SEC Filing | Cassava Sciences, Inc.

View:

Download DOC

Download PDF

Download XLS

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2005

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

Commission File Number: 000-29959

Pain Therapeutics, Inc.

(Exact name of registrant as specified in its charter)


Delaware		91-1911336
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Remi Barbier

President and Chief Executive Officer

416 Browning Way

South San Francisco, CA 94080

(650) 624-8200

(Address, including zip code, or registrant’s principal executive offices and telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(D) of the Act. Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $296,011,004 computed by reference to the last sales price of $6.75 as reported by the Nasdaq National Market System, as of the last business day of the Registrant’s most recently completed second fiscal quarter, June 30, 2005.

The number of shares outstanding of the Registrant’s common stock on February 1, 2006 was 43,957,869.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2006 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference to Part III of this Form 10-K Report.

PAIN THERAPEUTICS, INC.

FORM 10-K

INDEX


		Page
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	24

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	50
Item 9A.	Controls and Procedures	50
Item 9B.	Other Information	52

	PART III
Item 10.	Directors and Executive Officers of the Registrant	52
Item 11.	Executive Compensation	52
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	52
Item 13.	Certain Relationships and Related Transactions	52
Item 14.	Principal Accountant Fees and Services	52

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	53

PART I

This document contains forward-looking statements that are based upon current expectations that are within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:

•

payments we may receive from our strategic alliance;

•

timing of commencement and completion of enrollment of patients for our clinical trials and the anticipated number of patients to be enrolled;

•

expected dates of announcement of achievement of our clinical milestones and results of our clinical trials;

•

potential sources of clinical and commercial supply of Remoxy and its components;

•

expansion of our product pipeline, including the formulation of additional dosage forms of Remoxy;

•

increases in our collaboration revenues and program fee revenue;

•

expectations regarding recognition of collaboration and program fee revenue;

•

future operating losses and anticipated operating and capital expenditures;

•

uses of proceeds from our securities offerings;

•

the potential benefits of our drug candidates;

•

the sufficiency of materials required for the clinical development of our drug candidates;

•

the size of the potential market for our products;

•

the utility or protection of our intellectual property;

•

expected future sources of revenue and capital or increasing cash needs;

•

potential competitors or competitive products;

•

future market acceptance of our drug candidates;

•

expenses increasing substantially or fluctuations in our operating results;

•

future expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions;

•

anticipated hiring and development of our internal systems and infrastructure;

•

the sufficiency of our current resources to fund our operations over the next twelve months; and

•

potential future dividends.

Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:

•

the success of our collaboration agreements, including our strategic alliance with King Pharmaceuticals, Inc., or King;

•

difficulties or delays in development, testing, clinical trials (including patient enrollment), regulatory approval, production and commercialization of our drug candidates;

•

unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials);

•

the uncertainty of patent protection for our intellectual property or trade secrets;

•

potential infringement of the intellectual property rights or trade secrets of third parties;

•

pursuing in-license and acquisition opportunities;

•

hiring and retaining personnel; and

•

our financial position and our ability to obtain additional financing if necessary.

In addition such statements are subject to the risks and uncertainties discussed in Item 1A “Risk Factors” and elsewhere in this document.

Item 1.

Business

Overview

We are a biopharmaceutical company dedicated to the development of innovative drugs. We specialize in developing safer or more efficacious drugs for use in pain management, particularly in the area of opioid painkillers, which are sometimes referred to as narcotic painkillers. According to IMS Health, sales for opioid painkillers in the United States exceeded $6.0 billion in 2004. We incorporated in Delaware in May 1998.

Our clinical pipeline consists of proprietary drug candidates. We are currently developing two oral, small molecule drugs to treat patients who suffer from severe chronic pain, such as pain associated with advanced osteoarthritis and low-back pain. Both of our novel drug candidates are currently in Phase III clinical trial programs:

•

Remoxy^™, an abuse-resistant version of long-acting oxycodone, and

•

Oxytrex^™, a new oral opioid painkiller for the treatment of severe chronic pain.

In November 2005, we and King announced a strategic alliance to develop and commercialize Remoxy and other abuse-resistant opioid painkillers. King made an upfront cash payment of $150 million to us at the closing of this strategic alliance in December 2005. King is also obligated to pay us up to $150 million in payments based on the achievement of milestones in the course of clinical development of Remoxy and other abuse-resistant opioid painkillers under the strategic alliance. In addition, subject to certain limitations, King is obligated to fund development expenses incurred by us related to Remoxy and other abuse-resistant opioid painkillers pursuant to the collaboration agreement. King is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed in connection with the strategic alliance. King is obligated to pay us a 20% royalty on net sales of drugs developed in connection with the strategic alliance, except as to the first $1 billion in net sales of such drugs, for which the royalty is set at 15%.

Remoxy

Remoxy is being developed as an abuse-resistant version of long-acting oral oxycodone. Sales of long-acting oxycodone were nearly $2.0 billion for the twelve months ended August 2005.

The active drug ingredient in Remoxy is oxycodone. Oxycodone is a strong narcotic painkiller that was developed around 1920 as a substitute for morphine. When used as prescribed, oxycodone can relieve severe chronic pain. The U.S. Drug Enforcement Administration, or DEA, and the national media have linked illicit oxycodone use to widespread patterns of drug abuse, addiction, diversion and drug overdose. In the United States, drug related emergency room visits are reported by the Department of Health and Human Service’s Drug Abuse Warning Network, or DAWN. DAWN reports 22,000 oxycodone mentions in emergency room visits in 2002, a 450% increase from 4,000 oxycodone mentions in emergency room visits in 1994.

Remoxy’s novel formulation is specifically designed to foil abusers who attempt to tamper with the drug in order to induce a powerful euphoric high. Our clinical results to date demonstrate Remoxy is significantly less

abusable than Oxycontin^®, a brand of long-acting oxycodone. During 2004, we announced data from clinical comparisons of the two drugs. In a variety of clinical comparisons of the abuse resistant characteristics of Remoxy and Oxycontin, Oxycontin released significantly more active ingredient than Remoxy during the time when abusers presumably expect to get high.

In September 2005 we announced top line data from our Phase III clinical trial of Remoxy. In this randomized, double-blinded clinical trial of 209 osteoarthritic patients with moderate to severe chronic pain, Remoxy demonstrated a statistically significant reduction in pain (p<0.05) when compared to placebo.

In February 2006, we completed a Special Protocol Assessment, or SPA, from the Food and Drug Administration, or FDA, for a Phase III clinical trial of Remoxy in patients with chronic pain. Under this procedure, a sponsor may seek the FDA’s agreement on the design and analysis of a clinical trial intended to form the primary basis of an effectiveness claim. If the FDA agrees in writing, its agreement may not be changed after the trial begins except in limited circumstances, such as the FDA determining that a substantial scientific issue essential to determining the safety or effectiveness of the product was identified after the trial had begun. If the outcome of the trial is successful, the sponsor will ordinarily be able to rely on the SPA as the basis for approval with respect to effectiveness. While we have received the FDA’s SPA agreement for this Phase III clinical trial assessing Remoxy, there can be no assurance that this clinical trial will have a successful outcome or that we will ultimately receive approval for this drug candidate.

We expect to conduct additional clinical trials and non-clinical studies of Remoxy in 2006, including additional abuse-resistance studies and other registration-enabling studies.

We believe the abuse-resistant technology used in Remoxy is applicable to different oral opioid painkillers. Pursuant to our agreement with King, we plan to develop abuse-resistant versions of additional opioid painkillers using this platform technology. We plan to formulate and scale-up a range of dosage forms of Remoxy.

We formulate Remoxy using, in part, proprietary technology licensed from Durect Corporation. Under the terms of this agreement, we have exclusive worldwide rights to develop and to commercialize Remoxy and certain other opioid drugs that use Durect’s technology. We reimburse Durect for certain formulation and related work, and are responsible to make milestone payments based on the achievement of certain technical, clinical or regulatory milestones. We are responsible to pay Durect royalties on related drug sales. King is obligated to reimburse us for all costs we incur under the agreement with Durect, including royalties.

We believe we can produce sufficient clinical materials necessary to complete our Phase III program for Remoxy. We rely on Durect Corporation and other third-party manufacturers to formulate, manufacture, fill, label, ship or store Remoxy.

Oxytrex

Oxytrex is an oral opioid painkiller with a novel mechanism of action. We believe Oxytrex could be an effective substitute for oxycodone, a narcotic painkiller widely used today to treat severe chronic pain. Sales of oxycodone were nearly $2.0 billion for the twelve months ended August 2005. We have worldwide commercial rights to Oxytrex.

Our clinical results to date have shown that Oxytrex can reduce physical dependence and provides superior and prolonged pain relief compared to oxycodone. Published preclinical results also demonstrate that the technology used in Oxytrex results in a lack of opioid addiction or tolerance in animals.

In March 2005, we announced positive clinical results from a Phase III clinical trial for Oxytrex. In this variable dose clinical trial of 719 patients with severe low-back pain, Oxytrex showed minimal physical dependence, better overall safety, less drug use and similar pain relief to oxycodone. Specifically, Oxytrex

patients reported 50% less symptoms of physical dependence and withdrawal (p<0.01) after cessation of prolonged, high-dose opioid therapy and about 20% less overall opioid-related side-effects during treatment, including less somnolence (p<0.05), less itching (p<0.05) and less moderate to severe constipation (p<0.05).

In November 2005, we announced results of a Phase III clinical trial with Oxytrex. Over 775 patients with moderate-to-severe osteoarthritic pain were enrolled in this randomized, double-blind, multi-center clinical trial in the United States. The pre-defined primary endpoint was reduction of physical dependence and withdrawal effects in the first 24 hours following cessation of therapy, as measured on the Short Opioid Withdrawal Scale. Oxytrex patients reported 22% less clinical symptoms of physical dependence and withdrawal effects in the first 24 hours following cessation of therapy, compared to patients on oxycodone. However, this result did not reach statistical significance, which we believe was due to a higher than expected overall drop-out rate in the clinical trial.

We expect to continue clinical progress of Oxytrex in 2006. We plan to meet with the FDA in the first half of 2006 to discuss next steps in the clinical development of Oxytrex.

Oxytrex is formulated with two active drug ingredients: oxycodone and low-dose naltrexone. We rely on a limited number of third-party manufacturers to manufacture, fill, label, ship and store Oxytrex.

PTI-901

In December 2005, we announced results of a Phase III clinical trial with PTI-901, an investigational drug candidate for the treatment of irritable bowel syndrome, or IBS. The clinical trial compared a daily dose of PTI-901 against placebo in 609 women with documented IBS over a three-month treatment period. PTI-901 did not demonstrate a meaningful benefit in the third month of treatment, which was the primary endpoint. According to current regulatory standards, an experimental drug for chronic IBS needs to show efficacy at the end of a three-month treatment period.

The Company believes this clinical trial was well designed to detect any durable benefits of PTI-901 versus placebo in a large patient population with IBS. Based on the adequacy of the clinical trial itself, coupled with the clinical results, we are discontinuing all further clinical development activities with PTI-901.

Strategy

Our commercial goal is to build a drug franchise in pain management. Our clinical goal is to continue to develop novel drugs that are more effective or safer than drugs used in the clinic today. Our strategy includes the following elements:

Focus on Clinical Development Stage Products. We believe this focus will enable us to generate product revenues earlier than if we were focused on early-stage research and discovery activities.

Retain Significant Rights to Our Drugs. We currently retain worldwide commercialization rights to all of our technology and drug candidates in all markets and indications, except for Remoxy and certain other abuse-resistant drug candidates that are subject to our strategic alliance with King. In general, we intend to independently develop our drug candidates through late-stage clinical trials. In market segments that require large or specialized sales forces, we may seek sales and marketing alliances with third parties.

Outsource Key Functions. We intend to continue to outsource preclinical studies, clinical trials and formulation and manufacturing activities. We believe outsourcing permits significant time savings and allows for more efficient deployment of our resources.

Pursue In-licensing or Acquisition Opportunities. We intend to evaluate promising drug candidates or technologies to further expand our product pipeline. Our in-licensing strategy consists of evaluating clinical or preclinical stage opportunities in therapeutic areas that can benefit from our core expertise in drug

development. Such in-licensing or acquisition opportunities may be in pain management or in other therapeutic areas outside of pain management. We believe this element of our corporate strategy could diversify some of the risks inherent in focusing on a single therapeutic area and could also increase our probability of commercial success.

We also conduct basic research in collaboration with academic and other partners. Company sponsored research and development expenditures were $18.9 million, $35.1 million, and $32.9 million in 2003, 2004 and 2005, respectively.

Oxytrex Science and Technology

Our science related to the use of opioid agonists combined with opioid antagonist and the use of opioid agonists alone was developed at Albert Einstein College of Medicine. It is well known that opioid painkillers produce their pain relieving effect by inhibiting the transmission of pain signals in certain nerve cells in the central nervous system. This inhibition of pain is achieved by inhibiting nerve cells that have opioid receptors on their membranes, via an inhibitory signaling pathway linked to the receptor. Scientists at Albert Einstein College of Medicine, however, have published results suggesting that opioid painkillers also activate an excitatory signaling pathway linked to opioid receptors, thereby stimulating the transmission of pain. This excitatory pathway counteracts pain inhibition and is believed to be a major cause of adverse side effects associated with opioid use, including the development of tolerance and addiction.

We believe that the excitatory pathway of opioid receptors contributes greatly to the adverse effects of chronic opioid use, such as tolerance, physical dependence and addiction. After repeated administration of morphine, oxycodone or other opioid painkillers, increasing doses of opioids are required in order to obtain the same level of pain relief, a process known as tolerance. If chronic opioid treatment is terminated abruptly, withdrawal symptoms rapidly appear. Continued administration of opioids prevents the appearance of withdrawal symptoms, at which point a patient is considered physically dependent. Published results in rodents also show that tolerance and physical dependence can be prevented by co-administration of low-dose naltrexone, an opioid antagonist. We believe low-dose naltrexone blocks the excitatory pathway, thus minimizing tolerance, physical dependence and addiction. In addition, preclinical work using animal models of addiction suggests that very low doses of opioid antagonists decrease the pleasurable effects and addictive potential of opioid drugs such as morphine or oxycodone.

Optimal dose ratios of low-dose opioid antagonist to opioid painkiller depend on their specific pharmacology and the mode of administration. Published preclinical and clinical dose response studies provide guidance in formulating optimal ratios of low-dose opioid antagonist to opioid painkiller for clinical development.

Oxytrex is a proprietary combination of two active drug ingredients. The first component is the opioid agonist oxycodone. The second component is an extremely low dose of the opioid antagonist naltrexone. Adding an antagonist to an agonist at usual clinical doses blocks the action of the agonist. This effect is clinically useful, for example, to reverse heroin overdose. At a very low dose, however, studies indicate that this effect is different: a very low-dose of an opioid antagonist can enhance pain relief and attenuate the development of tolerance or addiction. Oxytrex takes advantage of this effect by combining opioid agonists with low doses of opioid antagonists.

License from Albert Einstein College of Medicine

We have licensed certain technology from Albert Einstein College of Medicine. We have a worldwide exclusive license to the technology and all intellectual rights arising from the technology. Our license rights terminate upon the expiration of the patents used to protect the technology, which are scheduled to expire no earlier than September 2012. Pursuant to the agreement for the licensed technology, we are required to pay

Albert Einstein College of Medicine clinical milestone payments and royalties based on a percentage of net drug sales. If a product is combined with a drug or other substance for which we are paying an additional royalty, the royalty that we pay to Albert Einstein College of Medicine will be reduced by up to one-half of the amount of such additional royalty.

Albert Einstein College of Medicine originally received grants from the U.S. federal government to research some of the technology that we license. The terms of these grants provide the U.S. federal government with a non-exclusive, non-transferable paid-up license to practice inventions made with federal funds. Thus, our licenses are non-exclusive to the extent of the U.S. federal government’s license. If the U.S. federal government exercises its rights under this license, it could make use of the same technology that we license and the size of our potential market could thereby be reduced.

Our Intellectual Property

We seek to protect our technology by, among other methods, filing and prosecuting U.S. and foreign patents and patent applications with respect to our technology and products and their uses. We plan to prosecute and defend our patent applications, issued patents and proprietary information. Our competitive position and potential future revenues will depend in large part upon our ability to protect our intellectual property from challenges and to enforce our patent rights against potential infringements. If our competitors are able to successfully challenge the validity or scope of our patent rights, based on the existence of prior art or otherwise, they might be able to market products that contain features and clinical benefits similar to those of our products, and demand for our products could decline as a result.

The focus of our patent strategy is to secure and maintain intellectual property rights to technology for the following categories of our business:

•

the clinical use of a low-dose opioid antagonist, either alone or in combination with an opioid painkiller, for pain management and opioid and other addiction;

•

the use of a low-dose opioid antagonist to render opioid-based products more effective; and

•

the clinical use of a low-dose opioid antagonist, either alone or in combination with any opioid painkiller, for the treatment of other conditions.

In 2003, the U.S. Patent and Trademark Office, or PTO, disclosed that a law firm for an unidentified third-party filed requests for an Ex Parte Reexamination related to certain claims on patents we exclusively licensed from Albert Einstein College of Medicine. Between 2004 and 2006, Reexamination Certificates were issued resolving the proceedings.

We may be involved in additional challenges to our intellectual property. An adverse outcome of any challenges to our intellectual property could result in loss of claims of these patents that pertain to certain drugs we currently have under development and could have a material adverse impact on our future revenues.

Strategic Alliance with King Pharmaceuticals, Inc.

In November 2005, we entered into a collaboration agreement and a license agreement with King to develop and commercialize Remoxy and other abuse-resistant opioid painkillers. King made an upfront cash payment of $150 million to us at the closing of this strategic alliance in December 2005. King is also obligated to pay us up to $150 million in payments based on the achievement of milestones in the course of clinical development of Remoxy and other abuse-resistant opioid painkillers under the strategic alliance. In addition, subject to certain limitations, King is obligated to fund development expenses incurred by us related to Remoxy and other abuse-resistant opioid painkillers pursuant to the collaboration agreement. King is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed in connection with the strategic alliance.

We formed a joint operating committee, or JOC, with King to oversee drug development and commercialization strategies for the strategic alliance. Pursuant to the collaboration agreement in the strategic alliance, we retain sole control of drug development activities in the United States through Phase II clinical trials. We and King will jointly manage Phase III clinical trials and NDA submissions in the United States. King has responsibility for these development activities outside the United States. Upon regulatory approval, King will assume sole control and worldwide responsibility to exclusively commercialize Remoxy and other abuse-resistant opioid drugs developed pursuant to the strategic alliance. We retain all development and commercial rights in Australia and New Zealand.

Pursuant to the license agreement, King has the exclusive right to market and sell drugs developed pursuant to the strategic alliance and is obligated to pay us a 20% royalty on net sales, except as to the first $1 billion in cumulative net sales, for which the royalty is set at 15%. King is also obligated to reimburse us for our payment of third-party royalty obligations related to this strategic alliance.

The collaboration agreement continues until the later of the expiration of any patent rights licensed under the license agreement or developed under the collaboration agreement and the expiration of all periods of market exclusivity with respect to Remoxy and other abuse-resistant opioid drug candidates being developed under the strategic alliance. We and King can terminate the collaboration agreement under certain circumstances, including material breach and insolvency. King can terminate the collaboration agreement six months after the third anniversary of the effective date of the collaboration agreement, or sooner if the JOC determines that the development program under the collaboration agreement is unlikely to generate any marketable products. Our license agreement with King terminates at the time that the collaboration agreement terminates.

Formulation Agreement

We have an exclusive, worldwide licensing agreement with Durect Corporation to use a patented technology that forms the basis for a number of oral gel-cap drug candidates, including Remoxy. We have sub-licensed to King certain rights to develop and to commercialize Remoxy and certain other opioid drugs formulated in part with technology we licensed from Durect. Under the agreement with Durect, we control all of the preclinical, clinical, commercial manufacturing and sales/marketing activities for Remoxy and other abuse-resistant opioid painkillers. We reimburse Durect for formulation and related work, and will make milestone payments based on the achievement of certain technical, clinical or regulatory milestones. Durect will supply us with certain components of Remoxy and other abuse-resistant opioid painkillers on a cost-plus basis. We also are obligated to pay Durect royalties on any related drug sales.

King is obligated to reimburse us for costs we incur under the agreement with Durect, including royalties. Under our license agreement with King, we are obligated not to amend or terminate our agreement with Durect if an amendment or termination would alter the rights or obligations of King under the collaboration agreement or license agreement.

Manufacturing

We have no manufacturing facilities. We have entered into agreements with and rely upon qualified third parties for the formulation or manufacture of our clinical supplies. These supplies and the manufacturing facilities must comply with DEA regulations and current good manufacturing practices, or GMPs, enforced by the FDA and other government agencies. We plan to manufacture Remoxy with Mallinckrodt Pharmaceutical Outsourcing, a unit of Tyco Healthcare. Remoxy uses bulk oxycodone supplied by Noramco, Inc. We plan to continue to outsource formulation, manufacturing and related activities.

In 2006, we plan to continue to develop formulations of Remoxy and manufacture Remoxy to complete our Phase III clinical trial program. We also plan to develop abuse resistant formulations of other opioid drug candidates. We rely on a limited number of third-party manufacturers to formulate, manufacture, fill, label, ship or store all of our drug candidates.

Government Regulation

Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. All of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal, and in some cases state, statutes and regulations also govern or impact upon the manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require us to spend substantial resources. Regulatory approval, when and if obtained, may be limited in scope which may significantly limit the indicated uses for which our products may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products that may result in restrictions on their manufacture, sale or use or in their withdrawal from the market.

Applicable FDA regulations require the filing of an NDA and approval by the FDA prior to commercialization of Remoxy or Oxytrex in the United States.

The Drug Approval Process

We will be required to complete several activities before we can market any of our drug candidates for human use in the United States, including possibly:

•

preclinical studies;

•

submission to the FDA of an Investigational New Drug application, or IND, which must become effective before human clinical trials commence;

•

adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug candidate;

•

submission to the FDA of an NDA; and

•

FDA approval of the NDA prior to any commercial sale or shipment of the drug.

Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety of the product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practice. We submitted the results of preclinical tests to the FDA as part of our INDs prior to commencing clinical trials. We may be required to conduct additional toxicology studies concurrently with the clinical trials.

Based on preclinical testing, an IND is filed with the FDA to begin human testing of the drug in the United States. The IND becomes effective if not rejected by the FDA within 30 days. The IND must indicate the results of previous experiments, how, where and by whom the new clinical trials will be conducted, the chemical structure of the compound, the method by which it is believed to work in the human body, any toxic effects of the compound found in the animal studies and how the compound is manufactured. All clinical trials must be conducted in accordance with Good Clinical Practice. In addition, an Institutional Review Board, or IRB, generally comprised of physicians at the hospital or clinic where the proposed clinical trials will be conducted, must review and approve the IND. The IRB also continues to monitor the clinical trial. We must submit progress reports detailing the results of the clinical trials to the FDA at least annually. In addition, the FDA may, at any time during the 30-day period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials under the IND cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. An FDA imposed clinical hold on an IND application can result in substantial delay and large, unforeseen expenses, and it may cancel the viability of developing a new drug candidate in the United States.

Clinical trials are typically conducted in three sequential phases that may overlap. Phase I clinical trials typically study a drug’s safety profile, and may include the safe dosage range. Phase I clinical trials also determine how a drug is absorbed, distributed, metabolized and excreted by the body, and the duration of its action. In addition, we may, to the extent feasible, assess early indicators of a drug’s efficacy in our Phase I clinical trials. In Phase II clinical trials, controlled studies are conducted on volunteer patients with the targeted disease or condition. The primary purpose of these tests is to evaluate the effectiveness of the drug on the volunteer patients as well as to determine a drug’s side effect profile. These clinical trials may be conducted concurrently with Phase I clinical trials. In addition, Phase I/II clinical trials may be conducted to evaluate not only the efficacy of the drug on the patient population, but also its safety. During Phase III clinical trials, the drug is studied in an expanded patient population and in multiple sites. Physicians monitor the patients to determine efficacy and to observe and report adverse events that may result from use of the drug.

Our clinical trials are designed to produce clinical information about how our drugs perform compared to placebo or compared to existing opioid drugs where appropriate. We have tested Oxytrex in several clinical settings of pain in order to support a broad approval by the FDA for use of the drug for the relief of moderate to severe pain. FDA guidelines recommend that we demonstrate Oxytrex’s efficacy in more than one clinical presentation of pain, such as arthritis pain or generalized lower back pain. Because clinical models differ in their sensitivity to detect pain, we expect to complete clinical trials in multiple clinical models of pain.

We have designed most Phase II and Phase III clinical trials to date as randomized, double-blind, placebo- controlled, dose-ranging studies. A randomized clinical trial is one in which patients are randomly assigned to the various study treatment arms. A double-blind clinical trial is one in which the patient, the physician and our trial monitor are unaware if the patient is receiving placebo or study drug in order to preserve the integrity of the clinical trial and reduce bias. A placebo-controlled clinical trial is one in which a subset of patients is purposefully given inactive medication.

