to develop and commercialize MT
100, including:

. negative, inconclusive or otherwise unfavorable results from our
carcinogenicity studies or from any other studies or clinical trials;

. an inability to obtain, or delay in obtaining, regulatory approval for the
commercialization of MT 100;

. an inability to establish collaborative arrangements with third parties for
the manufacture and commercialization of MT 100, or any disruption of any
of these arrangements, if established;

. a failure to achieve market acceptance of MT 100;

. significant delays in our carcinogenicity studies;

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

. significant increases in the costs of any additional carcinogenicity
studies.

We have incurred losses since inception and anticipate that we will continue to
incur losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.

We have incurred losses in each year since our inception and we currently have
no source of product revenue. As of March 31, 2002, we had an accumulated
deficit of approximately $76.8 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:

. develop and obtain regulatory approvals for our product candidates;

. negotiate collaborative agreements under which we receive upfront and
milestone payments for our product candidates;

. successfully commercialize our product candidates, which may include
entering into collaborative agreements; and

. 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, including MT 100, have been approved for sale in the United States
or any foreign market. We will need to complete preclinical, toxicology,
genotoxicity and carcinogenicity studies, as well as clinical trials, on these
product candidates in support of NDA submissions to the FDA for approval to
market the product candidates. If we are unable to obtain and maintain FDA and
foreign governmental approvals for our product candidates, we 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 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 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.

We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
studies and clinical trials of all of our product candidates. Any unanticipated
costs or delays in these studies or trials, or the need to conduct additional
studies or trials, could reduce 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. Our product candidates
are in various stages of clinical development. Depending upon the stage at which
a product candidate is in the development process, 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. 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.

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. 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 have completed all planned Phase 3 pivotal clinical trials for MT 100
and even if we complete our current clinical trials for our other product
candidates, we may be required to conduct additional clinical trials and studies
to support our NDA's to the FDA. Once submitted, an NDA would require FDA
approval before we could 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.

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

. the order and timing of clinical indications pursued;

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

. the need to conduct additional clinical trials or studies;

. the number of patients required for enrollment;

. the difficulty of obtaining sufficient patient populations and
clinicians;

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

. 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 depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.

Our ability to develop, manufacture, commercialize and obtain regulatory
approval of our existing and any future product candidates depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others.

We have and intend in the future to retain contract manufacturers and clinical
trial investigators. In addition, the identification of new compounds or product
candidates for development may require us to enter into licensing or other
collaborative agreements with others, including pharmaceutical companies and
research institutions. We currently intend to market and commercialize our
products through others, which will require us to enter into sales, marketing
and distribution arrangements with third parties. These arrangements may reduce
our product revenues.

Our third-party contractual or collaborative arrangements may require us to
grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms that are burdensome to us, and
may involve the acquisition of our equity securities. 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.

We cannot be sure that we will be able to maintain our existing or future
collaborative or contractual arrangements, or that we will be able to enter into
future arrangements with third parties on terms acceptable to us, or at all. If
we fail to maintain our existing arrangements or to establish new arrangements
when and as necessary, we could be required to undertake these activities at our
own expense, which would significantly increase our capital requirements and may
delay the development, manufacture and commercialization of our product
candidates.

We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:

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

. Third parties may not fulfill their obligations to us.

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

. Business combinations and changes in the contractor's or
collaborator's business strategy may adversely affect its willingness
or ability to complete its obligations to us.

. 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.

. 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.

. 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 or commercialization of
our product candidates, 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 and
commercialization of our product candidates will be delayed.

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 are 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 unable to satisfy our requirements or meet any
regulatory requirements, and we are required to find an alternative source 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 we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will not
be able to commercialize any of our drug candidates.

We currently intend to enter into agreements with third parties to market and
sell any of our product candidates approved by the FDA for commercial sale. We
may not be able to enter into marketing and sales agreements with others on
terms acceptable to us, if at all. To the extent that we enter into marketing
and sales agreements with others, our revenues, if any, will be affected by the
sales and marketing efforts of others.

We may also retain the right, where possible, to co-promote our products in
conjunction with our collaborative parties. If we are unable to enter into
third-party sales and marketing agreements, or if we are exercising our rights
to co-promote a product, then we will be required to develop internal marketing
and sales capabilities. We may not successfully establish marketing and sales
capabilities or have sufficient resources to do so.

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. 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
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:

. developing product candidates;

. undertaking preclinical testing and human clinical trials;

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

. 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
other's 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 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.

Any of our future products, including MT 100, may not be accepted by the market,
which would limit the commercial opportunities for our products.

Even if our product candidates perform successfully in clinical trials and are
approved by the FDA and other regulatory authorities, our future products,
including MT 100, 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:

. the receipt and timing of regulatory approvals;

. the availability of third-party reimbursement;

. the indications for which the product is approved;

. the rate of adoption by health care providers;

. the rate of product acceptance by target patient populations;

. the price of the product relative to alternative therapies;

. the availability of alternative therapies;

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

. the publicity regarding our products or similar products; and

. 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 substantial 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 expect to incur
additional operating losses. In particular, we believe that we will require
additional capital to fund the acquisition of new product candidates. Our actual
capital requirements will depend upon numerous factors, including:

. the progress of our research and development programs;

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

. the time and cost involved in obtaining regulatory approvals;

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

. the effect of competing technological and market developments;

. the effect of changes and developments in our collaborative, licensing
and other relationships; and

. the terms and timing of any new collaborative, licensing and other
arrangements that we may establish.

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 have entered
into employment agreements with four 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 fail to recruit 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.

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. Declines in interest rates will,
however, reduce our interest income while increases in interest rates will
increase our interest income.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

We filed no reports on Form 8-K during the quarter ended March 31, 2002.

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)

April 30, 2002 By: /s/ JOHN R. PLACHETKA
-------------------------

John R. Plachetka
President and Chief Executive Officer

April 30, 2002 /s/ MATTHEW E. CZAJKOWSKI
-------------------------

Matthew E. Czajkowski
Chief Financial Officer
(Principal Financial Officer)

April 30, 2002 /s/ JOHN E. BARNHARDT
---------------------

John E. Barnhardt
Vice President, Finance and Administration
(Principal Accounting Officer)