The FDA publishes industry guidelines specifically for the clinical evaluation of painkillers. We rely in part on these guidelines to design a clinical strategy for the approval of each of our drug candidates. In particular, FDA guidelines recommend that we demonstrate efficacy of our new painkillers in more than one clinical model of pain. Acceptable clinical models of pain include low-back pain or arthritis pain. Upon a clear demonstration of the safety and efficacy of painkillers in multiple clinical models of pain, the FDA has historically approved painkillers with broad indications. Such general purpose labeling often takes the form of “for the management of moderate to severe pain.”

We may not successfully complete Phase I, Phase II or Phase III clinical trials within any specified time period, or at all, with respect to any of our drug candidates. Furthermore, we or the FDA may suspend clinical trials at any time in response to concerns that participants are exposed to an unacceptable health risk.

After the completion of clinical trials, if there is substantial evidence that the drug is safe and effective, an NDA is filed with the FDA. The NDA must contain all of the information on the drug gathered to that date, including data from the clinical trials. NDAs are often over 100,000 pages in length.

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting a NDA for filing. In such an event, the NDA must be resubmitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the Federal Food, Drug and Cosmetic Act, the FDA has 365 days in which to review the NDA and respond to the applicant. The review process is typically extended for significant amounts of time by the FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If the FDA’s evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter, or an

approvable letter which usually contains a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. If the FDA’s evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter.

If the FDA approves the NDA, the drug becomes available for physicians to prescribe. Periodic reports must be submitted to the FDA, including descriptions of any adverse reactions reported. The FDA may request additional post marketing studies, or Phase IV clinical trials, to evaluate long-term effects of the approved drug.

Other Regulatory Requirements

The FDA mandates that drugs be manufactured in conformity with current GMPs. If the FDA approves any of our drug candidates we will be subject to requirements for labeling, advertising, record keeping and adverse experience reporting. Failure to comply with these requirements could result, among other things, in suspension of regulatory approval, recalls, injunctions or civil or criminal sanctions. We may also be subject to regulations under other federal, state, and local laws, including the Occupational Safety and Health Act, the Environmental Protection Act, the Clean Air Act, national restrictions on technology transfer, and import, export, and customs regulations. In addition, any of our products that contain narcotics will be subject to DEA regulations relating to manufacturing, storage, distribution and physician prescribing procedures. It is possible that any portion of the regulatory framework under which we operate may change and that such change could have a negative impact on our current and anticipated operations.

The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Any of our drug candidates that contain a scheduled substance will be subject to regulation by the DEA.

Competition

Our success will depend, in part, upon our ability to achieve market share at the expense of existing and established and future products in the relevant target markets. Existing and future products, therapies, technological approaches or delivery systems will compete directly with our products. Competing products may provide greater therapeutic benefits for a specific indication, or may offer comparable performance at a lower cost. Companies that currently sell generic or proprietary opioid formulations include but are not limited to Roxane Laboratories, Purdue Pharma, Janssen Pharmaceutica, Abbott Laboratories, Cephalon, Endo Pharmaceuticals, Teva Pharmaceuticals, Elkins-Sinn, Watson Laboratories, Ortho-McNeil Pharmaceutical and Forest Pharmaceuticals. Alternative technologies are being developed to increase opioid potency, as well as alternatives to opioid therapy for pain management, several of which are in clinical trials or are awaiting approval from the FDA.

We compete with fully integrated pharmaceutical companies, smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have opioid drugs already approved by the FDA or in development and operate larger research and development programs in these fields than we do. In addition, many of these competitors, either alone or together with their collaborative partners, have substantially greater financial resources than we do, as well as significantly greater experience in:

•

developing drugs;

•

undertaking preclinical testing and human clinical trials;

•

obtaining FDA and other regulatory approvals of drugs;

•

formulating and manufacturing drugs; and

•

launching, marketing, distributing and selling drugs.

Developments by competitors may render our drug candidates or technologies obsolete or non-competitive.

Employees

As of December 31, 2005, we had approximately 37 employees. We engage consultants from time to time to perform services on a per diem or hourly basis.

Available Information

We file electronically with the Securities and Exchange Commission, or SEC, our Annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.paintrials.com, by contacting the Investor Relations Department at our corporate offices by calling 650-624-8200 or by sending an e-mail message to cwaarich@paintrials.com.

Item 1A.

Risk Factors

Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline, and you could experience losses on your investment.

Risks Relating to our Financial Position and Need for Financing

Our operating history may make it difficult for you to evaluate our business to date and to assess its future viability.

We were founded in May 1998. Our operations to date have been limited to organizing and staffing our company, acquiring, developing and securing our technology and undertaking preclinical studies and clinical trials of our drug candidates. We have not yet demonstrated our ability to obtain regulatory approval, formulate and manufacture our drug candidates on a commercial scale or conduct sales and marketing activities. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

We have a history of losses and expect to incur substantial losses and negative operating cash flows for the foreseeable future.

We have incurred net losses each year since our inception. As a result of ongoing operating losses, we had an accumulated deficit of $142.7 million as of December 31, 2005. Even if we succeed in developing and

commercializing one or more of our drug candidates, we expect to continue to use significant cash resources in our operations for the foreseeable future. We recognized positive cash flow from operations in 2005 as a result of the upfront payment from King. We anticipate that our expenses will increase substantially in the foreseeable future as we:

•

continue to conduct preclinical and clinical trials for our drug candidates;

•

seek regulatory approvals for our drug candidates;

•

develop, formulate, manufacture and commercialize our drug candidates;

•

implement additional internal systems and develop new infrastructure;

•

acquire or in-license additional products or technologies, or expand the use of our technology;

•

maintain, defend and expand the scope of our intellectual property; and

•

hire additional personnel.

We will need to generate significant revenues to achieve and maintain profitability. If we cannot successfully develop, obtain regulatory approval for and commercialize our drug candidates, we will not be able to generate such revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would have a material adverse impact on the market price of our common stock.

If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials of any or some of our drug candidates or to pursue attractive business opportunities.

We have funded all of our operations and capital expenditures with the proceeds from our public and private stock offerings. We expect that our current cash, cash equivalents and marketable securities on hand will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. However, we may need to raise additional funds within such twelve-month period or thereafter and additional financing may not be available on favorable terms, if at all. Even if we succeed in selling additional securities to raise funds, our existing stockholders’ ownership percentage would be reduced and new investors may demand rights, preferences or privileges senior to those of existing stockholders. If we raise additional capital through strategic alliance and license arrangements, we may have to trade our rights to our technology, intellectual property or drug candidates to others in such arrangements on terms that may not be favorable to us.

If we determine that we need to raise additional funds and we are not successful in doing so, we may be unable to complete the clinical development of some or all of our drug candidates or to seek or obtain FDA approval of our drug candidates. We then could be forced to discontinue product development, enter into a relationship with a strategic partner earlier than currently intended, reduce sales and marketing efforts or forego attractive business opportunities.

Clinical and Regulatory Risks

If we fail to obtain the necessary regulatory approvals, we will not be allowed to commercialize our drug candidates, and we will not generate product revenues.

Satisfaction of all regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the drug candidate, and requires the expenditure of substantial resources for research and development and testing. Our research and clinical approaches may not lead to drugs that the FDA considers safe for humans and effective for indicated uses we are studying. The FDA may require us to conduct additional clinical testing, in which case we would have to expend additional time and resources and would likely delay the date of potentially receiving regulatory approval. In particular, the FDA may require additional toxicology studies for certain excipients used in Remoxy or any of our other drug candidates. The approval process may also

be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals will:

•

delay commercialization of, and product revenues from, our drug candidates; and

•

diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our operating results and financial condition.

Even if we comply with all FDA regulatory requirements, we may never obtain regulatory approval for any of our drug candidates. If we fail to obtain regulatory approval for any of our drug candidates we will have fewer saleable products, if any, and corresponding lower product revenues, if any. Even if we receive regulatory approval of our drug candidates, such approval may involve limitations on the indications and conditions of use or marketing claims we may make for our products. Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us to commit to perform lengthy Phase IV post-approval clinical trials, for which we would have to expend additional resources, which could have an adverse effect on our operating results and financial condition.

In jurisdictions outside the United States, we must receive marketing authorizations from the appropriate regulatory authorities before we can commercialize our drugs. Regulatory approval processes outside the United States generally include all of the aforementioned requirements and risks associated with FDA approval.

If we are unable to design, conduct and complete clinical trials successfully, we will not be able to obtain regulatory approval for our drug candidates.

In order to obtain FDA approval for any of our drug candidates, we must submit to the FDA an NDA that demonstrates that the drug candidate is safe and effective in humans for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials.

Our Phase III clinical trials may not demonstrate the safety or efficacy of our drug candidates. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. Results of later clinical trials may not replicate the results of prior clinical trials and preclinical testing. FDA guidelines recommend that the efficacy of new painkillers be demonstrated in more than one clinical model of pain. This means that even if one of our Phase III clinical trials demonstrates positive results for our drug candidates, we are likely to have to demonstrate positive results in one or more additional Phase III clinical trials prior to receiving broad label FDA approval for treatment of severe chronic pain. Even if the results of our Phase III clinical trials are positive, we may have to commit substantial time and additional resources to conducting further preclinical studies and clinical trials before we can submit NDAs or obtain FDA approvals for our drug candidates.

Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements. The clinical trial process is also time consuming. Furthermore, if participating patients in clinical trials suffer drug-related adverse reactions during the course of such clinical trials, or if we or the FDA believe that participating patients are being exposed to unacceptable health risks, we will have to suspend or terminate our clinical trials. Failure can occur at any stage of the clinical trials, and we could encounter problems that cause us to abandon or repeat clinical trials.

In addition, completion of clinical trials can be delayed by numerous factors, including:

•

delays in identifying and agreeing on acceptable terms with prospective clinical trial sites;

•

slower than expected rates of patient recruitment and enrollment;

•

increases in time required to complete monitoring of patients during or after participation in a clinical trial; and

•

unexpected need for additional patient-related data.

Any of these delays, if significant, could impact the timing, approval and commercialization of our drug candidates and could significantly increase our overall costs of drug development.

Even if our clinical trials are completed as planned, their results may not support our expectations or intended marketing claims. The clinical trials process may fail to demonstrate that our drug candidates are safe and effective for indicated uses. Such failure would cause us to abandon a drug candidate and could delay development of other drug candidates.

Clinical trial designs that were discussed with authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.

We discuss with and obtain guidance from regulatory authorities on certain of our clinical development activities. These discussions are not binding obligations on the part of regulatory authorities. Regulatory authorities may revise previous guidance or decide to ignore previous guidance at any time during the course of our clinical activities or after the completion of our clinical trials. Even with successful clinical safety and efficacy data, we may be required to conduct additional, expensive clinical trials to obtain regulatory approval.

Developments by competitors may establish standards of care that affect our ability to conduct our clinical trials as planned.

We have conducted clinical trials of our drug candidates comparing our drug candidates to both placebo and other approved drugs. Changes in standards related to clinical trial design could affect our ability to design and conduct clinical trials as planned. For example, regulatory authorities may not allow us to compare our drug candidates to placebo in a particular clinical indication where approved products are available. In that case, both the cost and the amount of time required to conduct a clinical trial could increase.

The Drug Enforcement Administration, or DEA, limits the availability of the active ingredients in certain of our current drug candidates and, as a result, our quota may not be sufficient to complete clinical trials, or to meet commercial demand or may result in clinical delays.

The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Certain active ingredients in our current drug candidates, such as oxycodone, are listed by the DEA as Schedule II under the Controlled Substances Act of 1970. Consequently, their manufacture, research, shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription. Furthermore, the amount of Schedule II substances we can obtain for clinical trials and commercial distribution is limited by the DEA and our quota may not be sufficient to complete clinical trials or meet commercial demand. There is a risk that DEA regulations may interfere with the supply of the drugs used in our clinical trials, and, in the future, our ability to produce and distribute our products in the volume needed to meet commercial demand.

Government agencies may establish and promulgate usage guidelines that directly apply to our drug candidates.

Government agencies, professional and medical societies, and other groups may establish usage guidelines that apply to our drug candidates. These guidelines could address such matters as usage and dose, among other factors. Application of such guidelines could limit the use of our drug candidates.

Conducting clinical trials of our drug candidates or potential commercial sales of a drug candidate may expose us to expensive product liability claims and we may not be able to maintain product liability insurance on reasonable terms or at all.

The risk of product liability is inherent in the testing of pharmaceutical products. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or terminate testing of one or more of our products. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of our products. We currently carry clinical trial insurance but do not carry product liability insurance. If we successfully commercialize one or more of our drug candidates, we may face product liability claims, regardless of FDA approval for commercial manufacturing and sale. We may not be able to obtain such insurance at a reasonable cost, if at all. If our agreements with any future corporate collaborators entitle us to indemnification against product liability losses, such indemnification may not be available or adequate should any claim arise.

If we receive regulatory approval for our drug candidates, we and our collaborators will also be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and limit our ability to commercialize our potential drugs.

Any regulatory approvals that we receive for our drug candidates may also be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drug, including but not limited to adverse events of unanticipated severity or frequency, or the discovery that adverse events previously observed in preclinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing our drugs and our business could suffer.

Risks Relating to our Collaboration Agreements

If King or other outside collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, our regulatory submissions and our product introductions may be delayed.

Pursuant to our strategic alliance, we will jointly manage Phase III clinical trials and NDA submissions in the United States for Remoxy and other abuse resistant drug candidates with King. We rely on King to devote time and resources to the development and commercialization of Remoxy and other abuse resistant drug candidates. If King limits their time and resources attributable to the strategic alliance, or otherwise fails to perform as we expect, we may not achieve clinical and regulatory milestones and regulatory submissions and related product introductions may be delayed or prevented, and revenues that we would receive from these activities will be less than expected.

We depend on independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, the approval of our regulatory submissions and our introductions of new drugs will be delayed or prevented.

Our collaborators may also have relationships with other commercial entities, some of which may compete with us. If outside collaborators assist our competitors to our detriment, the approval of our regulatory submissions will be delayed and the sales from our products, if any are commercialized, will be less than expected.

If we fail to maintain our strategic alliance for Remoxy and other abuse resistant drugs, we may have to reduce or delay our drug candidate development.

Our plan for developing, manufacturing and commercializing Remoxy and other abuse resistant drugs currently requires us to successfully maintain our strategic alliance with King to advance our programs and provide funding to support our expenditures on Remoxy and other drug candidates. If we are not able to maintain our existing strategic alliance with King, we may have to limit the size or scope of, or delay or abandon the development of Remoxy and other abuse resistant drug candidates or undertake and fund development of these drug candidates ourselves. If we elect to fund drug development efforts with respect to Remoxy and other abuse resistant drug candidates on our own, we may need to obtain additional capital, which may not be available on acceptable terms, or at all.

We may not succeed at in-licensing drug candidates or technologies to expand our product pipeline.

We may not successfully in-license drug candidates or technologies to expand our product pipeline. The number of such candidates or technologies is limited. Competition among large pharmaceutical companies and biopharmaceutical companies for promising drug candidates or technologies is intense because such companies generally desire to expand their product pipelines through in-licensing.

Our collaborative agreements may not succeed or may give rise to disputes over intellectual property or other issues.

Our strategy to focus on development of novel drug candidates discovered by third parties requires us to enter into license agreements with such third parties. In addition, we may enter into collaborative agreements to commercialize our products, such as our strategic alliance with King. Such agreements are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property under collaborations. Such disputes can delay or prevent the development of potential new drug products, or can lead to lengthy, expensive litigation or arbitration. Other factors relating to collaborative agreements may adversely affect the success of our drug candidates, including:

•

the development of parallel products by our collaborators or by a competitor;

•

arrangements with collaborative partners that limit or preclude us from developing certain products or technologies;

•

premature termination of a collaborative agreement; or

•

failure by a collaborative partner to devote sufficient resources to the development of our potential products.

Risks Relating to Commercialization

If physicians and patients do not accept and use our drugs, we will not achieve sufficient product revenues and our business will suffer.

Even if the FDA approves our drugs, physicians and patients may not accept and use them. Acceptance and use of our drugs will depend on a number of factors including:

•

perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drugs;

•

published studies demonstrating the cost-effectiveness of our drugs relative to competing products;

•

availability of reimbursement for our products from government or healthcare payers;

•

our ability to implement a risk management plan prior to the distribution of any Schedule II drug; and

•

effectiveness of marketing and distribution efforts by us and our licensees and distributors.

Because we expect to rely on sales generated by our current lead drug candidates for substantially all of our revenues for the foreseeable future, the failure of any of these drugs to find market acceptance would harm our business and could require us to seek additional financing.

If King is not successful in commercializing Remoxy and other abuse resistant drugs, our revenues and our business will suffer.

Our ability to commercialize Remoxy and other abuse resistant drugs and generate royalties from product sales of such drugs will depend on King’s abilities in assisting us in developing such drugs and in maintaining regulatory approval and achieving market acceptance of such drugs once commercialized. King may elect to independently develop drugs that could compete with ours or fail to commit sufficient resources to the development, marketing and distribution of Remoxy and other abuse resistant drugs developed under our strategic alliance. King may not proceed with the commercialization of Remoxy and other abuse resistant drugs developed under our strategic alliance with the same degree of urgency as we would because of other priorities they face. If King is not successful in commercializing Remoxy for a variety of reasons, including but not limited to competition from other pharmaceutical companies, or if King fails to perform as we expect, our potential for revenue from drugs developed in connection with our strategic alliance with King, if any, could be dramatically reduced and our business would suffer.

If we are unable to develop our own sales, marketing and distribution capabilities, or if we are not successful in contracting with third parties for these services on favorable terms, or at all, our product revenues could be disappointing.

We currently have no sales, marketing or distribution capabilities. Except with regard to products developed under our strategic alliance with King, in order to commercialize our products, if any are approved by the FDA, we will either have to develop such capabilities internally or collaborate with third parties who can perform these services for us. If we decide to commercialize any of our drugs ourselves, we may not be able to hire the necessary experienced personnel and build sales, marketing and distribution operations which are capable of successfully launching new drugs and generating sufficient product revenues. In addition, establishing such operations will take time and involve significant expense.

If we decide to enter into new co-promotion or other licensing arrangements with third parties, we may be unable to locate acceptable collaborators because the number of potential collaborators is limited and because of competition from others for similar alliances with potential collaborators. Even if we are able to identify one or more acceptable new collaborators, we may not be able to enter into any collaborative arrangements on favorable terms, or at all.

In addition, due to the nature of the market for pain management products, it may be necessary for us to license all or substantially all of our drug candidates not covered by our strategic alliance with King to a single collaborator, thereby eliminating our opportunity to commercialize these other pain management products independently. If we enter into any such new collaborative arrangements, our revenues are likely to be lower than if we marketed and sold our products ourselves.

In addition, any revenues we receive would depend upon our collaborators’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, change of strategic focus, further business combinations or other factors outside of our control. Depending upon the terms of our collaboration, the remedies we have against an under-performing collaborator may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement collaborator on acceptable terms, or at all.

If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.

The market for our drug candidates is characterized by intense competition and rapid technological advances. If our drug candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products are unable to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

We will compete for market share against fully integrated pharmaceutical companies or other companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have opioid painkillers already approved or in development. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

•

developing drugs;

•

conducting preclinical testing and human clinical trials;

•

obtaining FDA and other regulatory approvals of drugs;

•

formulating and manufacturing drugs; and

•

launching, marketing, distributing and selling drugs.

Our ability to generate product revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products from healthcare payers.

Our ability to commercialize our drugs, alone or with collaborators, will depend in part on the extent to which reimbursement will be available from:

•

government and health administration authorities;

•

private health maintenance organizations and health insurers; and

•

other healthcare payers.

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, health maintenance organizations and managed care organizations, are challenging the prices charged for medical products and services and/or are seeking pharmacoeconomic data to justify formulary acceptance and reimbursement practices. We currently have not generated pharmacoeconomic

data on any of our products. Government and other healthcare payers increasingly are attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs, and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has or has not granted labeling approval. Adequate third-party insurance coverage may not be available to patients for any products we discover and develop, alone or with collaborators. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our products, market acceptance of our product candidates could be limited.

Risks Relating to our Intellectual Property

If we are unable to protect our intellectual property our competitors could develop and market products with similar features that may reduce demand for our products.

Our success, competitive position and potential future revenues will depend in part on our ability to protect our intellectual property. If we, Albert Einstein College of Medicine or our other collaborators fail to file, prosecute or maintain certain patents, our competitors could market products that contain features and clinical benefits similar to those of our products, and demand for our products could decline as a result.

We may be involved in additional challenges to our intellectual property. An adverse outcome of a challenge to our intellectual property could result in loss of claims of patents or other intellectual property rights that pertain to certain drugs we currently have under development and could have a material adverse impact on our future revenues.

We intend to file additional patent applications relating to our technology, products and processes. We may direct Albert Einstein College of Medicine or our collaborators to file additional patent applications relating to the licensed technology or we may do so ourselves. However, our competitors may challenge, invalidate or circumvent any of our current or future patents. These patents may also fail to provide us with meaningful competitive advantages.

We may become involved in expensive litigation or other legal proceedings related to our existing intellectual property rights, including patents.

We expect that we will rely upon patents, trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information or be issued patents that may prevent the sale of our products or know-how or require us to license such information and pay significant fees or royalties in order to produce our products.

Our technology could infringe upon claims of patents owned by others. If we were found to be infringing on a patent held by another, we might have to seek a license to use the patented technology. In that case, we might not be able to obtain such a license on terms acceptable to us, or at all. If a legal action were to be brought against us or our licensors, we could incur substantial defense costs, and any such action might not be resolved in our favor. If such a dispute were to be resolved against us, we could have to pay the other party large sums of money and our use of our technology and the testing, manufacture, marketing or sale of one or more of our proposed products could be restricted or prohibited.

Risks Relating to our Business and Strategy

Competition for qualified personnel in the pharmaceutical industry is intense, and if we are not successful in attracting and retaining qualified personnel, we could experience delays in completing necessary clinical trials, in the regulatory approval process or in formulating, manufacturing, marketing and selling our potential products.

We will need to hire additional qualified personnel with expertise in clinical research, preclinical testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals, particularly in the San Francisco Bay area, is intense, and our search for such personnel may not be successful. Attracting and retaining qualified personnel will be critical to our success.

If third-party manufacturers of our drug candidates fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may be higher than expected.

We have no manufacturing facilities and have limited experience in drug product development and commercial manufacturing. We lack the resources and expertise to formulate, manufacture or test the technical performance of our drug candidates. We currently rely on a limited number of experienced personnel and a small number of contract manufacturers and other vendors to formulate, test, supply, store and distribute drug supplies for our clinical trials. Our reliance on a limited number of vendors exposes us to the following risks, any of which could delay our clinical trials, and, consequently, FDA approval of our drug candidates and commercialization of our products, result in higher costs, or deprive us of potential product revenues:

•

Contract commercial manufacturers, their sub-contractors or other third parties we rely on, may encounter difficulties in achieving the volume of production needed to satisfy clinical needs or commercial demand, may experience technical issues that impact quality or compliance with applicable and strictly enforced regulations governing the manufacture of pharmaceutical products, and may experience shortages of qualified personnel to adequately staff production operations.

•

Our contract manufacturers could default on their agreements with us to provide clinical supplies or meet our requirements for commercialization of our products.

•

The use of alternate manufacturers may be difficult because the number of potential manufacturers that have the necessary governmental licenses to produce narcotic products is limited. Additionally, the FDA and the DEA must approve any alternative manufacturer of our products before we may use the alternative manufacturer to produce our supplies.

•

It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all. Our contract manufacturers and vendors may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our products.

•

If any contract manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to such innovation.

Our employees and consultants are generally subject to confidentiality or other agreements with their former employers and they may inadvertently or otherwise violate those agreements.

Many of our employees and consultants were previously employed at universities or biotechnology or pharmaceutical companies. While we require our employees and consultants to honor any agreements they may have entered into prior to working with us, we may be subject to claims that we inadvertently or otherwise used or disclosed trade secrets or other confidential information belonging to former employers. Failure to defend such claims could result in loss of valuable rights or personnel, which in turn could harm or prevent commercialization

of our drug candidates. Successful defense against such claims can be expensive and might distract us from executing our strategies.

Law enforcement concerns over diversion of opioids and social issues around abuse of opioids may make the regulatory approval process very difficult for our drug candidates.

Media stories regarding the diversion of opioids and other controlled substances are commonplace. Law enforcement agencies or regulatory agencies may apply policies that seek to limit the availability of opioids. Such efforts may adversely affect the regulatory approval process for our drug candidates.

Developments by competitors may render our products or technologies obsolete or non-competitive.

Alternative technologies and products are being developed to improve or replace the use of opioids for pain management, several of which are in clinical trials or are awaiting approval from the FDA. In addition, the active ingredients in nearly all opioid drugs are available in generic form. Drug companies that sell generic opioid drugs represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. Our competitors may market less expensive or more effective drugs that would compete with our product candidates or reach market with competing drugs before we are able to reach market with our drug candidates. These organizations also compete with us to attract qualified personnel and partners for acquisitions, joint ventures or other collaborations.

Business interruptions could limit our ability to operate our business.

Our operations as well as those of our collaborators on which we depend are vulnerable to damage or interruption from computer viruses, human error, natural disasters, electrical and telecommunication failures, international acts of terror and similar events. We have not established a formal disaster recovery plan and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses we may suffer. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

Risks Relating to Manufacturing

We rely on third-party commercial drug manufacturers for drug supply.

Approved third-party commercial drug manufacturers may subsequently be stopped from producing, storing, shipping or testing our drug products due to their non-compliance with federal, state or local regulations. Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the DEA, and corresponding state and foreign government agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.

In addition, even if we enter into long-term supply arrangements with third-party suppliers, we cannot control changes in strategy by third-party suppliers that affect their ability or willingness to continue to supply our drug products on acceptable terms.

If our drug supply for one of our drug candidates was interrupted, our operations could be negatively affected.

If we cannot formulate and scale-up a wide range of dosage forms of Remoxy and other abuse resistant product candidates, we and King might determine that the commercial opportunity for Remoxy is too limited to warrant further investment in clinical testing and development.

We plan to formulate and scale-up a wide range of dosage forms of Remoxy and other abuse resistant drug candidates. We may not be able to successfully complete our formulation or scale-up activities or we may determine that the commercial opportunity for Remoxy and other abuse resistant drug candidates in certain dosage forms is too limited to warrant further investment. If we are unsuccessful in our formulation or scale-up activities with Remoxy and other abuse resistant drug candidates, our future revenue from milestones and royalties under our strategic alliance with King may be less than expected and our operations may suffer.

We rely on Durect, our sole source provider of certain components of Remoxy and other abuse resistant drug candidates, to produce Remoxy and other abuse resistant drug candidates for clinical supplies and will rely on Durect to produce commercial supplies of these components.

We rely on Durect as our sole source provider of certain components of Remoxy and other abuse resistant drug candidates, and will rely solely on Durect to produce commercial supplies of these components. Durect’s failure to achieve and maintain satisfactory manufacturing standards could result in product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could materially harm our business. Durect may encounter manufacturing difficulties involving production yields, quality control and quality assurance. Durect is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMP and other government regulations and corresponding foreign standards. We cannot control Durect’s compliance with these regulations and standards.

To date, Durect has not produced commercial-scale supply of these components. If we and King receive marketing approval for and commercially launch Remoxy or other abuse resistant candidates, we anticipate that Durect will need to expand its manufacturing capacity, possibly materially. Durect may not be able to increase its manufacturing capacity for Remoxy and other abuse resistant drug candidates in a timely or economic manner, or at all. Moreover, significant scale up of manufacturing may require additional validation studies, which the FDA must review and approve. If Durect is unable to successfully increase the manufacturing capacity for such components of Remoxy and other abuse resistant drugs, at an acceptable cost or otherwise, and we are unable to establish alternative manufacturing capabilities, the commercial launch or continued commercialization after a commercial launch of Remoxy and other abuse resistant drugs may be delayed, prevented or impaired or there may be a shortage in supply, which would harm our revenues and cause our business to suffer.

Risks Relating to an Investment in our Common Stock

Our stock price has been volatile and could experience a sudden decline in value.

Our common stock has experienced significant price and volume fluctuations and may continue to experience volatility in the future. You may not be able to sell your shares quickly or at the latest market price if trading in our stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:

•

the success of our collaboration agreements;

•

results of or delays in our preclinical and clinical trials;

•

publicity regarding actual or potential medical results relating to products under development by us or others;

•

announcements of technological innovations or new commercial products by us or others;

•

developments in patent or other proprietary rights by us or others;

•

comments or opinions by securities analysts or major stockholders;

•

future sales of our common stock by existing stockholders;

•

regulatory developments or changes in regulatory guidance;

•

litigation or threats of litigation;

•

economic and other external factors or other disaster or crises;

•

the departure of any of our officers, directors or key employees;

•

period-to-period fluctuations in financial results; and

•

limited daily trading volume.

The National Association of Securities Dealers, Inc., or NASD, and the Securities and Exchange Commission, or SEC, have adopted certain new rules. If we were unable to continue to comply with the new rules, we could be delisted from trading on the NASDAQ National Market, or Nasdaq, and thereafter trading in our common stock, if any, would be conducted through the over-the-counter market or on the Electronic Bulletin Board of the NASD. As a consequence of such delisting, an investor would likely find it more difficult to dispose of, or to obtain quotations as to the price of, our common stock. Delisting of our common stock could also result in lower prices per share of our common stock than would otherwise prevail.

Anti-takeover provisions in our charter documents, our Stockholder Rights Plan and Delaware law may prevent or delay removal of incumbent management or a change of control.

Anti-takeover provisions of our amended and restated certificate of incorporation and amended and restated bylaws, our Stockholder Rights Plan and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:

•

a classified board so that only one of the three classes of directors on our board of directors is elected each year;

•

elimination of cumulative voting in the election of directors;

•

procedures for advance notification of stockholder nominations and proposals;

•

the ability of our board of directors to amend our bylaws without stockholder approval; and

•

the ability of our board of directors to issue up to 10,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine.

The rights issued pursuant to our Stockholder Rights Plan will become exercisable, subject to certain exceptions, the tenth day after a person or group announces acquisition of 15% or more of our common stock or announces commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of our common stock.

In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203.

These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.

Volatility in the stock prices of other companies may contribute to volatility in our stock price.

The stock market in general, Nasdaq and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of early stage life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

Our share ownership is concentrated, and our officers, directors and principal stockholders can exert significant control over matters requiring stockholder approval.

Due to their combined stock holdings, our officers, directors and principal stockholders (stockholders holding greater than 5% of our common stock) acting collectively may have the ability to exercise significant influence over matters requiring stockholder approval including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of the Company and may make some transactions more difficult or impossible to complete without the support of these stockholders.

Publicly available information regarding stockholders’ ownership may not be comprehensive because the SEC does not require certain large stockholders to publicly disclose their stock ownership positions.

Our operating results may fluctuate from quarter to quarter and this fluctuation may cause our stock price to decline.

Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. Factors contributing to these fluctuations include, among other items, the timing and enrollment rates of clinical trials for our drug candidates, our need for clinical supplies and the valuation of stock-based compensation. Thus, quarter-to-quarter comparisons of our operating results are not indicative of what we might expect in the future. As a result, in some future quarters our clinical, financial or operating results may not meet the expectations of securities analysts and investors that could result in a decline in the price of our stock.

There may not be an active, liquid trading market for our common stock.

There is no guarantee that an active trading market for our common stock will be maintained on Nasdaq. Investors may not be able to sell their shares quickly or at the latest market price if trading in our stock is not active.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We currently lease approximately 10,500 square feet of space in South San Francisco, California, which is used as general office space. We believe that this facility is adequate and suitable for our current needs.

Item 3.

Legal Proceedings

We are not a party to any legal proceedings.

Item 4.

Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the security holders during the fourth quarter of 2005.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on the Nasdaq National Market under the symbol “PTIE.” The following table sets forth the high and low sales prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated.


	Sale Price
	High		Low
Fiscal 2005:
First Quarter	$	7.48	$	4.99
Second Quarter	$	7.24	$	4.78
Third Quarter	$	7.22	$	5.79
Fourth Quarter	$	9.45	$	5.46
Fiscal 2004:
First Quarter	$	9.86	$	5.77
Second Quarter	$	9.34	$	6.54
Third Quarter	$	8.39	$	6.22
Fourth Quarter	$	8.13	$	6.82

We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and have not paid and do not anticipate paying any cash dividends in the foreseeable future. As of February 1, 2006, there were approximately 75 holders of record of our common stock.

The following table summarizes the securities authorized for issuance under our equity compensation plans as of December 31, 2005.


	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by stockholders	6,993,492	$	6.74	1,420,802
Equity compensation plans not approved by stockholders	—		—	—

Total	6,993,492	$	6.74	1,420,802

Item 6.

Selected Financial Data (in thousands except per share data)


	Years ended December 31,
	2005			2004			2003			2002			2001
Statement of operations data:
Program fee revenue	$	3,712		$	—		$	—		$	—		$	—
Collaboration revenue		1,368			—			—			—			—

Total revenues		5,080			—			—			—			—
Research and development expense		32,938			35,093			18,913			11,396			11,668
General and administrative expense		4,859			3,868			3,338			5,523			5,647

Total operating expenses		37,797			38,961			22,251			16,919			17,315

Operating loss		(32,717	)		(38,961	)		(22,251	)		(16,919	)		(17,315	)
Interest and other income		2,047			1,185			634			994			2,978

Net loss	$	(30,670	)	$	(37,776	)	$	(21,617	)	$	(15,925	)	$	(14,337	)

Basic and diluted loss per share	$	(0.70	)	$	(1.01	)	$	(0.73	)	$	(0.59	)	$	(0.57	)

Weighted average shares used in computing basic and diluted loss per share		43,795			37,267			29,483			27,039			25,332


	December 31,
	2005			2004			2003			2002			2001
Balance sheet data:
Cash and cash equivalents	$	95,651		$	1,379		$	12,027		$	50,091		$	65,274
Marketable securities		117,001			98,018			65,402			55			—
Working capital		181,817			91,860			74,799			48,146			63,195
Total assets		215,795			101,192			80,513			53,325			68,136
Deferred program fee revenue		146,288			—			—			—			—
Total liabilities		152,435			7,796			3,951			3,101			2,519
Total Stockholders’ equity		63,360			93,396			76,562			50,224			65,616

Item 7.

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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

Overview

Both of our novel drug candidates are currently in Phase III clinical trial programs:

•

Remoxy^™, an abuse-resistant version of long-acting oxycodone, and

•

Oxytrex^™, a new oral opioid painkiller for the treatment of severe chronic pain.

In November 2005, we and King announced a strategic alliance to develop and commercialize Remoxy and other abuse-resistant opioid painkillers. King made an upfront cash payment of $150 million to us at the closing of this strategic alliance in December 2005. We could also receive from King up to $150 million in milestone payments in the course of clinical development of Remoxy and other abuse-resistant opioid painkillers under the strategic alliance. In addition, subject to certain limitations, King is also obligated to pay us up to $150 million in payments based on the achievement of milestones in the course of clinical development of Remoxy and other abuse-resistant opioid painkillers under the strategic alliance. King is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed in connection with the strategic alliance. King is obligated to pay us a 20% royalty on net sales of drugs developed in connection with the strategic alliance, except as to the first $1 billion in net sales of such drugs, for which the royalty is set at 15%.

We have yet to generate any revenues from product sales. We have not been profitable and through December 31, 2005, we have recorded an accumulated deficit of approximately $142.7 million. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing and enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.

We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures will increase substantially in the future as we:

•

continue to conduct preclinical and clinical trials for our drug candidates;

•

seek regulatory approvals for our drug candidates;

•

develop, formulate, manufacture and commercialize our drug candidates;

•

implement additional internal systems and develop new infrastructure;

•

acquire or in-license additional products or technologies, or expand the use of our technology;

•

maintain, defend and expand the scope of our intellectual property; and

•

hire additional personnel.

Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. If our development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.

We focus all our research and development efforts on the research and development of opioid drugs for the treatment of pain. The following table summarizes expenses by category for research and development efforts (in thousands):


	Years Ended December 31,
	2005		2004		2003
Compensation	$	4,717	$	3,769	$	3,690
Contractor fees ⁽¹⁾		23,642		26,605		10,049
Supplies ⁽²⁾		2,351		2,575		3,262
Other ⁽³⁾		2,228		2,144		1,912

	$	32,938	$	35,093	$	18,913

(1)	Contractor fees generally include expenses for preclinical studies and clinical trials.

(2)	Supplies generally include costs for formulation and manufacturing activities.

(3)	Other generally includes the allocation of common costs such as facilities.

Our technology has been applied across our portfolio of drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.

Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.

Critical Accounting Policies

The preparation of our financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to contract agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:

•

Expenses for clinical trials. Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the underlying data. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on clinical data collection and management. Costs that

are associated with patient enrollment are recognized as each patient in the clinical trial completes enrollment. Costs that are based on clinical data collection and management are recognized based on estimates of unbilled goods and services received. In the event of early termination of a clinical trial, we would accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial.

•

Stock based compensation. The preparation of the financial statement footnotes requires us to estimate the fair value of stock options granted to employees. While fair value may be readily determinable for awards of stock, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We currently use the Black-Scholes option-pricing model, or Black-Scholes to estimate the fair value of employee stock options. However, Black-Scholes was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility. Because our stock options have characteristics significantly different from those of traded options, changes to the assumptions used in Black-Scholes may materially affect the fair value estimate. After evaluating our option valuation policies and assumptions in light of current accounting standards related to employee stock options, we expect to continue to use the Black-Scholes option-pricing model for determining the fair value of our options.

•

Revenue recognition. In connection with our strategic alliance with King, we recognize program fee revenue and collaboration revenue. Program fee revenue is derived from the upfront payment from King and is recognized ratably over our estimate of the development period under the strategic alliance with King. Collaboration revenues from reimbursement of development expenses are recognized as costs are incurred that relate to the strategic alliance with King.

•

Taxes. We make estimates and judgments in determining income tax expense. We have accumulated significant deferred tax assets. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any. We are uncertain of the timing and amount of any future earnings. Accordingly, we fully offset the total deferred tax assets by a valuation allowance. We may in the future determine that some, or all, of our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period.

Results of Operations

Years Ended December 31, 2005 and 2004

Revenues—Program fee revenue

King paid us a $150.0 million upfront fee in connection with the closing of our strategic alliance with King in December 2005. Revenues recognized from amortization of the upfront fee were $3.7 million in the fourth quarter of 2005 for recognition of the revenue for the period from the execution of the agreement in November 2005 to the end of 2005. We expect to recognize the remainder of the program fee ratably over our estimate of the development period under the strategic alliance with King.

Revenues—Collaboration revenue

Collaboration revenues were $1.4 million in the fourth quarter of 2005, related to reimbursement of our development expenses incurred pursuant to the King strategic alliance from the execution of the agreement in November 2005 to the end of 2005. We did not have any corresponding collaboration revenue in 2004.

We expect collaboration revenues to increase significantly in 2006 and beyond as compared to revenue recognized in 2005 in connection with future increases in our research and development activities for Remoxy and other abuse-resistant drug candidates and reimbursement of these expenses pursuant to the King Agreement.

Research and Development Expense

Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:

•

preclinical testing,

•

clinical trials,

•

clinical supplies and related formulation and design costs, and

•

salaries and other personnel-related expenses.

Research and development expense decreased to $32.9 million from $35.1 million in the years ended December 31, 2005 and 2004, respectively. The decrease was primarily due to lower clinical trial activity in 2005 as compared to 2004. This decrease was offset in part by increased formulation and development activities for Remoxy and other preclinical activities as well as increased compensation related expenses.

We expect research and development expenses to increase over the next several years as we expand our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials, including our Phase III clinical trials of Oxytrex, Remoxy, and other abuse resistant drug candidates. King is obligated to reimburse development expenses for Remoxy and other abuse resistant drug candidates pursuant to our agreement. Also, we expect to continue other development efforts on our drug candidates. The increase in research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies.

General and Administrative Expense

General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expense increased to $4.9 million from $3.9 million in the years ended December 31, 2005 and 2004, respectively, primarily due to increases in headcount and general corporate activities, offset in part by decreased non-cash stock-based compensation expense in 2005 as compared to 2004. We expect general and administrative expenses to increase over the next several years in connection with precommercialization and commercialization activities for our product candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies.

Interest and Other Income

Interest and other income increased to $2.0 million from $1.2 million in the years ended December 31, 2005 and 2004, respectively, primarily due to increases in yields on our investments in marketable securities and, to a lesser extent, in average balances of marketable securities. We expect our interest income to increase during 2006 because we expect our average balance of our marketable securities to be higher in 2006 as compared to 2005 and we expect the yield on our marketable securities to be higher in 2006 as compared to 2005.

Years Ended December 31, 2004 and 2003

Research and Development Expense

Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:

•

preclinical testing,

•

clinical trials,

•

clinical supplies and related formulation and design costs, and

•

salaries and other personnel-related expenses.

Research and development expense increased to $35.1 million from $18.9 million in the years ended December 31, 2004 and 2003, respectively. The increase was primarily due to the increase in Phase III clinical trials activities for Oxytrex, PTI-901 and Remoxy as well as continued development activities for Remoxy.

General and Administrative Expense

General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expense increased to $3.9 million from $3.3 million in the years ended December 31, 2004 and 2003, respectively, primarily due to an increase in non-cash stock-based compensation expense.

Interest Income

Interest income increased to $1.2 million from $0.6 million in the years ended December 31, 2004 and 2003, respectively, primarily due to increases in average balances of marketable securities.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through public and private securities offerings. Additionally, in December 2005, we received a $150.0 million program fee under our strategic alliance with King. We intend to continue to use the proceeds from these offerings and from this program fee to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of December 31, 2005, cash, cash equivalents and marketable securities were $212.7 million.

Net cash provided by operating activities was $113.2 million for the year ended December 31, 2005 compared to net cash used in operating activities of $32.6 million for the year ended December 31, 2004. The increase in cash provided by operating activities was primarily attributable to the December 2005 program fee received from King. Cash used in operating activities in both years related primarily to the funding of operating losses.

We may use cash in 2007 to pay certain alternative minimum taxes related to using either net operating loss carryforwards or tax credits to offset revenue stemming from the upfront payment from King.

Our investing activities to purchase property, equipment and leasehold improvements used cash of $0.5 million for the year ended December 31, 2005 and $0.2 million for the year ended December 31, 2004. Other investing activities for both years consisted primarily of the purchase and sale of marketable securities. We expect to continue to invest in our infrastructure to support our operations.

Net cash provided by financing was $0.3 million in 2005 compared to $54.8 million in 2004. In 2004, we issued 8,000,000 shares of common stock at $7.25 per share in a follow-on public offering and received approximately $54.5 million in net proceeds after deducting underwriting discounts and related expenses. In 2005, we filed with the Securities and Exchange Commission a registration statement on Form S-3, using a shelf registration process under which we may offer to sell any combination of securities described in such registration statement in one or more offerings, up to a total dollar amount of $150.0 million. We have not sold any securities under this shelf registration statement.

We lease approximately 10,500 square feet of general office space. In addition to office space, we also lease equipment pursuant to operating leases. Our leases expire at various dates through 2010. Under the terms of our real property and equipment leases, annual minimum lease payments are as follows as of December 31, 2005 (in thousands):


	2006		2007		2008		2009		2010		Total
Future minimum lease payments	$	191	$	187	$	196	$	206	$	160	$	940

We have license agreements that require us to make milestone payments upon the successful achievement of defined milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of December 31, 2005. Our formulation agreement with Durect Corporation obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones. King is obligated to reimburse us for any of our milestone payments and royalty payments to Durect Corporation.

We have an accumulated deficit of approximately $142.7 million. While our cash requirements to fund our operations may be lower in the future than in the year ended December 31, 2005 due to the obligation of King under the strategic alliance to reimburse us for certain expenses, we expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates and the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products. We believe that our current resources should be sufficient to fund our operations for at least the next twelve months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, the principal amount of our investment will probably decline. A hypothetical 50 basis point increase in interest rates reduces the fair value of our available-for-sale securities at December 31, 2005 by approximately $0.6 million. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debt securities and/or money market funds that invest in such securities. We have no holdings of derivative financial or commodity instruments. As of December 31, 2005, our investments consisted of short-term investments in corporate and government notes and obligations or in money market accounts and checking funds with variable, market rates of interest.

Item 8.

Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS



		Page
Report of Independent Registered Public Accounting Firm		34

Balance Sheets		35

Statements of Operations		36

Statement of Stockholders’ Equity		37

Statements of Cash Flows		38

Notes to Financial Statements		39

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Pain Therapeutics, Inc.

We have audited the accompanying balance sheets of Pain Therapeutics, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pain Therapeutics, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pain Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006 expressed an unqualified opinion thereon.

ERNST & YOUNG LLP

Palo Alto, California

February 21, 2006

PAIN THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands except share and per share data)


	December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	95,651		$	1,379
Marketable securities		117,001			98,018
Collaboration revenue receivable		889			—
Prepaid expenses		623			259

Total current assets		214,164			99,656
Property and equipment, net		1,556			1,461
Other assets		75			75

Total assets	$	215,795		$	101,192

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	998		$	877
Accrued development expense		4,461			6,358
Deferred program fee revenue—current portion		26,200			—
Accrued compensation and benefits		501			415
Other accrued liabilities		187			146

Total current liabilities		32,347			7,796

Non-current liabilities
Deferred program fee revenue—noncurrent portion		120,088			—

Total liabilities		152,435			7,796

Commitments and contingencies
Stockholders’ equity
Preferred stock; $.001 par value; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.001 par value; 120,000,000 shares authorized; 43,936,088 and 43,652,116 shares issued and outstanding in 2005 and 2004, respectively		44			44
Additional paid-in-capital		206,489			205,920
Accumulated other comprehensive loss		(479	)		(544	)
Accumulated deficit		(142,694	)		(112,024	)

Total stockholders’ equity		63,360			93,396

Total liabilities and stockholders’ equity	$	215,795		$	101,192

See accompanying notes to financial statements.

PAIN THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(in thousands except per share data)


	Years ended December 31,
	2005			2004			2003
Revenues:
Program fee revenue	$	3,712		$	—		$	—
Collaboration revenue		1,368			—			—

Total revenues		5,080			—			—
Operating expenses:
Research and development		32,938			35,093			18,913
General and administrative		4,859			3,868			3,338

Total operating expenses		37,797			38,961			22,251

Operating loss		(32,717	)		(38,961	)		(22,251	)
Other income:
Interest and other income		2,047			1,185			634

Net loss	$	(30,670	)	$	(37,776	)	$	(21,617	)

Basic and diluted loss per share	$	(0.70	)	$	(1.01	)	$	(0.73	)

Weighted-average shares used in computing basic and diluted loss per share		43,795			37,267			29,483

Included in research and development and general and administrative expenses are stock-based compensation expenses of $248, $401, and $139 for the years ended December 31, 2005, 2004 and 2003, respectively.

See accompanying notes to financial statements.

PAIN THERAPEUTICS, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands except share data)


	Common and Preferred stock			Additional paid-in capital			Deferred compensation			Notes receivable for stock			Accumulated other comprehensive income (loss)			Accumulated deficit			Total stockholders’ equity
	Shares	Par value		Additional paid-in capital			Deferred compensation			Notes receivable for stock						Accumulated deficit			Total stockholders’ equity
Balance at December 31, 2002	27,200,508	$	27	$	103,254		$	(304	)	$	(122	)	$	—		$	(52,631	)	$	50,224
Issuance of common stock pursuant to exercise of stock options	272,150		—		227			—			—			—			—			227
Issuance of common stock pursuant to follow-on offering, net of expenses	7,730,500		8		46,650			—			—			—			—			46,658
Issuance of common stock pursuant to exercise of warrants	120,000		—		600			—			—			—			—			600
Amortization of employee deferred compensation, net of reversals	—		—		(406	)		297			—			—			—			(109	)
Compensation with respect to non-employee option grants	—		—		248			—			—			—			—			248
Issuance of common stock related to employee stock purchase plan	58,151		—		159			—			—			—			—			159
Receipt of payment of stockholder notes receivable	—		—		—			—			122			—			—			122
Unrealized gains on investment in marketable securities	—		—		—			—			—			50			—			50
Net loss	—		—		—			—			—			—			(21,617	)		(21,617	)

Comprehensive loss																				(21,567	)

Balance at December 31, 2003	35,381,309		35		150,732			(7	)		—			50			(74,248	)		76,562
Issuance of common stock pursuant to exercise of stock options	184,257		1		473			—			—			—			—			474
Issuance of common stock pursuant to follow-on offering, net of expenses	8,000,000		8		54,074			—			—			—			—			54,082
Amortization of employee deferred compensation, net of reversals	—		—		—			7			—			—			—			7
Compensation with respect to non-employee option grants	—		—		394			—			—			—			—			394
Issuance of common stock related to employee stock purchase plan	86,550		—		247			—			—			—			—			247
Net unrealized losses on investment in marketable securities	—		—		—			—			—			(594	)		—			(594	)
Net loss	—		—		—			—			—			—			(37,776	)		(37,776	)

Comprehensive loss																				(38,370	)

Balance at December 31, 2004	43,652,116		44		205,920			—			—			(544	)		(112,024	)		93,396
Issuance of common stock pursuant to exercise of stock options	148,136		—		159			—			—			—			—			159
Issuance of common stock pursuant to exercise of warrants	60,450		—		6			—			—			—			—			6
Expenses pursuant to filing registration statements	—		—		(116	)		—			—			—			—			(116	)
Compensation with respect to non-employee option grants	—		—		248			—			—			—			—			248
Issuance of common stock related to employee stock purchase plan	75,386		—		272			—			—			—			—			272
Net unrealized gains on investment in marketable securities	—		—		—			—			—			65			—			65
Net loss	—		—		—			—			—			—			(30,670	)		(30,670	)

Comprehensive loss																				(30,605	)

Balance at December 31, 2005	43,936,088	$	44	$	206,489		$	—		$	—		$	(479	)	$	(142,694	)	$	63,360

See accompanying notes to financial statements.

PAIN THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)


	Years ended December 31,
	2005			2004			2003
Cash flows used in operating activities:
Net loss	$	(30,670	)	$	(37,776	)	$	(21,617	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		368			383			341
Non-cash net interest income		(100	)		(484	)		(27	)
Non-cash stock based compensation		248			401			139
Changes in operating assets and liabilities:
Collaboration revenue receivable		(889	)		—			—
Prepaid expenses		(364	)		1,062			(220	)
Accounts payable		121			(1,354	)		960
Accrued development expense		(1,897	)		5,148			(167	)
Deferred program fee revenue		146,288			—			—
Accrued compensation and benefits		86			46			96
Other accrued liabilities		41			5			(39	)

Net cash provided by (used in) operating activities		113,232			(32,569	)		(20,534	)

Cash flows used in investing activities:
Purchase of property and equipment		(463	)		(156	)		(26	)
Purchase of marketable securities		(93,591	)		(114,067	)		(68,829	)
Sales of marketable securities		74,773			81,341			3,559

Net cash used in investing activities		(19,281	)		(32,882	)		(65,296	)

Cash flows from financing activities:
Stock subscription note payments received		—			—			122
Proceeds from issuance of common stock, net		321			54,803			47,644

Net cash provided by financing activities		321			54,803			47,766

Net increase (decrease) in cash and cash equivalents		94,272			(10,648	)		(38,064	)
Cash and cash equivalents at beginning of period		1,379			12,027			50,091

Cash and cash equivalents at end of period	$	95,651		$	1,379		$	12,027

See accompanying notes to financial statements.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Business

Pain Therapeutics, Inc. is a biopharmaceutical company dedicated to the development of innovative drugs. We specialize in developing safer or more efficacious drugs for use in pain management, particularly in the area of opioid painkillers, which are sometimes referred to as narcotic painkillers.

In the course of our development activities, we have sustained operating losses. There are no assurances that additional financing will be available on favorable terms, or at all.

Our development activities involve inherent risks. These risks include, among others, dependence on our collaboration partners, key personnel and determination of patentability and protection of our products and processes. In addition, we have drug candidates that have not yet obtained FDA approval. Successful future operations depend on our ability to obtain approval for and commercialize these products.

Prior to 2005 we were a development stage company.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition and Deferred Program Fee Revenue

In November 2005, we and King Pharmaceuticals, Inc., or King, announced that we have entered into a strategic alliance to develop and commercialize Remoxy and other abuse-resistant opioid painkillers. In connection with this strategic alliance, we recognize program fee revenue and collaboration revenue. Program fee revenue is derived from the upfront payment from King and is recognized ratably over our estimate of the development period under the strategic alliance with King. Collaboration revenues from reimbursement of development expenses are recognized as costs are incurred that relate to the strategic alliance with King.

Collaboration Revenue Receivable from King

We accrue a receivable for yet-to-be reimbursed development expenses incurred in connection with the strategic alliance with King. We expect to receive payment for the receivable within 90 days of the balance sheet date and classify the receivable as a current asset.

Cash, Cash Equivalents and Concentration of Cash Risk

We consider all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash maintained at two financial institutions and money market funds.

Marketable Securities

In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” we consider our investments to be held as “available-for-sale.” We

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

classify these investments as current assets and carry them at fair value. Unrealized gains and losses are recorded as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). All realized gains and losses on our available-for-sale securities are recognized in results of operations. Our investments are maintained at one financial institution and are governed by our investment policy as approved by our Board of Directors. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. We would recognize an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than our amortized cost, any adverse changes in the investees’ financial condition and our intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets (generally two to five years). Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or the lease term.

Impairment of Long-Lived Assets

We regularly perform reviews to determine if the carrying value of our long-lived assets is impaired. We consider facts or circumstances, either internal or external, that indicate that we may not recover the carrying value of the asset.

We measure impairment loss related to long-lived assets based on the amount by which the carrying amounts of such assets exceed their fair values. Our measurement of fair value is generally based on an analysis of the present value of estimated future discounted cash flows. We use available information and reasonable and supportable assumptions and projections. We consider the likelihood of possible outcomes and our best estimates of projected future cash flows. If necessary, we perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the measurement of fair value of the impaired asset. No events or changes in circumstances have occurred with respect to our long-lived assets that would indicate that an impairment analysis should have been performed.

Business Segments

Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, requires an enterprise to report segment information based on how management internally evaluates the operating performance of its business units (segments). Our operations are confined to one business segment: the clinical development and commercialization of novel painkillers.

Expenses for Clinical Trials

Research and development expense includes the cost of clinical trials. Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the underlying data. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and treatment as well as on clinical data collection and management. Costs that are associated with patient enrollment are recognized as each patient in the clinical trial completes enrollment. Costs that are based on clinical data collection and management are recognized based on estimates of unbilled goods and services received. In the event of early termination of a clinical trial, we accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Stock Based Compensation

We use the intrinsic-value method of accounting for stock based awards granted to employees and directors in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. Accordingly, we would recognize compensation expense in our financial statements in connection with stock options granted to employees and directors with exercise prices less than fair value at the time the stock option is granted. We record stock based compensation expense for non-employees at the fair value of the options granted in accordance with Statement of Financial Accounting Standards No. 123, or SFAS 123 and Emerging Issues Task Force No. 96-18, or EITF 96-18. The fair value of options granted to non-employees is estimated using a Black-Scholes option valuation model, or Black Scholes. The model considers a number of factors, including the market price and volatility of our common stock at the date of measurement. We periodically re-measure the compensation expense for options granted to non-employees as the underlying options vest. The compensation expense related to all grants is amortized using the graded vesting method, in accordance with SFAS 123, EITF 96-18 and FASB Interpretation No. 28, over the vesting period of each respective stock option, generally four years. Assuming no change in the fair value of the award, the graded vesting method results in expensing approximately 57% of the total award value in year one, 26% in year two, 13% in year three and 4% in year four.

If we had recorded compensation expense for our stock based plans in a manner consistent with the fair value approach of SFAS 123, our net loss and loss per share would have been increased as follows (in thousands, except per share data):


	Years Ended December 31,
	2005			2004			2003
Net loss as reported	$	(30,670	)	$	(37,776	)	$	(21,617	)
Deduct: Total stock based employee and director compensation expense determined under the fair valued based method for all awards		(7,772	)		(6,188	)		(5,153	)
Add (deduct): Total stock based employee and director compensation included in net loss		—			7			(109	)

Adjusted net loss	$	(38,442	)	$	(43,957	)	$	(26,879	)

Net loss per share basic and diluted as reported	$	(0.70	)	$	(1.01	)	$	(0.73	)

Adjusted net loss per share basic and diluted	$	(0.88	)	$	(1.18	)	$	(0.90	)

The weighted average fair value of stock options granted to employees and directors was $4.47 in 2005, $6.25 in 2004, and $5.48 in 2003. The fair value of each option granted to both employees, directors and non-employees was estimated using Black-Scholes with an expected life of options of 5 years from vesting date for employees and directors, 10 years for non-employee options and no dividend yield. We assumed volatility was between 78% and 86% in 2005, 89% and 95% in 2004, and 91% and 100% in 2003. We used risk-free interest rates of between 4% and 5% in 2005, 3% and 4% in 2004, and 2% and 5% in 2003.

For the 2000 Employee Stock Purchase Plan, the weighted-average fair value of purchase rights granted was $2.14 per share in 2005, $2.85 per share in 2004 and $2.74 in 2003 calculated using Black-Scholes with an expected life of 1 year in 2005 and 2 years in 2004 and 2003, and no dividend yield. We assumed volatility was between 41% and 46% in 2005, 89% and 94% in 2004 and between 91% and 100% in 2003. We used risk-free interest rates of 3% to 4% in 2005, 3% in 2004, and between 1% and 2% in 2003.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Loss per Share

Basic loss per share is computed on the basis of the weighted-average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted-average number of common shares outstanding plus dilutive potential common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of convertible preferred stock, outstanding stock options and outstanding warrants.

In all years presented we have reported a loss and therefore all potential common shares related to potentially dilutive securities have been excluded from the calculation of diluted loss per share because they are anti-dilutive. The following table sets forth the number of weighted-average potential shares of common stock that are in-the-money for the periods indicated but have not been included in the computation of diluted net loss per share because to do so would be anti-dilutive:


	Years Ended December 31,
	2005	2004	2003
Options to purchase common shares	1,695,391	3,363,985	1,084,553
Warrants	150,000	220,000	220,000

	1,845,391	3,583,985	1,304,553

Comprehensive Loss

Comprehensive loss is comprised of net loss and unrealized holding gains and losses on available-for-sale securities as follows (in thousands):


	Years Ended December 31,
	2005			2004			2003
Net loss	($	30,670	)	($	37,776	)	($	21,617	)
Other comprehensive income (loss)		65			(594	)		50

Comprehensive loss	($	30,605	)	($	38,370	)	($	21,567	)

Income Taxes

Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized. Management performs assessments of the realization of deferred tax assets considering all available evidence, both positive and negative. These assessments require that management make significant judgments about many factors, including the amount and likelihood of future taxable income.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board, or FASB, issued a revision of Financial Accounting Standards No. 123, or SFAS 123R, which requires all share-based payments to employees and

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

directors, including grants of employee stock options, to be recognized in the income statement based on their values. We expect to calculate the value of share-based payments under SFAS 123R on a basis substantially consistent with the fair value approach of SFAS 123. We are required to adopt SFAS 123R in our fiscal quarter beginning January 1, 2006, using the modified prospective method. We expect the adoption of SFAS 123R will have a material impact on our results of operations in that fiscal quarter and in each subsequent quarter, although it will have no impact on our overall financial position. We cannot reasonably estimate the impact of adoption because it will depend on levels of share-based payments granted in the future as well as certain assumptions that can materially affect the calculation of the value share-based payments to employees and directors. However, had we adopted SFAS 123R in prior periods, the impact of the standard would have approximated the impact of SFAS 123 as described in the disclosure of pro-forma net loss and net loss per share in the Stock Based Compensation section above.

3. Collaboration Agreements

King Pharmaceuticals, Inc.

In November 2005, we and King announced a strategic alliance to develop and commercialize Remoxy and other abuse-resistant opioid painkillers. King made an upfront cash payment of $150 million to us at the closing of this strategic alliance in December 2005, of which $3.7 million was recorded as program fee revenue for the year ended December 31, 2005. King is also obligated to pay us up to $150 million in payments based on the achievement of milestones in the course of clinical development of Remoxy and other abuse-resistant opioid painkillers under the strategic alliance. In addition, subject to certain limitations, King is obligated to fund development expenses incurred by us related to Remoxy and other abuse-resistant opioid painkillers pursuant to the collaboration agreement, of which $1.4 million was recorded as collaboration revenue for the year ended December 31, 2005. King is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed in connection with the strategic alliance. King is obligated to pay us a 20% royalty on net sales of drugs developed in connection with the strategic alliance, except as to the first $1 billion in net sales of such drugs, for which the royalty is set at 15%.

Durect Corporation

We have an exclusive, worldwide licensing agreement with Durect Corporation to use a patented technology that forms the basis for a number of oral gel-cap drug candidates, including Remoxy. We have sub-licensed to King certain rights to develop and to commercialize Remoxy and certain other opioid drugs formulated in part with technology we licensed from Durect. Under the agreement with Durect, we control all of the preclinical, clinical, commercial manufacturing and sales/marketing activities for Remoxy and other abuse-resistant opioid painkillers. We reimburse Durect for formulation and related work, and will make milestone payments based on the achievement of certain technical, clinical or regulatory milestones. Durect will supply us with certain components of Remoxy and other abuse-resistant opioid painkillers on a cost-plus basis. We also are responsible to pay Durect royalties on any related drug sales. King is obligated to reimburse us for costs we incur under the agreement with Durect, including royalties.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

4. Cash and Cash Equivalents and Marketable Securities

Cash, cash equivalents and marketable securities held as available-for-sale consisted of the following (in thousands):


	Cash, Cash Equivalents and Investments
	Amortized Cost		Accrued Interest		Unrealized Gains		Unrealized Losses on Investments Held Under One Year			Unrealized Losses on Investments Held Over One Year			Estimated Fair Value
December 31, 2005
Cash & cash equivalents:
Money market securities	$	95,599	$	52	$	—	$	—		$	—		$	95,651

Total		95,599		52		—		—			—			95,651

Marketable securities available-for-sale:
U.S. government and agency obligation		40,785		255		—		(76	)		(43	)		40,921
Corporate obligation		65,644		854		7		(188	)		(112	)		66,205
Mortgage/asset-backed securities		9,928		14		—		(62	)		(5	)		9,875

		116,357		1,123		7		(326	)		(160	)		117,001

	$	211,956	$	1,175	$	7	$	(326	)	$	(160	)	$	212,652

December 31, 2004
Cash & cash equivalents:
Money market securities	$	1,379	$	—	$	—	$	—		$	—		$	1,379

Total		1,379		—		—		—			—			1,379

Marketable securities available-for-sale:
U.S. government and agency obligation		41,676		228		—		(265	)		—			41,639
Corporate obligation		44,574		648		—		(222	)		(5	)		44,995
Mortgage/asset-backed securities		11,424		12		—		(52	)		—			11,384

		97,674		888		—		(539	)		(5	)		98,018

	$	99,053	$	888	$	—	$	(539	)	$	(5	)	$	99,397

Of the $117.0 million of estimated fair value marketable securities at December 31, 2005, $107.6 million are in an unrealized loss position. This unrealized loss is primarily attributable to increases in prevailing interest rates subsequent to purchase of the underlying securities.

The gross realized losses and gains on the sale of available-for-sale securities during the years ended December 31, 2005, 2004 and 2003 were not material.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our marketable securities at December 31, 2005, consisted of the following (in thousands):


Less than one year	$	38,060
Greater than one year but less than three years		78,941

	$	117,001

5. Property and Equipment

Property and equipment at December 31, consisted of the following (in thousands):


	2005			2004
Furniture and fixtures	$	1,089		$	630
Computers and software		128			224
Leasehold improvements		1,887			1,887

		3,104			2,741
Accumulated depreciation and amortization		(1,548	)		(1,280	)

	$	1,556		$	1,461

Depreciation expense was $368, $383 and $341 in 2005, 2004 and 2003, respectively.

6. Stockholders’ Equity

Common Stock

In 2003, we issued 7,730,500 shares of common stock at $6.50 per share in a follow-on public offering and received net proceeds of approximately $46.7 million, after deducting underwriting discounts and related expenses.

In 2004, we file with the Securities and Exchange Commission a registration statement, using a shelf registration process, and reserved 15,000,000 shares of common stock to be offered via prospectus in amounts, at prices and at terms determined at the time of an offering and that may be sold directly by us to investors, through agents designated from time to time, or to or through underwriters or dealers. In 2004, we issued 8,000,000 shares of common stock at $7.25 per share in a follow-on public offering pursuant to this shelf registration statement and received net proceeds of approximately $54.5 million after deducting underwriting discounts and related expenses.

In 2005, we filed with the Securities and Exchange Commission a registration statement, using a shelf registration process under which we may offer to sell any combination of securities described in the registration statement in one or more offerings, up to a total dollar amount of $150 million. We have not sold any securities under this registration statement.

Preferred Stock

Our Board of Directors has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges, restrictions and the number of shares constituting any series or the designation of the series.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

In 2005, our Board of Directors adopted a stockholder rights plan designed to guard against partial tender offers and other coercive tactics to gain control of the Company without offering a fair and adequate price and terms to all of Pain Therapeutics’ stockholders. Pursuant to the stockholder rights plan, our Board of Directors declared and paid a dividend of one right to purchase one one-thousandth share of the Company’s Series A Participating Preferred Stock for each outstanding share of our common stock. Each of these rights entitles the registered holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $40.00, subject to adjustment at any time.

Warrants

As of December 31, 2005, we have outstanding warrants to purchase 150,000 shares of common stock at $1.00 per share. These warrants were issued in connection with corporate activities. The value of these warrants was immaterial. These warrants expire in 2010.

2000 Employee Stock Purchase Plan

Under the 2000 Employee Stock Purchase Plan, or the Purchase Plan, eligible employees may purchase common stock through payroll deductions of up to 15% of the employee’s compensation. The purchase price of the stock is generally 85% of the lower of the fair market value of the common stock at the beginning of the offering period or at the end of the purchase period. A total of 500,000 shares of common stock have been reserved for issuance under the Purchase Plan. Shares reserved for issuance under the Purchase Plan may be automatically increased each year by the amount equal to the lesser of (i) 500,000 shares, (ii) 1% of the initially outstanding shares of common stock on such date, or (iii) an amount determined by our Board of Directors. We have issued 276,510 shares of common stock pursuant to the Purchase Plan through December 31, 2005, leaving 223,490 shares reserved for issuance.

1998 Stock Plan

Under the 1998 Stock Plan, our employees, directors and consultants may be granted options that allow for the purchase of shares of our common stock. Incentive stock options may only be granted to employees. Through December 31, 2005 a total of 10,600,000 shares of common stock were authorized for issuance under the 1998 Stock Plan. The 1998 Stock Plan allows for annual increases in the number of common shares authorized for issuance equal to the lesser of (i) 2,000,000 shares, (ii) 5% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (iii) an amount determined by our Board of Directors.

Our Board of Directors or a designated Committee of the Board is responsible for administration of the 1998 Stock Plan and determines the terms and conditions of each option granted, consistent with the terms of the plan. Incentive stock options may be granted under the 1998 Stock Plan at a price not less than 100% of the fair market value of the stock on the date of grant (not less than 110% of the fair market value on the date of grant in the case of holders of more than 10% of our voting stock). Options granted under the 1998 Stock Plan generally expire ten years from the date of grant (five years for incentive stock options granted to holders of more than 10% of our voting stock). Forfeited options become available for reissuance under the 1998 Stock Plan.

The 1998 Stock Plan also provides for the automatic grant of options to purchase shares of common stock to outside directors. On the date of each annual stockholders’ meeting, each outside director is automatically granted an option to purchase 25,000 shares of common stock. The term of the option is ten years, the exercise price is 100% of the fair market value of the stock on the date of grant, and the option becomes exercisable as to 25% of the shares on the anniversary of its date of grant provided the optionee continues to serve as a director on such dates.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The following table summarizes option activity under the 1998 Stock Plan:


	Number of options		Weighted- average exercise price
Options outstanding as of December 31, 2002	3,993,629		$	6.15
Granted	1,146,300			6.70
Exercised	(272,150	)		0.83
Forfeited	(499,270	)		7.00

Options outstanding as of December 31, 2003	4,368,509			6.53
Granted	1,373,100			7.56
Exercised	(184,257	)		2.57
Forfeited	(222,618	)		6.28

Options outstanding as of December 31, 2004	5,334,734			6.94
Granted	1,880,300			5.75
Exercised	(148,136	)		1.08
Forfeited	(73,406	)		7.90

Options outstanding as of December 31, 2005	6,993,492		$	6.74

Shares reserved for issuance and available for grant under the 1998 Stock Plan were 1,197,312 as of December 31, 2005.

The following table summarizes information about stock options outstanding as of December 31, 2005:


	Options outstanding
	Number of options	Weighted average remaining contractual life (years)	Weighted average exercise price		Options exercisable
Range of exercise prices	Number of options	Weighted average remaining contractual life (years)	Weighted average exercise price		Number of vested options	Weighted average exercise price
$0.10—$ 4.99	700,200	6.43	$	2.80	509,226	$	2.33
5.25	995,000	9.41		5.25	145,101		5.25
5.34— 6.67	718,904	8.76		6.06	209,920		6.21
6.71— 6.85	786,000	6.72		6.75	616,166		6.72
6.90	700,000	6.45		6.90	685,416		6.90
6.92— 7.16	842,452	7.47		7.13	502,750		7.13
7.25— 7.75	745,512	8.52		7.50	237,397		7.50
7.78— 8.00	763,300	8.12		7.80	333,818		7.83
8.03— 14.13	667,124	5.92		9.72	585,244		9.88
18.63	75,000	4.71		18.63	75,000		18.63

$0.10—$18.63	6,993,492	7.59	$	6.74	3,900,038	$	7.00

7. Employee 401(k) Benefit Plan

We have a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Employees are eligible to participate in the plan the first day of the month after hire and may elect to contribute the lesser of 20% of their annual compensation or the current statutory limits under Internal Revenue Service regulations. The 401(k) plan permits us to make additional matching contributions on behalf of all employees. Through December 31, 2005, we have not made any matching contributions.

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

8. Income Taxes

There is no provision for income taxes because we have incurred losses through December 31, 2005. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):


	December 31,
	2005			2004			2003
Deferred tax assets:
Net operating loss carryforwards	$	51,300		$	38,300		$	25,300
Research and development credits		7,200			7,700			4,800
Stock related compensation		800			900			4,700
Other		2,400			3,000			800

Total deferred tax assets		61,700			49,900			35,600
Valuation allowance		(61,700	)		(49,900	)		(35,600	)

Net deferred tax assets	$	—		$	—		$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which we are uncertain. We have concluded that it was more likely than not that our deferred tax assets would not be realized. Accordingly, the total deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $11,800, $14,300, and $12,590, during 2005, 2004 and 2003, respectively.

As of December 31, 2005, we had net operating loss carryforwards for federal income tax purposes of approximately $126.2 million, which expire in the years 2018 through 2025 and federal research and developments tax credits of approximately $5.8 million, which expire in the years 2018 through 2025. As of December 31, 2005, we had net operating loss carryforwards for state income tax purposes of approximately $126.2 million, which expire in the years 2008 through 2015 and state research and development tax credits of approximately $1.3 million, which do not expire.

Utilization of our net operating loss and credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and credits before utilization.

9. Leases and Commitments

We conduct our product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations, however these contracts are cancelable on thirty days notice and our obligations under these contracts are largely based on services performed.

We currently lease office space and equipment pursuant to non-cancelable operating leases that will expire at various dates through 2010. Future minimum lease payments for these leases are as follows for the years ended December 31, (in thousands):


	2006		2007		2008		2009		2010		Total
Future minimum lease payments	$	191	$	187	$	196	$	206	$	160	$	940

PAIN THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Rent expense was $178,000, $178,000, and $171,000 for the years ended December 31, 2005, 2004, and 2003 respectively.

10. Selected Quarterly Financial Data (Unaudited) (in thousands except per share data)


	Quarters Ended
	March 31			June 30			September 30			December 31
2005
Total revenues		—			—			—		$	5,080
Net loss	$	(8,589	)	$	(10,182	)	$	(8,767	)	$	(3,132	)
Basic and diluted loss per common share	$	(0.20	)	$	(0.23	)	$	(0.20	)	$	(0.07	)
2004
Net loss	$	(10,163	)	$	(9,066	)	$	(9,231	)	$	(9,316	)
Basic and diluted loss per common share	$	(0.29	)	$	(0.26	)	$	(0.26	)	$	(0.22	)

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.

Controls and Procedures

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Management’s annual report on internal control over financial reporting. We are responsible for establishing and maintaining adequate internal control over our financial reporting. We have assessed the effectiveness of internal control over financial reporting as of December 31, 2005. Our assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated Framework.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(1)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on using the COSO criteria, we believe our internal control over financial reporting as of December 31, 2005 was effective.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our independent registered public accounting firm, Ernst & Young LLP has audited the financial statements included in this Annual Report on Form 10-K and has issued a report on management’s assessment of our internal control over financial reporting as well as on the effectiveness of our internal control over financial reporting. The attestation report of Ernst & Young LLP, the registered public accounting firm, on management’s assessment of internal control over financial reporting is included below.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Pain Therapeutics, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Pain Therapeutics, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Pain Therapeutics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, management’s assessment that Pain Therapeutics, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Pain Therapeutics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Pain Therapeutics, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Pain Therapeutics, Inc. and our report dated February 21, 2006 expressed an unqualified opinion thereon.

ERNST & YOUNG LLP

Palo Alto, California

February 21, 2006

Item 9B.

Other Information

None.

PART III

Item 10.

Directors and Officers of the Registrant

The information regarding our directors, executive officers and the audit committee of our board of directors is incorporated by reference from “Directors and Executive Officers” in our Proxy Statement for our 2006 Annual Meeting of Stockholders.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended requires our executive officers and directors and persons who own more than ten percent (10%) of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission, or SEC, and the National Association of Securities Dealers, Inc. Executive officers, directors and greater than ten percent (10%) stockholders are required by Commission regulation to furnish us with copies of all Section 16(a) forms they file. We believe all of our executive officers and directors complied with all applicable filing requirements during the fiscal year ended December 31, 2005.

Code of Ethics

We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. We publicize the Code of Ethics through posting the policy on our website, http://www.paintrials.com. We will disclose on our website any waivers of, or amendments to, our Code of Ethics.

Item 11.

Executive Compensation

The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading “Executive Compensation and Other Matters.”

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading “Security Ownership of Certain Beneficial Owners and Management.” The table required by this Item regarding equity compensation plans is incorporated by reference from Item 5 above of this Annual Report on Form 10-K.

Item 13.

Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading “Certain Relationships and Related Transactions.”

Item 14.

Principal Accountant Fees and Services

The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading “Principal Accounting Fees and Services.”

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a)

The following documents are filed as part of this Form 10-K:

(1)

Financial Statements (included in Part II of this report):

Reports of Independent Registered Public Accounting Firm

Balance Sheets

Statements of Operations

Statement of Stockholders’ Equity

Statements of Cash Flows

Notes to Financial Statements

(2)

Financial Statement Schedules:

All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.

(3)

Exhibits:


Exhibit Number		Description of Document

3.1(1)		Amended and Restated Certificate of Incorporation.

3.2(1)		Amended and Restated Bylaws.

4.1(2)		Specimen Common Stock Certificate.

4.2(3)		Preferred Stock Rights Agreement, dated as of April 28, 2005, between the Registrant and Mellon Investor Services LLC, including the Certificate of Designation, the form of Rights Certificate and Summary of Rights attached thereto as Exhibits A, B and C, respectively.

10.1(4)		Form of Indemnification Agreement between the Registrant and each of its directors and officers.

10.2(4)		1998 Stock Plan and form of agreements thereunder.

10.3(4)		2000 Employee Stock Purchase Plan and form of agreements thereunder.

10.4(5)		Employment Agreement dated August 29, 2000, between Registrant and Grant L. Schoenhard, Ph.D.

10.5(5)		Employment Agreement dated October 23, 2001, between Registrant and Nadav Friedmann, M.D., Ph.D.

10.6(4)		Second Amended and Restated Investors’ Rights Agreement dated as of February 1, 2000 between Registrant and the holders of its series B and series C redeemable convertible preferred stock.

10.7(6)		Lease Agreement dated July 21, 2000 between Registrant and Goss-Jewett Company of Northern California.

10.8 +		Collaboration Agreement dated November 9, 2005, between Registrant and King Pharmaceuticals, Inc.

10.9 +		License Agreement dated November 9, 2005, between Registrant and King Pharmaceuticals, Inc.

10.10+		Development and License Agreement dated December 19, 2002 between Registrant and DURECT Corporation and Southern Biosystems, Inc.


Exhibit Number		Description of Document

10.11+		Amendment dated December 15, 2005 to Development and License Agreement dated December 19, 2002 between Registrant and DURECT Corporation and Southern Biosystems, Inc.

23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (see page 55).

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference from exhibits to our report on Form 10-Q for the period ending June 30, 2005.

(2)	Incorporated by reference from exhibits to our report on Form 10-Q for the period ending March 31, 2005.

(3)	Incorporated by reference from exhibits to our report on Form 8-K as filed with the Securities and Exchange Commission on May 3, 2005.

(4)	Incorporated by reference from our registration statement on Form S-1, registration number 333-32370, declared effective by the Securities and Exchange Commission on July 13, 2000.

(5)	Incorporated by reference from exhibits to our report on Form 10-K for the period ending December 31, 2001.

(6)	Incorporated by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000.

+	Confidential treatment has been requested for certain portions of this agreement. The omitted portions have been filed separately with the Securities and Exchange Commission.

(b)

Exhibits

The exhibits listed under Item 14(a)(3) hereof are filed as part of this Form 10-K other than Exhibit 32.1, which shall be deemed, furnished.

(c)

Financial Statement Schedules

All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


PAIN THERAPEUTICS, INC.

By:		/s/ REMI BARBIER
		Remi Barbier
		President, Chief Executive Officer and Chairman of the Board of Directors

Dated: February 23, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Remi Barbier and Peter S. Roddy, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ REMI BARBIER Remi Barbier	President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)	February 23, 2006

/s/ PETER S. RODDY Peter S. Roddy	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February 23, 2006

/s/ NADAV FRIEDMANN, PH.D., M.D., Nadav Friedmann, PH.D., M.D.,	Chief Operating and Medical Officer and Director	February 23, 2006

/s/ ROBERT Z. GUSSIN, PH.D. Robert Z. Gussin, Ph.D.	Director	February 23, 2006

/s/ VERNON R. LOUCKS, JR. Vernon R. Loucks, Jr.	Director	February 23, 2006

/s/ MICHAEL J. O’DONNELL, ESQ. Michael J. O’Donnell, Esq.	Director and Secretary	February 23, 2006

/s/ SANFORD R. ROBERTSON Sanford R. Robertson	Director	February 23, 2006

EXHIBIT INDEX


Exhibit Number		Description of Document
3.1(1)		Amended and Restated Certificate of Incorporation.
3.2(1)		Amended and Restated Bylaws.
4.1(2)		Specimen Common Stock Certificate.
4.2(3)		Preferred Stock Rights Agreement, dated as of April 28, 2005, Registrant the Company and Mellon Investor Services LLC, including the Certificate of Designation, the form of Rights Certificate and Summary of Rights attached thereto as Exhibits A, B and C, respectively.
10.1(4)		Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2(4)		1998 Stock Plan and form of agreements thereunder.
10.3(4)		2000 Employee Stock Purchase Plan and form of agreements thereunder.
10.4(5)		Employment Agreement dated August 29, 2000, between Registrant and Grant L. Schoenhard, Ph.D.
10.5(5)		Employment Agreement dated October 23, 2001, between Registrant and Nadav Friedmann, M.D., Ph.D.
10.6(4)		Second Amended and Restated Investors’ Rights Agreement dated as of February 1, 2000 between Registrant and the holders of its series B and series C redeemable convertible preferred stock.
10.7(6)		Lease Agreement dated July 21, 2000 between Registrant and Goss-Jewett Company of Northern California.
10.8+		Collaboration Agreement dated November 9, 2005, between Registrant and King Pharmaceuticals, Inc.
10.9+		License Agreement dated November 9, 2005, between Registrant and King Pharmaceuticals, Inc.
10.10+		Development and License Agreement dated December 19, 2002 between Registrant and DURECT Corporation and Southern Biosystems, Inc.
10.11+		Amendment dated December 15, 2005 to Development and License Agreement dated December 19, 2002 between Registrant and DURECT Corporation and Southern Biosystems, Inc.
23.1		Consent of Independent Registered Public Accounting Firm.
24.1		Power of Attorney (see page 55).
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference from exhibits to our report on Form 10-Q for the period ending June 30, 2005.

(2)	Incorporated by reference from exhibits to our report on Form 10-Q for the period ending March 31, 2005.

(3)	Incorporated by reference from exhibits to our report on Form 8-K as filed with the Securities and Exchange Commission on May 3, 2005.

(4)	Incorporated by reference from our registration statement on Form S-1, registration number 333-32370, declared effective by the Securities and Exchange Commission on July 13, 2000.

(5)	Incorporated by reference from exhibits to our report on Form 10-K for the period ending December 31, 2001.

(6)	Incorporated by reference from Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000.

+	Confidential treatment has been requested for certain portions of this agreement. The omitted portions have been filed separately with the Securities and Exchange Commission.

Collaboration Agreement dated November 9, 2005

Exhibit 10.8

Execution Copy

COLLABORATION AGREEMENT

This COLLABORATION AGREEMENT is entered into as of November 9, 2005 (the “Effective Date”), by and between PAIN THERAPEUTICS, INC., a Delaware corporation having an address of 416 Browning Way, South San Francisco, California 94080 (“PTI”), and KING PHARMACEUTICALS, INC., a Tennessee corporation having an address of 501 Fifth Avenue, Bristol, Tennessee 37620 (“King”). Each of King and PTI is sometimes referred to individually herein as a “Party” and collectively as the “Parties.”

WHEREAS, PTI owns or controls certain technology and intellectual property rights relating to the preparation of tamper-resistant opioid formulations;

WHEREAS, King is engaged in the development and marketing of human therapeutics;

WHEREAS, King is entering into this Agreement based on, among other things, PTI’s specialized skill, knowledge, and expertise with respect to the technology and intellectual property relating to the preparation of tamper-resistant opioid formulations; and

WHEREAS, the Parties desire to enter into a collaboration for the purpose of Developing Remoxy and other Products and to give King the right to Market and manufacture Products, in each case, derived from PTI technology and intellectual property;

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration the receipt and sufficiency of which are acknowledged by the Parties, the Parties hereto, intending to be legally bound, agree as follows.

1. DEFINITIONS

Capitalized words and phrases used in this Agreement have the meanings ascribed to such terms in Annex A attached hereto.

2. ADMINISTRATION OF THE COLLABORATION

2.1 Establishment and Function of JOC. PTI and King shall establish the JOC within thirty (30) days of the Closing Date, which shall have the responsibilities set forth in this Agreement, including Section 2.2. Each Party shall appoint, in its sole discretion, three members to the JOC (which members shall be employees of such Party), with those members designated primarily to represent such Party with respect to clinical/regulatory, sales/marketing/finance and manufacturing matters. King and PTI each shall designate a co-chairman (each a “Co-Chairman” and together the “Co-Chairmen”). Upon the approval of both Co-Chairmen (or the remaining Co-Chairman in the event of a substitution in that position), which approval shall not be unreasonably withheld, each Party may substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JOC, by giving written notice thereof to the other Party. PTI and King shall each bear all out-of-pocket expenses of their respective JOC members related to their participation on the JOC and attendance at JOC meetings.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

2.2 JOC Responsibilities. The JOC shall administer and monitor all matters with respect to the Collaboration, including the following matters:

2.2.1 oversight of the Development Plans and Manufacturing/CMC Plans, including all related strategy and objectives, timelines and activities thereunder, and changes with respect thereto on a quarterly basis; such oversight will confer to each Party, through its JOC representative, an ongoing right of Consultation;

2.2.2 review and approval of all budgets to support the Program Plans;

2.2.3 review of the management and allocation of resources of the Collaboration;

2.2.4 review of all Patent Rights and Technology used in connection with Product;

2.2.5 review and approval (prior to execution by either Party) of (a) all Third Party licenses (including all amendments thereto), and (b) all subcontracts, sublicenses, and other agreements (including all amendments thereto) that are required or to be entered into in connection with the Development Program and that either (i) require payments by a Party to a Third Party of greater than [***] U.S. dollars ($[***]) over the life of the contract or (ii) are otherwise material, or reasonably likely to become material, to the Collaboration, such review in each case to include a determination, with respect to each such subcontract, sublicense, license, or agreement, regarding whether it is appropriate to require the inclusion of the protections set forth in Section 3.8 hereof; and

2.2.6 performance of such other functions as appropriate to further the purposes of this Agreement and the Collaboration as determined from time to time by the Parties.

2.3 Dispute Resolution.

2.3.1 In the event that the JOC shall not be able, within 10 days, to reach a decision or take an action on any matter, then such unresolved matter shall first be referred for resolution to the Chief Executive Officer of each Party for attempted resolution by good faith negotiation. Such good faith negotiation may include the appointment by either Party, at its own expense, of an unaffiliated Consultant, who shall be an expert chosen based on such person’s experience and expertise in the particular type of issue that is unresolved to advise such officers on the matter.

2.3.2 If such officers are unable to resolve the matter within 10 days, then, except as provided in Section 3.4.6 or 3.9, and subject to Section 3.3.2:

(a) the following matters shall be finally decided by PTI: (i) all matters related to the Development Plan in the U.S. Territory until immediately prior to the Phase II Meeting with respect to a Product (subject to Section 3.4.3); and (ii) all CMC matters relating to the Manufacturing/CMC Plan through the Regulatory Approval of an NDA for a Product;

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

(b) the following matters shall be finally decided by King: (i) all matters related to the Development Plan in the U.S. Territory after the Regulatory Approval of an NDA for a Product; (ii) all matters relating to the Development Plan in the ROW; (iii) all CMC matters relating to the Manufacturing/CMC Plan after the Regulatory Approval of an NDA for a Product; (iv) all non-CMC matters relating to the Manufacturing/CMC Plan that impact commercial supply (i.e., matters relating to choice of secondary packaging, secondary labeling, logistics, and the like); and (v) all matters relating to the Yearly Brand Plan; and

(c) notwithstanding the foregoing provisions of this Section 2.3.2, neither Party shall have final decision-making authority with respect to the following: (i) all matters related to the Development Plan in the U.S. Territory during the period immediately prior to the Phase II Meeting until the Regulatory Approval of an NDA for a Product (subject to Section 3.4.3) and (ii) all other matters not otherwise described in Sections 2.3.2(a) and (b) above, including, subject to the parameters set forth in Sections 3.3.2 and 3.7, final decisions with respect to budgets and spending funds in excess of approved budgets (or in excess of [***] percent ([***]%) of the [***] under the budget of a Development Plan, as provided in Section 3.7.2).

2.3.3 Disputes not subject to the final decision-making authority of either Party, as described in Section 2.3.2(c) above, will be resolved by binding arbitration in accordance with the rules of the American Arbitration Association (the “AAA”), unless another non-profit professional dispute resolution organization knowledgeable with respect to drug development is agreed to by the Parties within five (5) days, and the provisions of this Section 2.3.3.

(a) The Party desiring to initiate an arbitration proceeding will send a written notice to the other Party requesting the commencement of the arbitration proceeding and specifying the issue to be resolved. Following such notice, the JOC will work in good faith to select one neutral arbitrator, who will be an expert with respect to drug development and the pharmaceuticals industry so as to better understand the legal, business, and scientific issues addressed in the arbitral proceeding. In the event that, within 10 business days of such notice, the JOC is unable to agree upon an arbitrator, who is available to participate in the arbitration proceeding, then, each Party will designate one neutral arbitrator within 15 days thereafter. Within an additional 15 days thereafter, the first two arbitrators will designate a third. Each arbitrator will be a neutral arbitrator, who is an expert in drug development and the pharmaceuticals industry. If either Party fails to choose an arbitrator within the foregoing time period, the AAA (or equivalent organization) will choose an arbitrator on behalf of that Party. Disputes about arbitration procedure will be resolved by the arbitrators or, failing agreement, by the AAA (or equivalent organization) in San Francisco, California. Unless otherwise agreed by the Parties, the arbitration proceedings will be conducted in San Francisco, California.

(b) Within 5 days of the selection of the final arbitrator, the Parties will deliver to the arbitrators a joint letter (i) stating each of the issues that is the subject of the dispute, (ii) setting forth each Party’s final position with respect to each such issue, and (iii) directing the arbitrators to resolve the dispute by selecting the final position of one of the Parties; provided that, if the Parties cannot agree on a joint letter, each Party will submit a letter setting forth its position on each issue, and the failure of any Party to submit such a joint letter will not prevent the arbitration from proceeding. In addition, each Party may submit with the joint letter

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

supporting documentation for such Party’s final position or a request that the arbitrators permit the Parties to undertake limited discovery. In resolving the dispute, the arbitrators will have no authority to make a decision on any issue other than by selecting the final position of one of the Parties.

(c) An arbitration decision will be rendered in writing within 30 days of the submission of the letter described above, which award will be final and binding on the Parties and will be deemed enforceable in any court having concurrent jurisdiction of the subject matter hereof and the Parties. In selecting the final position of one of the Parties, the arbitrators will have the authority to grant specific performance and allocate costs between the Parties (excluding attorneys’ fees, which each Party must bear itself); provided that the arbitrators will have no authority to award punitive damages or any damages in excess of the limitations contained in this Agreement.

2.4 Committees. The JOC shall have the right and power to appoint and delegate its responsibilities to committees, and the composition and eligibility requirements for the same shall be agreed upon by the members of the JOC. Except as otherwise mandated by the JOC, each committee established by the JOC shall be governed by the rules and guidelines applicable to the JOC set forth in this Agreement.

2.5 Meetings.

2.5.1 Schedule of Meetings. The JOC shall establish a schedule of times for meetings, taking into account the planning needs of the Development Program and the need of the JOC to consult and render decisions. In no event shall the JOC meet less frequently than quarterly. Meetings shall alternate between the respective offices of the Parties in (i) Princeton, New Jersey or Cary, North Carolina and (ii) San Francisco, California, or another mutually agreed upon location; provided, however, that the Parties may mutually agree to meet by teleconference or video conference or may act by a written memorandum executed by the members of the JOC.

2.5.2 Quorum; Voting; Decisions. At each JOC meeting, the attendance of at least one member representing each Party shall constitute a quorum. All decisions of the JOC shall be made by unanimous vote. Representatives of each Party or of its Affiliates who are not members of the JOC may attend JOC meetings or committee meetings as non-voting observers at the invitation of either Party with the prior approval of the other Party, which approval shall not be unreasonably withheld.

2.5.3 Agenda and Minutes. An agenda for each JOC meeting shall be circulated no less than three days prior to the meeting, to the extent practicable. The JOC shall keep accurate minutes of its deliberations that record all proposed decisions and all actions recommended or taken. Drafts of the minutes shall be delivered to the members of the JOC within a reasonable time, not to exceed 10 days after the meeting. The responsibility for the preparation and circulation of the draft minutes shall alternate between the Parties. Draft minutes then shall be edited by the Co-Chairmen and shall be issued in final form within a reasonable time not to exceed 14 days after the meeting.

3. DEVELOPMENT PROGRAM

3.1 Development of Products.

3.1.1 Initial Product Designations. The Parties shall Develop no less than four (4) Products under the Collaboration. The Parties agree that the first such Product shall be Remoxy, the second such Product shall be a product within the Field containing [***] as its opioid API, and the third such Product shall be a product within the Field containing [***] as its opioid API. The fourth Product, and all additional Products, shall be selected as set forth in Section 3.1.2 below.

3.1.2 Designation of Additional Products. In Consultation with PTI and review by the JOC and in accordance with the strategies of the Program Plans, King shall have the right to designate which products within the Field, in addition to the three (3) Products listed in Section 3.1.1 above, shall be selected for Development and Marketing under the Development Program. Upon King’s designation of a product within the Field for inclusion in the Development Program, PTI shall inform Durect of such selection, and provided that such product is a product that may be developed under the DLA, PTI shall exercise its rights under Section 2.1 of the DLA to designate such product a “Licensed Product,” and the Parties shall thereafter promptly generate the Program Plans for such Product, all as further described in this Article 3.

3.1.3 Minimum Development and Marketing Obligations.

(a) King shall ensure that it is Marketing or funding the Development of a minimum of at least [***] different Products under the Collaboration at all times; provided that beginning on [***], such minimum number of different Products shall increase to [***]. In order to satisfy the foregoing requirement that King is Marketing or funding the Development of at least [***] different Products under the Collaboration by [***], King further agrees that it will designate a [***] Product to be Developed and Marketed hereunder no later than [***]. King further agrees that in the event King (i) does not designate a [***] Product by [***] or (ii) notifies PTI of its intention to terminate Development and Marketing of a Product pursuant to Section 3.1.4, is required pursuant to Section 3.1.4 to designate a replacement Product, and fails to select such a replacement Product within the applicable time frame specified thereunder (and such failure would result in a default of King’s obligations under this Section 3.1.3), PTI will be entitled to designate such Product on King’s behalf. For purposes of this Section 3.1.3, King shall be deemed to be “funding the Development” of a Product if King has (A) designated such Product for inclusion within the Collaboration pursuant to Section 3.1.2, (B) has used commercially reasonable efforts to have the JOC promptly approve a Development Plan and Manufacturing/CMC Plan for such Product, and (C) is meeting its material funding obligations under all existing Program Plans.

(b) Subject to King’s satisfaction of its funding obligations pursuant to Section 3.1.3(a) above, PTI shall ensure that it is Developing, together with the Products King is Marketing, a minimum of at least [***] different Products under the Collaboration at all times; provided that beginning on [***], such minimum number of different Products shall increase to [***].

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

3.1.4 Product Termination. King shall have the right to terminate Development and Marketing of a Product (the “Terminated Product”) hereunder by providing written notice to PTI [***] days prior to the effective date of such termination and, if necessary to comply with its obligations for maintaining a minimum number of Products, as provided in Section 3.1.3(a) above, designating a replacement Product in such notice, which shall be treated as a Product designation in accordance with Section 3.1.2 above, and the provisions of Section 9.2.2(a) shall apply to such Terminated Product in all respects. If a replacement Product is required to be designated, such notice of termination for such Terminated Product shall not be effective until a replacement Product has been selected and a Development Plan for such replacement Product has been approved by the JOC.

3.2 Durect License Agreement. Notwithstanding anything herein to the contrary, King acknowledges and agrees that PTI is subject to certain obligations under the Durect License Agreement as set forth in Section 2.4 of the License Agreement.

3.3 Program Plans. Disputes relating to the matters set forth in this Section 3.3 will be governed by Section 2.3.2.

3.3.1 Generally. In consultation with the JOC and in accordance with the strategy and objectives of the Program Plans, each Party shall be primarily responsible for those tasks assigned it as set forth in each Program Plan and such obligations set forth in this Agreement. The Parties will take such actions necessary to define, generate, and approve the Program Plans for each Product following the Effective Date. The Parties shall ensure that the Program Plans, including all timelines set forth therein, are consistent with each other, accurately reflect the objectives of the Development Program, and meet all of PTI’s obligations to Durect under the DLA. Each Program Plan shall be in writing and shall set forth objectives and tasks to be performed by each of the Parties for the period covered by the Program Plan as agreed by such Party and as specifically set forth in this Agreement. Any Program Plan may be amended at any time in accordance with the same procedures applicable to the adoption thereof. Although not specifically a part of a Program Plan, all issues and activities relating to Patent Rights and Technology used in connection with a Product shall be subject to review of the JOC.

3.3.2 Program Plan Budgets.

(a) Each Program Plan shall set forth an annual budget with respect to all material tasks required to be conducted by the Parties pursuant to such Program Plan. Each Party shall use commercially reasonable efforts to complete all tasks assigned to it pursuant to the Program Plans in accordance with the funding allocated to such tasks in the budget. All overruns and additional expenditures will be governed by Section 3.7.

(b) PTI will provide the JOC with updated budgets for each Development Plan and Manufacturing/CMC Plan on a [***], which updated budgets shall specify the funding which PTI projects to be required during the following [***] to perform its obligations under such Development Plans and Manufacturing/CMC Plans. Each

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

such budget will be subject to review and approval of the JOC (such approval not to be unreasonably withheld); provided that it is understood that such budgets may include expenses for Third Party services extending beyond the [***] period covered by such budget if incurring such expenses is contractually required in obtaining such services.

(c) Notwithstanding anything to the contrary herein, the Parties agree that the Collaboration Costs budgeted for PTI’s activities under the Development Plan(s) and Manufacturing/CMC Plan(s) with respect to Remoxy between the [***] shall be at least [***]. The Parties further agree that King’s financial commitment with respect to Products other than Remoxy shall be commensurate with the foregoing commitment to Remoxy, taking into account such factors as the stage of development and potential market of such Products relative to the stage of development and potential market of Remoxy and the regulatory strategy with respect to the Product; provided that the total Collaboration Costs budgeted for PTI’s activities under the Development Plans and Manufacturing/CMC Plans for all Products shall not exceed [***] a year in any of the first [***] Years following the inception of this Agreement, or a cumulative total of one hundred million U.S. dollars ($100,000,000). Notwithstanding the foregoing, the Parties agree that the JOC may (but the arbitrators may not) waive the preceding spending limits if, in its reasonable judgment, such increases in spending are warranted. For purposes of calculating the foregoing annual and cumulative spending limits, as well as the foregoing minimum financial commitment with respect to Remoxy, Collaboration Costs as used in this section shall exclude (i) any [***], (ii) costs of [***], including costs incurred in [***], (iii) all costs and expenses related to [***], and (iv) costs incurred in connection with [***], it being understood that the [***]. The Parties further agree that with respect to Products subsequent to Remoxy, prompt Development and Regulatory Approval shall mean the speediest Development Plan needed to reach Development and Regulatory Approval of any dosage form of such Products in the U.S. Territory, consistent with patients’ safety and all applicable regulatory rules and regulations. If the Program Plans need to be amended to maintain these annual and cumulative limits, King will propose those amendments it believes are required, subject to review and approval of PTI, which approval shall not be unreasonably withheld.

3.4 Development Plans.

3.4.1 PTI, in Consultation with King, will prepare, and provide the JOC with a copy of, a Development Plan for each Product, which will include pre-clinical, clinical, and regulatory timelines and an annual budget, including a general overview of the expected schedule of meetings, discussions, and correspondence with Regulatory Authorities and the expected Regulatory Filings to be completed and maintained by the Collaboration. The Development Plan will be subject to review and approval of the JOC, including ongoing review as provided in Section 2.2.1, which approval not to be unreasonably withheld; provided that the

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

JOC shall not withhold its approval or otherwise object to the budget in such Development Plan on any grounds that are inconsistent with the criteria and objectives set forth in Section 3.3.2(c) above.

3.4.2 Subject to Sections 3.4.5 and 3.4.6 below, the provisions of this Section 3.4.2 will apply to all matters relating to the Development Plan in the U.S. Territory. Until the Completion of Phase II for a Product (but immediately prior to the Phase II Meeting), PTI, in Consultation with King, will have sole control and responsibility for execution of all matters described in the Development Plan with respect to a Product. Following the Completion of Phase II for a Product but prior to the Regulatory Approval of an NDA for such Product, King and PTI will assume joint control and responsibility, through the JOC, for all matters described in the Development Plan with respect to such Product; provided that PTI, in Consultation with King, will continue to be responsible for execution of matters under such plan. Following such Regulatory Approval, King, in Consultation with PTI, will have sole control and responsibility for execution of all matters described in the Development Plan with respect to such Product. In addition, each Party will be given the opportunity to review and comment on draft and final development plans and all associated protocols, reports, and Regulatory Filings on an ongoing basis. Draft documents will be provided to a Party in electronic or written form in advance of finalization or submission to Regulatory Authorities.

3.4.3 In the event the FDA, during the Phase II Meeting for a Product, determines that the Development of such Product may not proceed to Phase III, or the Parties otherwise agree that additional Development should be performed before proceeding to Phase III, King and PTI will jointly develop a revised Development Plan for such Product, and PTI will then reassume sole control and responsibility for execution of such Development Plan until Completion of Phase II for a Product (immediately prior to the Phase II Meeting), as provided herein.

3.4.4 King, in Consultation with PTI, will have sole control and responsibility for execution of all Product Development and associated regulatory matters described in the Development Plan with respect to a Product in the ROW. King, or its Affiliates or Sublicensees, shall be responsible for all clinical and regulatory expenses incurred in seeking Regulatory Approval in markets in the ROW.

3.4.5 Upon the FDA’s approval of an NDA for a Product in the U.S. Territory, PTI, in Consultation with King, shall continue to have sole control and responsibility for the execution of any post-approval commitments mandated by the FDA with respect to such Product and the first Regulatory Approval thereof, and King, in Consultation with PTI, shall assume sole control and responsibility for execution of further Product Development of the Product.

3.4.6 In the event an NDA for Remoxy has not been accepted for filing by the FDA within [***] months of the Effective Date, King may elect to assume sole control and responsibility for execution of all matters under the Development Plan (and all CMC matters under the Manufacturing/CMC Plans) with respect to Remoxy in the U.S. Territory by providing PTI with written notice thereof. In such event, notwithstanding the provisions of Section 2.3.2, PTI will not have final decision-making authority with respect to matters related to Remoxy under the Development Plan, but King will have the final decision-making authority with respect

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

to all such matters. Both Parties agree that such transfer of control and responsibility from PTI to King described in this Section 3.4.6 shall in no way diminish PTI’s or Durect’s right to receive royalties or milestones, as provided in the License Agreement. King agrees to use commercially reasonable efforts to diligently proceed with execution of the Development Plan in good faith and consistent with PTI’s obligations under the DLA and this Agreement and shall use commercially reasonable efforts and diligence in Developing and seeking Regulatory Approval of Remoxy in the U.S. Territory in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market Remoxy in the U.S. Territory and to meet its obligations hereunder. In addition, following such transfer of control and responsibility, King will provide PTI with such plans, budgets, data, and other information as PTI had been obligated to provide to King prior to the assumption of control by King under this Section 3.4.6.

3.4.7 Upon transfer of control and responsibility of a Product, the Parties will cooperate with each other in effecting a Tech Transfer of such matters to King with respect to such Product.

3.4.8 PTI shall use commercially reasonable efforts to complete all tasks assigned to it pursuant to the Development Plans in accordance with the budget; provided, however, that PTI may spend the funds allocated to such task plus an additional [***]% of such funds, which additional expenditures shall be paid by King. If the actual costs under a particular Development Plan will likely exceed [***]% of the funds allocated to such task, the provisions of Section 3.7 shall govern.

3.4.9 During the period in which the Parties share joint control of matters under the Development Plan, both Parties agree that only PTI may initiate or respond to FDA communications (including e-mail) regarding a Product; provided, however, that PTI shall keep King informed regarding all important communications, whether written or oral, between PTI and the FDA and shall provide King with an opportunity to review and comment on all important written correspondence (including all e-mail correspondence) and participate in all planned meetings and telephone calls, between PTI and the FDA.

3.4.10 All INDs and NDAs for a Product in the U.S. Territory will be owned and maintained in the name of PTI; provided that, upon Regulatory Approval of a Product, ownership and maintenance of INDs and NDAs for such Product will be transferred to King. In connection with such transfer to King, PTI will transfer all underlying clinical data and regulatory filings in an electronic format, to the extent available, agreed upon by the Parties. PTI shall transfer the NDA for each approved Product to King within [***] days of the receipt of Regulatory Approval of such Product. PTI further agrees to transfer the applicable INDs, clinical data, and other regulatory filings within [***] days of the Regulatory Approval of the Product to which they relate. All INDs and NDAs for a Product in the ROW will be owned and maintained by King. PTI hereby grants King access to, and right of reference to, any INDs and NDAs for Products in the Territory owned and maintained in the name of PTI to the extent necessary for King to perform its obligations hereunder or conduct Product Development in the Territory. King hereby grants PTI access to, and right of reference to, any INDs and NDAs for Products in the Territory owned and maintained in the name of King to the extent necessary for PTI (a) to perform its obligations hereunder, (b) to develop products

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

that are within the Field (including Products) outside the Territory, (c) to develop [***] pursuant to the terms of this Agreement and the License Agreement, (d) to develop products outside the Field, including [***], or (e) as otherwise reasonably requested by PTI. For purposes of clarity, the rights granted by King to PTI in the preceding sentence shall include the right to permit Third Parties to access or reference such Regulatory Filings, so long as such Third Parties have agreed to confidentiality obligations that are at least as stringent as those set forth herein; provided that PTI agrees that it will not provide such rights of access or reference to Third Parties who are not engaged in a research, development, manufacturing, or marketing relationship with PTI.

3.4.11 PTI will use commercially reasonable efforts and diligence in Developing and seeking Regulatory Approval of each Product in the U.S. Territory in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market Products in the U.S. Territory and to meet its obligations hereunder.

3.4.12 Subject to Section 2.1.4 of the License Agreement, following the acceptance for review by a Regulatory Authority in the U.S. Territory of an NDA for a Product, King will use commercially reasonable efforts and diligence in conducting Product Development and seeking Regulatory Approval of such Product in the Major Market Countries in the ROW in accordance with its business, legal, medical, and scientific judgment and in undertaking investigations and actions required to obtain appropriate Regulatory Approvals necessary to market such Product in the Major Market Countries and to meet its obligations hereunder. In exercising its business, legal, medical, and scientific judgment, King may take the following factors, among other things, into consideration: [***]; provided that the level of efforts and diligence used by King in conducting Product Development and seeking Regulatory Approval of Products in the ROW shall at all times be at least a level of efforts sufficient to ensure that PTI’s obligations to Durect under the DLA are satisfied. Notwithstanding anything herein or in the License Agreement to the contrary, in the event PTI obtains Regulatory Approval for a [***] in any country in the Territory, including a Major Market Country, before King obtains in such country Regulatory Approval for the Product that contains the same opioid agonist as its API as such [***], King shall not be obligated to conduct Product Development, seek Regulatory Approval, or Market such Product in such country.

3.5 Manufacturing/CMC Plans.

3.5.1 King and PTI will jointly prepare each Manufacturing/CMC Plan and provide a copy to the JOC for its review and approval. Notwithstanding the foregoing, the Parties agree that PTI shall be solely responsible for preparing a Manufacturing/CMC Plan for

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Remoxy, it being understood that King will be given an opportunity to review and offer recommendations regarding such plan during its preparation, which recommendations PTI will consider in good faith.

3.5.2 PTI, in Consultation with King, will have control and responsibility for execution and implementation of all CMC development of a Product throughout the Territory until the first Regulatory Approval for such Product in the applicable country, including responsibility for provision of CTM, CMC information for such Product in Regulatory Filings, and pre-market validation of such Product. Notwithstanding the foregoing, PTI, in Consultation with King, will continue to have control and responsibility for execution and implementation of all CMC development after the first Regulatory Approval of a Product for all changes in formulation, including changes in dosage strength, requiring a further pre-market clearance by the FDA or other Regulatory Authority. Such changes in formulation may include line extension developments or reformulations that are, in PTI’s reasonable judgment, within the scope of the DLA. For purposes of clarity, with respect to novel Product formulations, PTI and Durect shall be responsible for determining the qualitative and quantitative composition of each novel formulation with respect to excipients and API and setting technical and regulatory specifications for each such excipient and API used in creating such novel formulation. King shall have the right to select the manufacturer of such excipients and API prior to the manufacture of Phase III CTM, so long as the excipients supplied by King’s selected manufacturer comply with the technical and regulatory specifications set by PTI and Durect. King shall have the right to negotiate and enter into supply agreements for API and excipients and to be the assignee with respect to agreements that may be in place for such Product excipients and API as of the Effective Date, in each case to the extent permitted under such supply agreements, and in compliance with the DLA and Section 2.1.3 of the License Agreement.

3.5.3 Except as provided in Section 3.5.2 above, King, in Consultation with PTI, will have control and responsibility for execution and implementation of post-approval support of each Product immediately upon the Regulatory Approval of an NDA for such Product, including logistics planning relating to such Product. To the extent PTI is obligated to purchase any excipients, additives, solvents, API, bulk form of Product, or other ingredients or materials from Durect pursuant to the terms of the DLA and which ingredients or materials, under the terms of the DLA, would be required to be used by King in its manufacture of Products, PTI shall sell to King such ingredients or materials so purchased by PTI at PTI’s actual cost, without any mark-up. In connection with the transfer of control and responsibility, upon filing of an NDA for a Product, the Parties will cooperate with each other to develop a plan for the completion of the Tech Transfer of such matters; and, with respect to all information, files, and documentation available as of the date of such NDA filing, within sixty (60) days from the acceptance by a Regulatory Authority of the NDA filing for a Product, the Parties will complete the Tech Transfer of such matters, including transferring files necessary for chemistry and manufacturing, to King with respect to such Product. Thereafter, the Parties will continue to perform Tech Transfer in a timely manner with respect to all other information, files, and documentation relating to such matters, including permitting King to witness pre-market validation and manufacture and quality operations. PTI agrees to assist, as requested by King, in post-approval support (including providing technical assistance, troubleshooting, and provision of post-marketing clinical supplies) to maximize the market opportunity for the Products and to assure uninterrupted supply.

3.5.4 In Consultation with King, PTI may enter into such agreements covering the clinical supply and manufacture of Products as are reasonably necessary to accomplish the objectives and purposes of the Development Program; and King agrees to abide by the terms of any such agreements which King has approved or which has been unanimously approved by the JOC pursuant to its oversight and approval functions set forth in Section 2.2.5. King may enter into such agreements covering the commercial supply and manufacture of component materials and API following the Completion of Phase II as are reasonably necessary to accomplish the objectives and purposes of the Development Program. King may at any time enter into an agreement covering manufacture of commercial Product.

3.5.5 The Parties agree that PTI’s existing plan for manufacturing and quality operations with respect to Remoxy will continue to be followed by the Collaboration, with a commercial supply agreement being entered into with Mallinckrodt-Hobart as the primary manufacturer. King acknowledges that PTI’s current understanding with Mallinckrodt-Hobart contemplates a term for such supply agreement of at least [***] of commercial launch in the United States. PTI, in Consultation with King, may continue negotiating an agreement with Mallinckrodt-Hobart; provided that any such agreement will include a provision that the agreement [***]; and provided further that [***]. The Mallinckrodt-Hobart supply agreement, with respect to Remoxy, will be assigned by PTI to King at a time mutually agreed to by the Parties, but no later than upon FDA approval of an NDA for Remoxy. Except with King’s consent, not to be unreasonably withheld, the Mallinckrodt-Hobart supply agreement will have provisions such that the supply of Remoxy is independent of the supply of any other products covered by the agreement (including provisions so that a breach by PTI of its obligations with respect to the other products will not affect the supply of Remoxy) and permit the assignment of the supply agreement with respect to Remoxy independent of any other products, it being understood that King shall not withhold its consent to PTI’s entering into the Mallinckrodt-Hobart supply agreement if PTI agrees to indemnify King and hold King harmless with respect to damages which King may incur as a result of Mallinckrodt-Hobart’s cross-termination of the supply agreement with respect to Remoxy as a result of a PTI’s breach of its obligations thereunder with respect to a product other than Remoxy. PTI will use commercially reasonable efforts to have provisions of the type described in the preceding sentence included in the Mallinckrodt-Hobart supply agreement.

3.5.6 Except with respect to Remoxy, which is addressed by Section 3.5.5 above, King will have control and responsibility for the commercial supply of Products in the Territory. Except as provided for Remoxy in Sections 3.5.1, 3.5.2, and 3.5.5 above, King may, in its sole discretion, decide to include its own manufacturing facility as a primary manufacturing site in the initial Regulatory Filings for any Products. Upon PTI’s request and with King’s consent (such consent not to be unreasonably withheld), King agrees to enter into an agreement

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

with respect to King’s commercial supply of Products to PTI or its licensee in Australia and New Zealand, the terms of such agreement to be negotiated in good faith. In the event that King agrees to supply Product to PTI and PTI agrees to purchase Product from King for commercial supply in Australia and New Zealand, then such Product will be sold by King to PTI [***].

3.5.7 Upon PTI’s written request, a second manufacturing site will be qualified for each Product at such time as any of the following shall occur: (a) such [***], or (b) there is an [***], or (c) [***]. With respect to Remoxy, such qualification will be obtained on a post-approval basis and may include, at King’s discretion, a King facility or other contract manufacturer. With respect to all other Products, if the primary site for such Product is a King manufacturing site, PTI may require that the second manufacturing site not be a King manufacturing site.

3.5.8 In connection with the Manufacturing/CMC Plans, each Party

(a) will, upon written request of the other Party, provide the other with the following documents to the extent that such documents being requested are available and in the possession or control of the Party to whom the request is made: for each Product, pharmaceutics development report and history, copies of CMC section submitted as part of any Regulatory Filings, and minutes from any meeting or correspondence with any Regulatory Authority regarding pharmaceutics development or CMC; and

(b) will allow the other Party to examine and copy, at the site where such records are normally stored and at a time that is mutually acceptable to the Parties, the following: (i) CMC development protocols and reports, (ii) for each batch of API and each batch of Product produced as CTM, batch records, analytical monograph (tests and specifications), certificate of analysis for Good Manufacturing Practices release, a table containing initial release and stability testing results (which table will be updated each time a stability pull point is analyzed), copies of any out of specification or laboratory investigation report events, and report of any failed batches and any corrective action; and (iii) for each batch of Product produced as CTM, packaging and labeling batch records.

The Manufacturing/CMC Plans will include a list and brief description of protocols to be developed thereunder. The reports described in clause (a) above and the protocols in the Manufacturing/CMC Plans that King notifies PTI that King would like to review will be developed in Consultation with the other Party and will be made available to the other Party in draft form with sufficient time for such Party to review and comment on the foregoing, as well as being provided to the other Party in final form when such materials are completed. In addition, each Party will make available to the other Party such additional documentation reasonably related to such other Party’s performance of its obligations hereunder that is in the possession or control of the Party to whom the request is made as such documentation is reasonably requested by the other Party.

3.6 Yearly Brand Plans. King will prepare each Yearly Brand Plan for each Product and provide a copy to the JOC for its review and comment. King, in Consultation with PTI, will

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

have control and responsibility for Marketing each Product and for all matters under the Yearly Brand Plan, including determining the packaging, trade dress, and labeling (to the extent not dictated by any applicable Regulatory Approval) for the distribution and sale of Product. Subject to Section 2.1.4 of the License Agreement, King shall use commercially reasonable efforts and diligence to Market the Product commensurate with industry standards; provided that in no event shall such level of efforts and diligence be less than King uses in marketing its own products of similar market potential and at a similar stage in development as the applicable Product, taking into account the competitiveness of the marketplace, the proprietary position of the Product, and the efforts and resources available to a company having a comparable market capitalization and taking into account then-current market conditions. King will spend at least [***] on Marketing for Remoxy in the U.S. Territory (excluding expenses related to a sales force) between the Closing Date and the date of Regulatory Approval of Remoxy by the FDA; provided that King will be entitled to suspend such spending in the event the JOC decides to cease pursuing Regulatory Approval of Remoxy in the U.S. Territory, such suspension to only remain in effect until such time as the JOC elects to resume pursuing Regulatory Approval of Remoxy in the U.S. Territory; provided further that King may propose changes in spending levels, with respect to which changes PTI will not unreasonably withhold its consent, in the event of (a) the FDA not accepting the NDA covering Remoxy for filing (or refusal to file), (b) a determination by the FDA that such NDA is not approvable, or (c) a failure by the FDA to approve such NDA within eighteen (18) months of the date of the FDA’s acceptance of an NDA for Remoxy.

3.7 Collaboration Costs, Overruns, and Additional Expenditures.

3.7.1 Subject to the terms and conditions of this Agreement, including Section 3.3.2, (a) all Collaboration Costs incurred by either Party on and after the Closing Date shall be paid by King; and (b) all Collaboration Costs incurred by either Party on or after the Effective Date but prior to the Closing Date will be paid by King, with such payment not to be paid prior to the Closing Date, so long as this Agreement is not terminated prior to Closing and such Collaboration Costs comply with the terms and conditions of this Agreement, as it will be in effect as of the Closing Date. Except as otherwise provided herein, PTI shall be entitled to reimbursement for the Collaboration Costs incurred by it in connection with the Collaboration; provided that all such Collaboration Costs must be included in the budget governing the activities for which such costs were incurred, subject to the provisions of this Section 3.7. All payments made by King hereunder shall be treated for all purposes, including all tax and accounting purposes, as the expenses of King and any applicable deductions shall be wholly allocable to King.

3.7.2 The Parties understand and agree that a Product may generate new data or may be the subject of new regulatory guidance at any time for any reason during a Calendar Year and that such changes may require substantial revisions to the clinical development activities associated with a Product or may cause PTI, in Consultation with King, or Durect to re-work a Product. In the event either Party anticipates or becomes aware that the actual costs of any given task assigned to it may or will likely exceed the funds allocated to such task in the applicable Program Plan budget, such Party shall promptly notify the JOC in writing. If the actual aggregate costs of conducting a particular Program Plan will likely exceed the aggregate annual funds budgeted for such Program Plan under the applicable Program Plan budget (or in the case of work conducted under a Development Plan, if the actual aggregate costs of conducting a

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

particular Development Plan will likely exceed [***] of the aggregate annual funds budgeted for such Development Plan under the applicable Development Plan budget), the JOC shall work in good faith for up to thirty (30) days to approve a budget amendment that provides for the continued prompt clinical Development and Regulatory Approval of a Product. Such amendment may include increasing the budget, readjusting the budget to allocate additional funds to such task, revising the scope of such task to permit satisfactory completion at the then-budgeted funding level, or all three. In the event no decision is reached, the matter shall be subject to the arbitration provisions of Section 2.3.3 hereof. For purposes of clarity, neither Party shall be obligated to perform any additional services in connection with such task if the JOC does not approve increasing the budget to pay for such additional services.

3.7.3 Notwithstanding the foregoing, either Party may, in its discretion, spend additional amounts above and beyond those allocated in the applicable budget (“Discretionary Funding”) on any task assigned to such Party pursuant to the Program Plans or on any other task the JOC has approved. In such event, the Party wishing to expend Discretionary Funding shall first inform the second Party of such first Party’s intent to do so. If the second Party consents to the Discretionary Funding being deemed a Collaboration Cost, which consent shall not be unreasonably withheld, the Discretionary Funding shall constitute a Collaboration Cost. If the second Party does not consent, then the Discretionary Funding shall not constitute a Collaboration Cost, but shall be borne solely by the Party undertaking the Discretionary Funding.

3.7.4 Except to the extent this Agreement expressly provides for payments that do not require JOC approval, and except to the extent the JOC has approved any payment hereunder, neither Party shall (a) be obligated to incur any costs or expend any funds that have not been approved by such Party or (b) have the authority to cause the other Party to incur any costs or expend any funds that have not been approved by such other Party.

3.8 Third Party Licenses and Collaborations. Subject to the review and the approval of the JOC as provided in Section 2.2.5, King may enter into such other Third Party licenses and collaboration agreements as are reasonably necessary to accomplish the objectives and purposes of the Development Program; and subject to the review and the approval of the JOC as provided in Section 2.2.5, PTI may enter into such Third Party licenses and collaborations agreements as are reasonably necessary to accomplish the objectives and purposes of the Collaboration. Except with the other Party’s consent, not to be unreasonably withheld, each such agreement shall (a) if only one Party is a party to the agreement, name the other Party as a third party beneficiary to such agreement, (b) include an assignment of all right, title, and interest in and to all work product and all inventions arising from the performance of such agreement, and all intellectual property rights attaching thereto to the contracting Party, and (c) bind the relevant Third Party by obligations of confidentiality and non-use with respect to all such work product, inventions, and intellectual property rights that are at least as stringent as those set forth herein. In order to ensure the ability of a Party (the “Non-Defaulting Party”) to proceed with the Development Program notwithstanding certain conduct of the other Party (the “Defaulting Party”) or the termination of this Agreement by the Non-Defaulting Party pursuant to Section 9.2.3, the JOC may require the inclusion, in those subcontracts, licenses, and other agreements (including manufacturing and supply agreements) entered into in connection with the Development Program (“Third Party Agreements”) that are or are likely to become material to the conduct of the Development Program, of (i) an enforceable provision granting to the Non-Defaulting

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Party hereto the same rights, benefits, and obligations as those granted to the Defaulting Party under that Third Party Agreement (whether by automatic assignment, a direct agreement, or otherwise), contingent upon a Default by the Defaulting Party of that Third Party Agreement or the termination of this Agreement by the Non-Defaulting Party pursuant to Section 9.2.3, and (ii) the applicable Third-Party’s unconditional consent to such provision.

3.9 Failure to Perform.

3.9.1 General. In the event that a Party does not perform a task or tasks assigned to it under a Program Plan, including due to a dispute as to the budget or scope of such task, or otherwise fails to perform its Development or Marketing obligations hereunder, including meeting timelines and budgets set forth in the Program Plans, PTI and King will negotiate in good faith with respect to remedying such failures. In the event such negotiations do not result in a resolution of such issues satisfactory to both Parties within thirty (30) days of the initiation of such negotiations, the matter shall be submitted to arbitration as set forth in Section 2.3.3.

3.9.2 Remedy. In the event the arbitrators determine that the failure to perform was intentional or willful (but not as a result of a failure to perform because of a disagreement about budget matters or regulatory strategy, which disagreement prevents the Parties from continuing to perform their obligations), the arbitrators may grant the non-breaching Party the right, but not the obligation, to perform the task or tasks of the breaching Party. In addition, in the event of any breach, including a failure to use commercially reasonable efforts to perform a Party’s obligations, the arbitrators may award the non-breaching Party monetary damages.

3.9.3 No Waiver. In the event a Party is granted a right to perform the other Party’s task, a Party’s election to perform such task will not be deemed a waiver with respect to such electing Party’s ability to exercise any other rights hereunder, including any rights under Section 9.2.2 or 9.2.3.

4. INFORMATION EXCHANGE

4.1 Records.

4.1.1 Record Keeping. Each of PTI and King shall maintain records in sufficient detail and in accordance with Good Laboratory Practice, Good Clinical Practice, and Good Manufacturing Practice, and as will properly reflect and document, in a manner appropriate for purposes of supporting the filing of potential patent applications and Regulatory Filings, all work done and results achieved in the performance of the Development Program (including all data in the form required under any Applicable Law); provided, however, that prior to King’s election to assume control and responsibility of execution of all matters under the Development Plan with respect to a particular Product, PTI shall be responsible for maintaining master files in accordance with Good Clinical Practices, Good Laboratory Practices, and Good Manufacturing Practices, to the extent applicable; provided, further, that upon such election by King, PTI shall transfer such records to King with respect to such Product. Subject to Section 6.4.3 hereof, PTI and King each hereby grants the other the right to inspect and copy such records to the extent reasonably required for the performance of its obligations or exercise of its rights under this Agreement, and neither Party shall use such records or information except to the extent otherwise permitted by this Agreement.

4.1.2 Reports. Each Party shall keep the JOC reasonably informed about the status of the Development Program, including furnishing the JOC with copies of all material reports that relate to the Development Program. In particular, without limitation, each Party shall (a) provide periodic reports in reasonable detail to the JOC, at least each Calendar Quarter and as requested from time to time by the JOC; (b) provide the other Party with access to all Technology and information employed in or arising out of the Development Program solely for the purpose of conducting their respective roles hereunder; (c) provide the other Party with the information and reports described in Section 3.5.8 at least each Calendar Quarter and as requested from time to time by the other Party; and (d) provide the other Party with information concerning the Development Program as such other Party shall reasonably request. For purposes hereof, “information” will include data, results, reports, records, and similar information.

4.2 Updates; Adverse Event Information.

4.2.1 Adverse Event Reports. In addition to the reports described in Section 4.1.2 above, each Party shall provide the JOC with all adverse event information and product complaint information required by such Party to be disclosed to any Regulatory Authority in connection with the Development, Marketing, or sale of any Product, within time frames consistent with reporting obligations under Applicable Law.

4.2.2 Confidential Information. Except as otherwise required in connection with disclosures to Regulatory Authorities required by Applicable Law, all reports, updates, adverse event, or product complaint and other information provided by a Party under this Agreement (including under this Section 4.2) shall be considered Confidential Information of both Parties, regardless of who provided the same, and shall be subject to the terms of Article 8.

4.3 Sales Report. Starting immediately following the First Commercial Sale of a Product and for the Term of this Agreement, King, at its own expense, shall provide PTI with such U.S. sales reports that King has obtained for itself from a third party vendor of King’s choice (such as IMS or NDC). Such report shall be provided to PTI on a timely basis in electronic form, if available, each Calendar Quarter and shall include no less than the following data (provided that King has obtained or can obtain such data without undue burden): (a) Product sales by territory, by prescriber, and by strength, (b) Product sales by hospital, clinic, or mail-order services, independent pharmacies, chains, mass merchandisers, and food stores, (c) a comparison of actual Product sales versus King’s forecast sales, (d) wholesale volume reports, (e) top 250 hospital report, and (f) a summary of managed care accounts by volume of Product. In addition, starting immediately following the First Commercial Sale of a Product and for eighteen (18) months thereafter, King, at its own expense, shall (i) provide PTI with a weekly Product sales report in electronic form and (ii) provide telephonic (or in-person) access to King’s national sales manager for purposes of holding an accurate discussion of a Product’s commercial sales trends, general market trends, and the like. PTI agrees that all information, data, and reports provided by King to PTI hereunder shall be considered Confidential Information of King, subject to the requirements of Article 8.

5. CERTAIN OTHER PROVISIONS

5.1 Product Liability Costs. The Parties understand and agree that, because of the nature of the collaborative effort set forth in this Agreement, should any Third Party claims be asserted against either Party or both Parties or any of their Affiliates, agents, or representatives that are in the nature of product liability claims (“Claims”), the Parties will cooperate through the JOC to ensure that such claims are defended and settled or compromised in a manner that best protects the interests of the Parties. In addition, the Parties will procure and maintain product liability insurance with first-class carriers in coverages and amounts and with deductibles not less than those determined by the JOC; provided that:

(a) PTI shall obtain such insurance for a Product for Claims arising prior to the Completion of Phase II, at PTI’s sole cost, which coverage shall continue until the earlier of (i) the initiation of Phase III for such Product and (ii) five years after the Completion of Phase II for such Product;

(b) If Phase III for a Product is initiated, PTI shall obtain such insurance for such Product for Claims arising following Completion of Phase II but prior to the First Commercial Sale of such Product, at PTI’s and King’s joint and equal cost, which coverage shall continue until the earlier of (i) the First Commercial Sale of such Product and (ii) five years after the first to occur of (A) the completion of Phase III, (B) the decision of the JOC not to proceed with the commercial sale of such Product, and (C) the termination of this Agreement in its entirety pursuant to Article 9 or with respect to such Product pursuant to Section 9.2.2(a), unless PTI or any of its Affiliates or its sublicensee continues to Develop the Product following such termination, in which case clause (d) below will apply;

(c) As of the First Commercial Sale of a Product, King shall, at its sole cost, have obtained such insurance for a Product for Claims arising following the First Commercial Sale of such Product, such insurance to be in an appropriate level (at a minimum of $[***]) exclusive of self-insured amounts and shall be in amounts maintained by King for other products of King of similar market potential and at a similar stage in development as the applicable Product, taking into account any particular risks related to such Product, which coverage shall continue until the earlier of (i) the termination of this Agreement in its entirety pursuant to Article 9 or with respect to such Product pursuant to Section 9.2.2(a), so long as PTI or any of its Affiliates or its sublicensee continues to sell the Product following such termination, and (ii) five years after the last commercial sale of the Product pursuant to this Agreement; and

(d) PTI shall, at its sole cost, obtain such insurance for a Product for Claims arising following the termination of this Agreement in its entirety or with respect to such Product, so long as PTI or any of its Affiliates or its sublicensee continues to Develop or sell the Product following such termination, such insurance to be in an appropriate level (at a minimum of $[***] in the case of Marketed Products) exclusive of self-insured amounts and shall be in amounts maintained by PTI for other products of PTI of similar market potential and at a similar stage in development as the applicable Product, taking into account any particular risks related to such Product, which coverage shall continue until five years after (i) termination of the Development of such Product if PTI elects not to sell such Product commercially or (ii) the last commercial sale of the Product, as applicable.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

The costs incurred to obtain the insurance described in this Section 5.1 shall not be deemed Collaboration Costs. The insurance described in this Section 5.1 shall name each Party as a co-insured.

5.2 Product Packaging. The Parties agree that packaging and package inserts for each finished Product sold to consumers will include King’s and PTI’s names and logos prominently displayed, subject to the approval of the applicable Regulatory Authorities. PTI agrees that it shall not use, and it will prohibit its Affiliates or sublicensees from using, trademarks, trade dress (including product intaglio), packaging, or marketing material with respect to the Marketing of products in the Field in Australia and New Zealand that is confusingly similar with the Product Trademarks and any Product trademarks, trade dress, packaging, or marketing material in the Territory, except with respect to the use of PTI’s name or logo. For clarity, PTI has the right to develop and market for use in Australia and New Zealand the identical formula, including colorants and inks, and container-closure system, as is developed and marketed for each Product in the Territory; provided, however, that all secondary packaging components must be different.

5.3 Mutual Financial Reporting. Each Party covenants to provide the other Party written notice at such time as (a) such Party enters the “zone of insolvency,” as defined in Applicable Law, including interpretations in applicable case law, (b) such Party’s liabilities exceed its assets, (c) such Party is unable to pay its debts as they become due, (d) there is an occurrence of a Default by such Party with respect to any of its debt or payment obligations or any agreement material to the Development Program, or (e) such Party suspends, closes, or otherwise ceases to operate a majority of its business relating to this Agreement and the License Agreement. In addition, within 15 days of a written request of either Party (such request not to be made more than four times during any Calendar Year), the other Party covenants to provide the requesting Party with its most recent audited financial reports. Each Party will treat all notices and financial reports (and the information contained therein) as Confidential Information of the other Party, subject to the terms of Article 8.

6. CLOSING; PAYMENTS

6.1 Closing.

6.1.1 Covenants Pending Closing.

(a) Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the Parties agrees to use all reasonable efforts to do, or cause to be done, all things necessary and appropriate to satisfy all conditions of and to consummate the transactions contemplated by this Agreement, including the satisfaction of the applicable conditions set forth in Section 6.1.3 below.

(b) Filings. The Parties shall cooperate with one another in the preparation, execution, and filing of all documents that are required or permitted to be filed on or before the Closing, including filings pursuant to the HSR Act and will promptly file the same after the Effective Date. The related filing fees shall be borne by King, and the costs and expenses incurred by each Party shall be paid by such Party.

6.1.2 Closing. As promptly as practicable after the Effective Date and after the satisfaction by each Party or, if permissible, waiver of the conditions set forth in Sections 6.1.3(a) and (b), the Parties hereto shall cause the Closing to occur on the Closing Date. The Closing shall be held at the offices of Jones Day, 222 East 41st Street, New York, New York 10017, or such other place as the Parties shall agree, for the purpose of confirming the satisfaction or waiver, as the case may be, of the conditions set forth in Sections 6.1.3(a) and (b). If the Closing Date has not occurred prior to February 9, 2006, either Party may terminate this Agreement upon written notice to the other Party; provided, however, that, as of such date, the Party terminating this Agreement is not in default under this Agreement.

6.1.3 Conditions to Closing.

(a) The obligation of PTI to close shall be subject to the satisfaction on or before the Closing Date of the following conditions, any or all of which may be waived in whole or in part by PTI:

(i) the expiration or termination of all applicable waiting periods under the HSR Act, unless a joint determination is made by PTI and King (by certification from PTI and King to each other) that notification under the HSR Act is not required;

(ii) the representations and warranties made by King in Article 10 shall be true and correct in all material respects as of the Effective Date and as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and King shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to Closing;

(iii) the provision by King to PTI of an officer’s certificate certifying that (i) and (ii) above are true and correct as of the Closing Date;

(iv) the provision by King to PTI of an opinion of counsel, in form reasonably satisfactory to PTI, that the execution of this Agreement and the License Agreement and the transactions contemplated hereby and thereby are duly authorized by all corporate action on the part of King;

(v) the payment to PTI of the Program Fee by King;

(vi) the execution by King and delivery to PTI of the License Agreement; and

(vii) any agreement entered into by PTI with Mallinckrodt-Hobart pursuant to Section 3.5.5 shall be in form and substance satisfactory to King.

(b) The obligation of King to close shall be subject to the satisfaction on or before the Closing Date of the following conditions any or all of which may be waived in whole or in part by King:

(ii) the representations and warranties made by PTI in Article 10 shall be true and correct in all material respects as of the Effective Date and as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and PTI shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to Closing;

(iii) the provision by PTI to King of an officer’s certificate certifying that (i) and (ii) above are true and correct as of the Closing Date;

(iv) the provision by PTI to King of an opinion of counsel, in form reasonably satisfactory to King, that the execution of this Agreement and the License Agreement and the transactions contemplated hereby and thereby are duly authorized by all corporate action on the part of PTI;

(v) the execution by Durect and PTI of an agreement, in the form attached hereto as Exhibit B, granting Durect’s consent to the transactions contemplated by this Agreement and the License Agreement; and

(vi) the execution by PTI and delivery to King of the License Agreement.

6.2 Program Fee. Simultaneous with the Closing, King shall pay to PTI a one-time collaboration fee in the amount of one hundred fifty million U.S. dollars ($150,000,000) (the “Program Fee”). The Program Fee shall be paid by King in U.S. dollars by wire to an account designated by PTI.

6.3 Milestone Payments.

6.3.1 Development Milestones. King will make the following payments to PTI within ten (10) days after the determination of the first achievement of each of the milestones set forth below. For purposes of clarity, it is understood and agreed that the following milestone payments shall (a) be non-refundable and non-creditable and (b) only be payable once with respect to each Product, such that that a payment will be due only once for (i) each Product with a given active opioid, but will not be payable with respect to line extensions, new indications, new dosages, or new Regulatory Filings that subsequently may be filed for a Product that contains the same active opioid, and (ii) the first filing of an IND or NDA or the first regulatory approvable letter for such Product in a country of the Territory, notwithstanding the subsequent filing or approval of other Regulatory Filings in other countries in the Territory for a Product with the same active opioid.


	Payment
Milestone	Remoxy		All Other Products
Acceptance by a Regulatory Authority of the first IND filing for a Product in the Territory		N/A	$	[***]
Acceptance by a Regulatory Authority of the first NDA filing for a Product in the Territory	$	15 Million	$	[***]
First regulatory approvable letter transmitted by a Regulatory Authority for NDA of a Product in the Territory	$	15 Million	$	[***]

Total Development Milestones for Each Product	$	30 Million	$	[]*

6.3.2 Termination of Milestones. In the event any suit, action, or proceeding results in the entry of an injunction pursuant to Section 4.6 of the License Agreement that prevents King from Marketing a Product, which injunction is unappealable or unappealed within the time allowed for appeal, King’s obligation to make milestone payments with respect to future milestones for such Product pursuant to this Section 6.3 shall immediately terminate. It is understood and agreed that following the issuance of any such injunction, PTI’s Development and manufacturing obligations with respect to such Product shall be waived, and the Parties shall promptly amend the Project Plans and, if required to meet the minimum obligations under Section 3.1.3, designate a replacement Product pursuant to Section 3.1.2. For purposes of clarity, it is understood that this Section 6.3.2 shall not relieve King of its obligation to pay any milestone payments for milestones that were achieved prior to the date such injunction is issued or to subsequently pay milestones in the event such injunction is lifted.

6.4 Collaboration Costs.

6.4.1 Determination of Collaboration Costs. Within [***] following the end of the [***] of each Calendar Quarter, PTI shall submit to King a documented and reasonably detailed accounting of all Collaboration Costs, determined in accordance with GAAP, incurred by PTI with respect to all Products during the [***], which King shall pay to PTI pursuant to Section 3.7 above. All such payments shall be made within [***] following the end of the second month of the applicable Calendar Quarter.

6.4.2 Currency Conversion. All Collaboration Costs incurred in currencies other than U.S. dollars shall be converted to U.S. dollars using the method agreed by the Parties and set forth in the budget of the applicable Program Plan.

6.4.3 Records. Each Party shall maintain its records in accordance with GAAP. PTI shall maintain, and shall require that its Affiliates, Sublicensees, and licensees maintain, for three years from the date of each quarterly reconciliation of Collaboration Costs, complete and accurate records of the same, in sufficient detail to allow calculation and verification of Collaboration Costs. King shall have the right for a period of three years after receiving any report or statement with respect to Collaboration Costs to appoint, at its expense, an independent certified public accountant reasonably acceptable to PTI to inspect the relevant records of PTI and its Affiliates and, if applicable, Sublicensees to verify such report or statement. PTI, its Affiliates, and, if applicable, Sublicensees shall each make its records available for inspection by such independent certified public accountant (who agrees to confidentiality provisions consistent

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

with Article 8) during regular business hours at such place or places where such records are customarily kept, upon reasonable notice from King, solely to verify the accuracy of the reports and payments. PTI will use commercially reasonable efforts to ensure that King is granted the right to audit PTI’s Sublicensees’ financial records, as provided herein; provided that, to the extent that PTI does not obtain that right for King, PTI shall obtain for itself such right and, at the request of King, PTI shall exercise such audit right with respect to such Sublicensees and provide the results of such audit for inspection by King pursuant to this Section 6.4.3. Such inspection right shall not be exercised more than once in any Calendar Year. The results of each inspection, if any, shall be binding on both Parties. In the event that any such inspection shall conclude that Collaboration Costs were overstated by more than [***] percent ([***]%) in any given Calendar Year, PTI shall pay for all the reasonable costs of King in respect of the inspection, as well as make any payments required to remedy the overstatement. Any dispute regarding the results of any such inspection hereunder shall be subject to the dispute resolution provisions of Section 2.3 hereof; provided that if PTI is the Party with final decision-making authority over the subject matter in dispute, and the CEO’s are unable to reach agreement even after good faith discussions in accordance with Section 2.3, then the dispute shall not be subject to the sole discretion of either Party but shall be subject to arbitration pursuant to the provisions of Section 2.3.3. All information and data reviewed in the inspection shall be used only for the purpose of verifying the accuracy of the reports and payments and shall be treated as PTI’s Confidential Information subject to the obligations of this Agreement.

6.4.4 Overdue Payments. All overdue payments, not subject to a bona fide dispute, due and payable pursuant to this Agreement shall bear interest at a rate of [***] per month from the due date until paid in full.

6.4.5 Withholding Taxes. All payments made by a Party hereunder shall be made to the other Party free and clear of any Taxes. If a Party is required by law to deduct or withhold any Taxes from any payment made hereunder, then such Party shall (a) make such deductions and withholdings; (b) pay the full amount deducted or withheld to the relevant taxing authority or other applicable governmental authority; and (c) promptly provide the other Party with written documentation of any such payment that, if applicable, shall be in a form sufficient to satisfy the requirements of the United States Internal Revenue Code relating to a claim by such other Party for a foreign tax credit in respect of such Tax payment.

7. LIMITATIONS

7.1 For PTI. Except as otherwise expressly permitted herein or in the License Agreement with respect to [***], during the Term, PTI agrees that it will not develop or market any products in the Field in the Territory on its own or with or through an Affiliate, Sublicensee, licensee, or other Third Party, or grant to any Affiliate, Sublicensee, licensee, or other Third Party any right, option, license, covenant not to sue, or any other agreement to forbear from enforcing PTI’s rights to do so.

7.2 For King. Except as otherwise expressly permitted herein or in the License Agreement with respect to Products, during the Term, King agrees that it will not develop or market any products incorporating SABER Technology in the Territory with Durect or license from Durect or any licensee or other recipient of rights from Durect, any rights to develop or market any such products, except any rights for use in the Collaboration, in each case, either on its own or with or through an Affiliate, Sublicensee, licensee, or other Third Party.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

8. TREATMENT OF CONFIDENTIAL INFORMATION; PUBLICITY.

8.1 Confidentiality.

8.1.1 Confidentiality Obligations. PTI and King each acknowledges and agrees that the other Party’s Confidential Information constitutes highly valuable and proprietary confidential information and materials. PTI and King each agrees that during the Term of this Agreement and for an additional five years (or, in the case of any Confidential Information identified as a trade secret by the Disclosing Party at the time of disclosure, for so long as such trade secret Confidential Information is susceptible of remaining a trade secret), it will use commercially reasonable efforts to keep confidential, and will use commercially reasonable efforts to cause its employees, Consultants, Affiliates, agents, advisors, and Sublicensees to keep confidential, all Confidential Information of the other Party. Neither PTI nor King nor any of their respective employees, Consultants, Affiliates, or Sublicensees shall use Confidential Information of the other Party for any purpose whatsoever except as expressly permitted in this Agreement or the License Agreement.

8.1.2 Limited Disclosure. PTI and King each agree that any disclosure of the other Party’s Confidential Information to any officer, employee, Consultant, agent, or Affiliate of PTI or King, as the case may be, shall be made only if and to the extent necessary to carry out its rights and responsibilities under this Agreement and the License Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities, and shall only be made to persons who are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement or the License Agreement. PTI and King each further agrees not to disclose or transfer the other Party’s Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement or the License Agreement. Each Party shall take such action, and shall cause its Affiliates and Sublicensees to take such action, to preserve the confidentiality of the Disclosing Party’s Confidential Information as the Receiving Party would customarily take to preserve the confidentiality of its own Confidential Information, using a level of care that shall not under any circumstances be less than reasonable and prudent care. If a court or other government authority orders that the Receiving Party disclose Confidential Information, or proposes such an order, the Receiving Party must notify the Disclosing Party immediately after learning of the order, so as to provide the Disclosing Party an opportunity to protect the information, and the Receiving Party must limit the disclosure to the minimum that will comply with the order. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within 60 days of the request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain Confidential Information of the other Party relating to any license or right to use Technology that survives such termination and one copy of all other Confidential Information may be retained in inactive archives solely for the purpose of establishing the contents thereof.

8.1.3 Employees and Consultants. PTI and King each hereby agrees that all of its employees, and all of the employees of its Affiliates, and any Consultants to such Party or its Affiliates, in any case that participate in the activities of the Development Program and who shall have access to Confidential Information of the other Party shall be bound by written obligations to maintain the same in confidence and not to use such information except as expressly permitted herein. Each Party agrees to enforce confidentiality obligations to which its employees and Consultants (and those of its Affiliates) are obligated. Each Party agrees to have each employee or Consultant that participates in the Development Program enter into a written agreement with such Party that includes an assignment to such Party of all right, title, and interest in and to all work product and all inventions arising during the course of his or her employment with or provision of services to such Party, and all intellectual property rights attaching thereto.

8.1.4 Equitable Relief. PTI and King each acknowledges that a breach by it of Article 7 or the provisions of this Article 8 cannot reasonably or adequately be compensated in damages in an action at law and that such a breach may cause the other Party irreparable injury and damage. By reason thereof, each Party agrees that the other Party may be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of Article 7 or 8 by the other Party; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. Each Party agrees that the existence of any claim, demand, or cause of action of it against the other Party, whether predicated upon this Agreement, or otherwise, shall not constitute a defense to the enforcement by the other Party, or its successors or assigns, of the covenants contained in Articles 7 and 8.

8.2 Publicity. Neither Party may publicly disclose the existence or terms of this Agreement without the prior written consent of the other Party. Notwithstanding the foregoing, each Party shall have the right to disclose the existence or terms of this Agreement, or information relating to the Development Program, Remoxy, or other Products, without the consent of the other Party (a) to the extent the disclosure is required by law or by the requirements of any nationally recognized securities exchange, quotation system, or over-the-counter market on which such Party has its securities listed or traded, (b) to any investors, prospective investors, lenders, and other potential financing sources who are obligated to keep such information confidential, or (c) to any Third Party who is obligated by written confidentiality agreement to keep such information confidential; provided, in each case, that the Party making such disclosure shall use reasonable efforts to provide the other Party with as much notice beforehand as is reasonable under the circumstances with respect to any such disclosure. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to the Development Program for publication. Once such press release or any other written statement is approved for disclosure by both Parties, either Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party. Additionally from time-to-time PTI may wish to issue press releases or make similar disclosures regarding the results or status of its research or Product activities, the achievement of a regulatory or development milestone, or any other material achievements under this Agreement

or the DLA. Notwithstanding anything to the contrary in Section 8.3 or this Section 8.2, PTI shall be free to issue such press releases or make such disclosures, and shall have the right to choose the wording and timing of any such press releases and disclosures; provided that PTI agrees to provide King a draft copy of any such press release or disclosure at least twelve (12) hours prior to its publication or disclosure, which copy in any event must be provided during normal business hours, and provided further that such disclosure does not mention King without King’s prior written consent. King shall have the right to inform PTI of any information contained therein that King believes is inaccurate.

8.3 Publication. It is expected that each Party may wish to publish the results of its research under this Agreement and the DLA in scientific journals or through scientific conferences, which disclosures will be subject to the obligations of this Section 8.3. At any time prior to the filing of an NDA for a particular Product, PTI may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that PTI complies with the provisions of this Section 8.3; and provided further that such publication does not mention King without King’s prior written consent. At any time following the filing of an NDA for a particular Product, King may publish the results of its research for such Product in scientific journals or through scientific conferences; provided that King complies with the provisions of this Section 8.3; and provided further that such publication does not mention PTI without PTI’s prior written consent. In order to safeguard patent rights and other intellectual property, the Party wishing to publish in any scientific journal or at any scientific conference the results of any research being conducted by the Parties in the Development Program shall first submit a draft of each proposed technical publication or an outline of each proposed presentation for a scientific conference, with any related materials to be published or distributed in connection therewith, to the other Party for review, comment, and consideration of appropriate patent action at least thirty (30) days prior to any submission for publication (or in the case of a disclosure in connection with a scientific conference, at least fifteen (15) days prior to such disclosure). Within fifteen (15) days of receipt of the prepublication materials (or as soon as practicable in connection with an outline of an oral presentation), the other Party will notify the Party seeking publication as to whether a patent application shall be prepared and filed (in which case the Party seeking publication shall delay submission until the first to occur of the filing of a patent application and thirty (30) days from such notice provided by the JOC) or whether such publication must be revised to eliminate Confidential Information of a Party (in which case the Party seeking publication shall delete from any proposed publication all such Confidential Information contained therein).

9. TERM AND TERMINATION

9.1 Term. This Agreement shall commence on the Closing Date and shall continue in full force and effect until the later of (a) the expiration of the last to expire of any Patent Rights licensed under the License Agreement or developed in the Collaboration and (b) the expiration of all periods of market exclusivity relating to any Products in the Territory, unless earlier terminated in accordance with the provisions of Section 6.1.2 or this Article 9 (the “Term”).

9.2 Termination. This Agreement may be terminated, with respect to a particular Product or in whole, as follows:

9.2.1 Mutual Termination. The Parties may agree in writing to mutually terminate this Agreement at any time. If a Party has given notice of termination of this Agreement pursuant to Section 9.2.2, 9.2.3, or 9.2.4 hereof, the other Party may not invoke this Section 9.2.1 by agreeing to such termination. In the event of termination pursuant to this Section 9.2.1, the Parties shall negotiate in good faith within thirty (30) days after the date of such termination the terms and conditions of such termination. In addition, King shall make payments due and payable for the Final Calendar Year as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination.

9.2.2 Termination At Will.

(a) Product Specific Termination. King may terminate this Agreement with respect to a particular Product as set forth in Section 3.1.4 above. In connection with a termination pursuant to this Section 9.2.2(a), the following shall apply:

(i) King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of such Terminated Product in the Territory, including the following, in each case to the extent so related: (A) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI (including all data and reports in the possession of King) with respect to the Terminated Product, including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, shall use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program for such Terminated Product; (B) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for such Terminated Product; (C) King shall pay all non-cancelable costs in connection with the Development Program for such Terminated Product; (D) King shall pay all costs of any of the ongoing clinical trials of such Terminated Product for a period of six (6) months from the effective date of termination, but only for such costs incurred for those patients already enrolled in the study at the time of giving the termination notice (it being understood that King shall continue to be liable beyond the end of such six (6)-month period for any non-cancelable costs associated with such clinical trials); (E) all rights and licenses granted herein to King with respect to the Terminated Product shall, for no additional consideration, immediately terminate; and (F) King shall, within ten (10) days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Terminated Product in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing (except for non-cancelable costs as described in clause (C) above) will be borne by King for a period of six (6) months after the effective date of termination, unless the Parties otherwise agree.

(ii) The Parties shall make payments due and payable for the Final Calendar Year with respect to the Terminated Product as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination.

(b) Termination of the Agreement in its Entirety. King may terminate this Agreement in its entirety upon six (6) months’ prior written notice to PTI, which notice may be given (1) following the third anniversary of the Effective Date, or (2) in the event of Scientific Failure, with such termination to be effective at the end of such six (6)-month period. As used herein, “Scientific Failure” means a determination by the JOC that the Development Program is unlikely to be commercially viable, or is unlikely to generate any marketable Products, as determined in accordance with its business, legal, medical, and scientific judgment. In connection with a termination pursuant to this Section 9.2.2(b), the following shall apply:

(i) King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of all Products in the Territory, including the following, in each case only to the extent so related: (A) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI (including all data and reports in the possession of King) with respect to the Products, including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, shall use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program for all Products; (B) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for such Products; (C) King shall pay all non-cancelable costs in connection with the Development Program for such Products; (D) King shall pay all costs of any of the ongoing clinical trials of such Products for a period of six (6) months from the effective date of termination, but only for such costs incurred for those patients already enrolled in the study at the time of giving the termination notice (it being understood that King shall continue to be liable beyond the end of such six (6)-month period for any non-cancelable costs associated with such clinical trials); (E) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (F) King shall, within ten (10) days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. All reasonable costs and expenses incurred with respect to the foregoing (except for non-cancelable costs as described in clause (C) above) will be borne by King for a period of six (6) months after the effective date of termination, unless the Parties otherwise agree. In addition, King shall continue to pay the labor costs of PTI personnel at the FTE Rate for the number of hours of service called for in the budget then in effect, whether or not such PTI employees are providing such services, for a period of six (6) months after the effective date of termination; provided that, if a budget is not in effect for a portion of such six (6)-month period, the labor costs for such unbudgeted period will be paid for the number of hours of service set forth in the final approved budget pro-rated to the length of such unbudgeted period. Notwithstanding the

foregoing, King shall not be obligated to continue to pay such labor costs for such PTI personnel to the extent such PTI personnel are actually redeployed to other projects funded by a Third Party or are no longer employed by PTI.

(ii) The Parties shall make payments due and payable for the Final Calendar Year with respect to the Products as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination.

9.2.3 Termination for Material Breach. In the event that either Party breaches any material term of this Agreement that applies to it, the other Party shall have the right to terminate this Agreement by giving sixty (60) days’ prior written notice to the breaching Party; provided, however, that in the case of a breach capable of being cured, if the breaching Party shall cure the breach within such notice period after notice shall have been given, then such notice shall not be effective. For purposes of this Section 9.2.3, (i) the failure to timely make any payment or fulfill any funding obligation under this Agreement that is not subject to a bona fide dispute and (ii) the commission of any act or the occurrence of any omission, in each case that constitutes a breach of any material term of this Agreement shall each constitute a material breach of this Agreement (but the list set forth in clauses (i) and (ii) shall not be deemed an exhaustive list of material breaches of this Agreement). In the event of a termination pursuant to this Section 9.2.3, the following shall apply (the “Termination Procedures”):

(a) In the event that PTI is the breaching Party, King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of the Products in the Territory, including the following, in each case to the extent so related: (i) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI with respect to the Products (including all data and reports in the possession of King), including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program; (ii) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for the Products; (iii) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (iv) King shall, within 10 days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing will be borne by PTI, unless the Parties otherwise agree.

(b) In the event that King is the breaching Party, King shall execute and deliver to PTI such documents, material, data, records, analyses, and information and do such things as reasonably requested by PTI to the extent reasonably related to the Development and Marketing of the Products in the Territory, including the following, in each case to the extent so related: (i) King shall use its commercially reasonable efforts to effect a reasonably smooth and orderly transition of any ongoing clinical studies, Regulatory Approval, or pre-marketing efforts to PTI with respect to the Products (including all data and reports in the possession of

King), including the assignment of any relevant Third Party contracts and Regulatory Filings and, unless otherwise requested by PTI, use commercially reasonable efforts to cancel all cancelable costs already incurred and mitigate all other costs incurred in connection with the Development Program; (ii) King shall make its personnel and other resources reasonably available to PTI as reasonably necessary to effect a reasonably orderly transition of development responsibilities for the Products; (iii) King shall pay all the costs for the completion of any of the ongoing clinical trials of Products, but only for such costs directly incurred for those patients already enrolled in the study at the time of giving the termination notice, as well as all other non-cancelable costs in connection with the Development Program for the Products; (iv) all rights and licenses granted herein to King with respect to the Products shall, for no additional consideration, immediately terminate; and (v) King shall, within 10 days after the termination date, provide and assign to PTI all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of the Products in the Territory. Except as otherwise provided herein, all reasonable costs and expenses incurred with respect to the foregoing will be borne by King, unless the Parties otherwise agree. In addition, King shall continue to pay the labor costs of PTI personnel at the FTE Rate for the number of hours of service called for in the budget then in effect, whether or not such PTI employees are providing such services, for a period of six (6) months after the effective date of termination; provided that, if a budget is not in effect for a portion of such six (6)-month period, the labor costs for such unbudgeted period will be paid for the number of hours of service set forth in the final approved budget pro-rated to the length of such unbudgeted period. Notwithstanding the foregoing, King shall not be obligated to continue to pay such labor costs for such PTI personnel to the extent such PTI personnel are actually redeployed to other projects funded by a Third Party or are no longer employed by PTI.

(c) The Parties shall make payments due and payable for the Final Calendar Year as required by Sections 6.3 and 6.4, as well as pay any other amounts due and owing on the date of termination.

9.2.4 Termination for Insolvency. In the event that a Party (a) makes an assignment for the benefit of creditors, (b) appoints or suffers appointment of a receiver or trustee over its property, (c) is generally unable to pay its debts as they become due, (d) files a petition under, or invokes the protection of, any bankruptcy, insolvency, or similar laws, and consent is requested but not granted for an assignment of the Agreement under Section 9.4.1(c) hereof, (e) has a petition or proceeding filed against it under any bankruptcy, insolvency, or similar laws, which is not dismissed within sixty (60) days, and consent is requested but not granted for an assignment of the Agreement under Section 9.4.1(c) hereof, or (f) suspends, closes, or otherwise ceases to operate a majority of its business relating to this Agreement and the License Agreement, then the other Party may terminate this Agreement effective immediately upon written notice to the first Party. In the event of a termination pursuant to this Section 9.2.4, the Termination Procedures shall apply, with the terminating Party treated as the non-breaching Party. Nothing in this Section 9.2.4 limits or affects any other rights, elections, or remedies that the terminating Party may have under the Bankruptcy Code, or other Applicable Law and all such rights, elections, and remedies are expressly reserved.

9.2.5 Required Assignments. If a Party is required by the terms of this Agreement to assign or transfer to the other Party any agreement, document, or right and such

Party, after utilizing the level of efforts required hereunder, is unable to do so as the result of forces beyond its reasonable control, then the Party shall use its commercially reasonable efforts to make available to the other Party the material benefits of such agreement, document, or right in lieu of such assignment or transfer.

9.3 Surviving Provisions. Termination and expiration of this Agreement for any reason shall be without prejudice to:

(a) the following provisions, which shall survive termination or expiration of this Agreement for as long as necessary to permit their full discharge: Sections 5.1, 6.4.3, 8.1, 11.1, 11.2, 11.3, 11.5 and 11.6; Sections 9.2.2(b)(i) and 9.2.2(b)(ii) in the event of a termination by King pursuant to Section 9.2.2(b); Sections 9.2.3(b) and 9.2.3(c) in the event of a termination by PTI pursuant to Section 9.2.3, 9.2.4 or 9.4.3; Sections 9.2.3(a) and 9.2.3(c) in the event of a termination by King pursuant to Section 9.2.3, 9.2.4 or 9.4.3; the obligations of the Parties set forth in the first two sentences of Section 8.2; Articles 12 and 13; and the definitions set forth in Annex A; additionally, in the event of termination of this Agreement for any reason, King’s reporting obligations under Section 4.2.1 with respect to adverse event information and product complaint information shall survive; provided that King shall provide such information directly to the PTI rather than to the JOC, and

(b) any other rights or remedies provided at law or equity that either Party may otherwise have against the other. Except as otherwise provided in this Section 9.3, all rights and obligations of the Parties under this Agreement shall terminate upon the expiration or termination of this Agreement; provided that it is expressly understood that nothing herein shall relieve any Party from liability from any breach of any covenant or agreement of such Party contained herein or any willful or intentional breach of any representation or warranty of such Party contained herein.

9.4 Treatment Upon Bankruptcy.

9.4.1 Assumption and Assignment of Agreement.

(a) Notwithstanding any other provision of this Agreement, the License Agreement, or any other related agreements, each Party hereby consents to the assumption of this Agreement by the other Party (the “Debtor Party”) in any case commenced by or against the Debtor Party under the Bankruptcy Code to the extent that such consent is required under Section 365(c)(1) of the Bankruptcy Code, but only if the Debtor Party is otherwise entitled to assume this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party’s assumption of this Agreement in a bankruptcy case concerning the Debtor Party. It is not intended to limit any other rights of the other Party (the “Non-Debtor Party”) under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1). The foregoing consent applies only to the assumption of this Agreement by the Debtor Party and does not apply to the Debtor Party’s assignment of this Agreement or any rights hereunder to a Third Party.

(b) Notwithstanding any other provision of this Agreement (including Sections 9.4.1(c) and 13.9), the License Agreement, or any other related agreements, the Non-Debtor Party hereby consents to the assignment of this Agreement by the Debtor Party to a Third Party solely in connection with a sale of all or substantially all of the Debtor Party’s business or assets relating to this Agreement and the License Agreement to such Third Party, pursuant to an orderly sale process under Section 363 of the Bankruptcy Code or a confirmed plan under Section 1129 of the Bankruptcy Code, that contemplates the continued operation of the purchased business or assets and, if PTI is the Debtor Party, the retention of the Existing Management Team, provided that such Third Party promptly agrees in writing to be bound by the terms and conditions of this Agreement and the Debtor Party is otherwise entitled to assign this Agreement under the applicable requirements of the Bankruptcy Code. The sole purpose of the foregoing consent is to overcome any restriction potentially imposed by Section 365(c)(1) of the Bankruptcy Code on the Debtor Party’s assignment of this Agreement under the specific circumstances described in this Section 9.4.1(b). It is not intended to limit any other rights of the Non-Debtor Party under this Agreement or any provision of the Bankruptcy Code, including Section 365(c)(1), or to apply to the assignment of this Agreement in any other context.

(c) Notwithstanding any other provision of this Agreement (including Section 13.9), the License Agreement, or any other related agreements, but subject to Section 9.4.1(b) above, the Debtor Party may only assign this Agreement to a Third Party in any case commenced by or against it under the Bankruptcy Code with the prior written consent of the Non-Debtor Party.

9.4.2 Intellectual Property Rights. All rights related to and licenses of intellectual property granted under this Agreement and the License Agreement by one Party to the other Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy Code, licenses of rights to “intellectual property” as defined under Section 101(35A) of the Bankruptcy Code. In addition to any other rights, elections, and remedies under this Agreement, any related agreements, the Bankruptcy Code, or any other Applicable Law, upon a written request under Section 365(n) of the Bankruptcy Code, the Non-Debtor Party shall be entitled to complete access to any intellectual property of the Debtor Party pertaining to the rights granted in the licenses under the License Agreement, all embodiments of such intellectual property and all documents, material, data, records, analyses, and information related thereto (including all clinical data, INDs, NDAs, Regulatory Approvals, Regulatory Filings, and all other documentation reasonably useful in respect of Product in the Territory in the Field). This Agreement and any other related agreements (to the extent such agreements do not constitute licenses of intellectual property under the Bankruptcy Code) shall be considered agreements supplementary (as such term is used in Section 365(n) of the Bankruptcy Code) to the License Agreement and any other intellectual property licenses between the Parties.

9.4.3 Rejection in Bankruptcy. Any rejection of this Agreement by the Debtor Party pursuant to Section 365 of the Bankruptcy Code shall constitute a material breach of this Agreement not subject to notice or cure. Upon any such rejection, (a) all rights, elections, and remedies of the Non-Debtor Party to this Agreement (including under Section 365 of the Bankruptcy Code) are expressly reserved, and (b) in the event that this Agreement is deemed terminated upon or subsequent to such rejection, the Termination Procedures shall apply, with the Non-Debtor Party treated as the non-breaching Party. Further, upon any such rejection, the

Parties intend and agree that the Non-Debtor Party may elect to retain its rights under this Agreement pursuant to Section 365(n) of the Bankruptcy Code and that such election shall, among other things, entitle the Non-Debtor Party to invoke and exercise all of its rights to any intellectual property under this Agreement, the License Agreement, and any other related agreements.

9.5 Damages; Relief. Termination of this Agreement shall not preclude any Party from claiming any other damages, compensation, or legal or equitable relief that it may be entitled to upon such termination.

9.6 Tax Treatment. The Parties intend that, for United States federal income tax purposes and all other applicable state, local, and foreign income or franchise taxes as may be permitted by law, the Collaboration shall be treated as a cost sharing arrangement between the Parties and shall not be treated as a partnership. The Parties agree that, to the extent permitted by law, they will report their participation in the Collaboration in accordance with the foregoing.

10. REPRESENTATIONS AND WARRANTIES

10.1 By Each Party. PTI and King each represents and warrants to the other as of the Effective Date as follows:

(a) Organization. It is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction of its organization, is qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification, and, except as would not have a material adverse effect on the ability of the Party to perform its obligations hereunder, has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease, and operate its properties and to execute, deliver, and perform this Agreement.

(b) Authorization and Right to Grant Licenses. The execution, delivery, and performance by it of this Agreement have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of its stockholders or (ii) violate any provision of any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to it or any provision of its charter documents. Each Party has the right, power, and authority to grant licenses granted by it hereunder.

(c) Binding Agreement. This Agreement is a legal, valid, and binding obligation of it, enforceable against it in accordance with its terms and conditions, except as enforceability may be limited by bankruptcy, insolvency, or other laws affecting the enforcement of creditors’ rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought.

(d) No Inconsistent Obligation. It is not under any obligation to any person or entity, contractual or otherwise, that is conflicting or inconsistent in any respect with the terms of this Agreement, and it has all power and authority under all instruments or agreements to which it is a Party to enter into this Agreement and to perform its obligations hereunder.

(e) Absence of Actions. To its Knowledge, it is not a party to or object of any litigation, suit, legal claim, action, proceeding, judgment, settlement, or investigation (an “Action”) pending or threatened against it, or any of its Affiliates, or any of its properties or assets, before any governmental authority or Regulatory Authority that might reasonably be expected to have a material adverse effect on its ability to diligently and completely fulfill its obligations hereunder. A material breach of or inaccuracy in this Section 10.1(e) with respect to a Party shall constitute a material breach of this Agreement by such Party pursuant to Section 9.2.3.

(f) Applicable Law. It has complied with and shall continue to comply with and shall perform all its duties and obligations hereunder in accordance with all Applicable Law.

(g) Debarment. As of the date hereof, neither it nor any of its respective employees or agents, in their capacity as such, have been disqualified or debarred by the FDA, pursuant to 21 U.S.C. § 335(a) or (b), or been charged with or convicted under any Applicable Law of the United States for conduct relating to the development or approval, or otherwise relating to the regulation of any Product under the Generic Drug Enforcement Act of 1992, or any other relevant law, rule, or regulation or been disbarred, disqualified, or convicted under or for any equivalent or similar applicable foreign law, rule, or regulation.

10.2 By PTI. PTI further represents and warrants to King as of the Effective Date as follows:

(a) Clinical Trials. All pre-clinical and clinical work, studies, and trials conducted, supervised, or monitored by PTI with respect to any Designated Product and that are intended to be used to support Regulatory Approval, have, to the Knowledge of PTI, been conducted and performed in substantial compliance with Applicable Laws, including Good Laboratory Practice, Good Clinical Practice, and Good Manufacturing Practice requirements and ICH Guidelines. PTI has, or, as applicable, any Third Parties with whom PTI has contracted to perform any clinical trials or modifications thereto with respect to any Designated Product has, to the Knowledge of PTI, obtained and maintained any necessary IRB approvals of clinical trials or modifications thereto sponsored by PTI. To the Knowledge of PTI, in no clinical trial sponsored, conducted, supervised, or monitored by PTI with respect to any Designated Product has any IRB, ethics committee, or European competent authority approval ever been suspended, terminated, put on clinical hold, or voluntarily withdrawn.

(b) Disclosure. To PTI’s Knowledge, no employees or agents of PTI have made an untrue statement of material fact on behalf of PTI to any Regulatory Authority with respect to any product in the Field or failed to disclose a material fact required to be disclosed to any Regulatory Authority with respect to any product in the Field that at the time such disclosure was made, could reasonably be expected to (i) provide a basis for the FDA or any other Regulatory Authority to invoke its policy respecting Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities, set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy or (ii) otherwise materially adversely affect the prospect of, or materially delay the obtaining of, Regulatory Approval for such product.

(c) Intellectual Property. To the actual knowledge of Remi Barbier, Nadav Friedmann, Michael Zamloot, Grant Schoenhard, and Peter Roddy, the manufacture, use, offer for sale, sale, or importation of the Designated Products (provided that King acknowledges PTI has not conducted any patent search with regard to hydrocodone), in each case as such Designated Product is specifically formulated, will not infringe or misappropriate the intellectual property rights of any Third Party as of the Effective Date, specifically excluding from such representation and warranty the patents that have been identified by patent number to King prior to the Effective Date (it being acknowledged by King that PTI has not conducted, among other things, a comprehensive analysis of the other family members of the patent families to which such identified patents belong); provided, however, that with regard to infringement or misappropriation of the intellectual property rights of a Third Party arising from the utilization of the Saber Technology with regard to any such Designated Product (the “Saber Infringement”), King acknowledges and agrees that the foregoing representation by PTI with respect to the Saber Infringement is based solely on the representation and warranty received by PTI from Durect with regard to the infringement of Third Party intellectual property rights pursuant to the DLA, and PTI shall have no liability to King with regard to any Saber Infringement beyond the amount of damages or any other remedy that PTI shall receive from Durect as a result of such breach.

(d) No Omissions. No representation or warranty of PTI contained in this Agreement or the License Agreement, and no written information previously provided by PTI to King in connection with the transactions contemplated hereby, including any representation, warranty, or information relating to any pre-clinical, clinical, manufacturing, or regulatory issues concerning any Designated Product, contains any untrue statement of a Material Fact or omits to state a Material Fact actually known to PTI and which would be necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. For purposes of this representation and warranty, King shall be deemed to be on notice and to have received disclosures of the following information: (i) with respect to PTI, information publicly available through PTI’s filings with the Securities and Exchange Commission and the publications listed on Schedule 10.2(d)(i) attached hereto, and, (ii) with respect to Durect, information publicly available through Durect’s filings with the Securities and Exchange Commission and the publications listed on Schedule 10.2(d)(ii) attached hereto as well as any peer-reviewed publications in English generally available to the public regarding the subject matter of this Agreement (including Remoxy and the SABER Technology) and written by the individuals set forth on Schedule 10.2(d)(ii). As used in this Section 10.2(d), a “Material Fact” means a fact that would have a materially adverse effect on the commercial prospects for products in the Field in the Territory taken as a whole.

11. INDEMNIFICATION

11.1 Indemnification of King by PTI. PTI shall indemnify, defend, and hold harmless King, its Affiliates, and their respective directors, officers, employees, and agents (the “King Indemnitees”), against any liability, damage, loss, or expense (including reasonable attorneys’ fees and expenses of litigation) (collectively, “Losses”) incurred by or imposed upon the King Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions,

demands, or judgments made against such King Indemnitees by Third Parties, including claims for personal injury and claims of suppliers and PTI employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by King of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of King), in each case to the extent arising out of (a) the breach of any representation or warranty of PTI under Article 10 hereof, (b) the gross negligence or willful misconduct of PTI, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement, and (c) any government funding received by PTI prior to the Effective Date in connection with the research or development of any Products or any subject matter disclosed in any PTI Patent Rights, including pursuant to any grants from the National Institutes of Health, and the failure of PTI to comply in all material respects with the terms and conditions of such funding agreements and grants, and with all Applicable Laws with respect thereto, including to obtain any necessary permits or waivers thereunder. For purposes of clarity, it is understood and agreed that, except as provided in this Section 11.1 or in Section 9.1 of the License Agreement, PTI provides no indemnification to King with respect to product liabilities claims relating to Products.

11.2 Indemnification of PTI by King. King shall indemnify, defend, and hold harmless PTI, its Affiliates, and their respective directors, officers, employees, and agents (the “PTI Indemnitees”), against any Losses incurred by or imposed upon the PTI Indemnitees, or any one of them, as a result of claims, causes of action, suits, actions, demands, or judgments made against such PTI Indemnitees by Third Parties, including personal injury and claims of suppliers and King employees (except in cases where such claims, suits, actions, demands, or judgments result from a material breach by PTI of its representations or warranties under this Agreement, gross negligence, or willful misconduct on the part of PTI), in each case to the extent arising out of (a) the breach of any representation or warranty of King under Article 10 hereof and (b) the gross negligence or willful misconduct of King, its Affiliates, or their respective employees or agents in the performance of any obligation under this Agreement. For purposes of clarity, it is understood and agreed that, except as provided in this Section 11.2 or in Section 9.2 of the License Agreement, King provides no indemnification to PTI with respect to product liabilities claims relating to Products.

11.3 Conditions to Indemnification. A Party seeking indemnification under this Article 11 (the “Indemnified Party”) shall give prompt notice of the claim to the other Party (the “Indemnifying Party”) and, provided that the Indemnifying Party is not contesting the indemnity obligation, shall permit the Indemnifying Party to control any litigation relating to such claim and disposition of any such claim. The Indemnifying Party shall act reasonably and in good faith with respect to all matters relating to the settlement or disposition of any claim as the settlement or disposition relates to Parties being indemnified under this Article 11. The Indemnifying Party shall not settle or otherwise resolve any claim without prior notice to the Indemnified Party and the consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned, or delayed) if such settlement involves anything other than the payment of money by the Indemnifying Party. The Indemnified Party shall reasonably cooperate with the Indemnifying Party in its defense of any claim for which indemnification is sought under this Article 11 and shall have the right to be present in person or through counsel at all legal proceedings giving rise to the right of indemnification. For purposes of clarity, it is understood that in the event that a claim is eligible for indemnification under both this Article 11 and under

Article 9 of the License Agreement, the Indemnified Party shall be entitled to seek indemnification for such claim under either this Agreement or the License Agreement, but not both.

11.4 Insurance. In addition to the insurance coverages required by Section 5.1 hereof, each Party shall obtain other insurance coverage from first class insurers in types and amounts commensurate with industry standards for such Party’s activities hereunder.

11.5 Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT OR THE LICENSE AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER PARTY MAKES ANY GUARANTEES TO THE OTHER CONCERNING THE SUCCESS OR POTENTIAL SUCCESS OF THE ACTIVITIES CONTEMPLATED UNDER THIS AGREEMENT.

11.6 Limited Liability. EXCEPT WITH RESPECT TO A BREACH OF THE OBLIGATIONS IN ARTICLE 8 OR WITH RESPECT TO AMOUNTS PAID TO THIRD PARTIES UNDER THE INDEMNIFICATION OBLIGATIONS OF THIS ARTICLE 11, NEITHER PTI NOR KING WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES.

12. REMEDIES

Subject to the terms of this Agreement, the Parties are not excluded from exercising or seeking any and all rights and remedies available, in law or in equity, under Applicable Law.

13. MISCELLANEOUS

13.1 Notices. All notices or other communications that shall or may be given pursuant to this Agreement shall be in writing and shall be deemed to be effective (a) simultaneously with the transmission or delivery thereof, if sent by facsimile transmission (followed by hard copy by mail), (b) when delivered, if sent by United States registered or certified mail, return receipt requested, or (c) on the next business day, if sent by overnight courier, in each case to the Parties at the following addresses (or at such other addresses as shall be specified by like notice) with postage or delivery charges prepaid:


If to King:		If to PTI:

King Pharmaceuticals, Inc. 501 Fifth Street Bristol, Tennessee 37620 Tel.: (423) 989-8000 Fax: (423) 990-2566 Attention: General Counsel		Pain Therapeutics, Inc. 416 Browning Way South San Francisco, California 94080 Tel.: (650) 825-3342 Fax: (650) 624-8222 Attention: President & CEO

With a copy to:		With a copy to:

King Pharmaceuticals, Inc. 501 Fifth Street Bristol, Tennessee 37620 Tel.: (423) 989-8000 Fax: (423) 274-2602 Attention: Business Development		Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Tel.: (650) 493-9300 Fax: (650) 493-6811 Attention: Michael O’Donnell

13.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the application of principles of conflicts of law.

13.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors, and permitted assigns.

13.4 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original.

13.5 Amendment; Waiver. This Agreement may be amended, modified, superseded, or canceled, and any of the terms may be waived, only by a written instrument executed by each Party or, in the case of waiver, by the Party or Parties waiving compliance. The delay or failure of any Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same. No waiver by any Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement.

13.6 No Third Party Beneficiaries. No Third Party, including any employee of any Party to this Agreement, shall have or acquire any rights by reason of this Agreement.

13.7 Purposes and Scope. The Parties hereto understand and agree that this Development Program is limited solely to the Field in the Territory, and to the activities, rights, and obligations as set forth in this Agreement. Nothing in this Agreement shall be construed (a) to create or imply a general partnership between the Parties, (b) to make either Party the agent of the other for any purpose, (c) to alter, amend, supersede, or vitiate any other arrangements between the Parties with respect to any subject matters not covered hereunder, (d) to give either Party the right to bind the other, (e) to create any duties or obligations between the Parties except as expressly set forth herein, or (f) to grant any direct or implied licenses or any other right other than as expressly set forth herein.

13.8 Performance by Affiliates. Each Party shall have the right to direct its wholly-owned Affiliates to act in satisfaction of such Party’s or Affiliate’s obligations hereunder or make an assignment to an Affiliate in accordance with Section 13.9; provided that such Party shall remain liable and fully responsible for the performance of such Affiliate hereunder.

13.9 Assignment and Successors. Neither this Agreement nor any obligation of a Party hereunder may be assigned by either Party without the consent of the other, except that, subject to Section 9.4.1, each Party may assign this Agreement and the rights, obligations, and interests of such Party, in whole or in part, to any of its Affiliates (subject to Section 13.8) or to any Third Party that succeeds to all or substantially all of a Party’s business or assets relating to this Agreement and the License Agreement, whether by sale, merger, operation of law, or otherwise; provided that such assignee or transferee promptly agrees in writing to be bound by the terms and conditions of this Agreement. Any attempted assignment in violation of this Section 13.9 shall be null, void, and of no effect. This Agreement shall be binding upon and inure to the benefit of all permitted successors-in-interest and assigns.

13.10 Force Majeure. In the event of the occurrence of a Force Majeure Event, the Parties shall not be deemed in breach of their obligations to the extent of the Force Majeure Event. The Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder.

13.11 Interpretation.

(a) The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in a favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement.

(b) The headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes,” or “including” are used in this Agreement, they will be deemed to be followed by the words “without limitation.” Unless the context otherwise requires, (i) ”or” is disjunctive but not necessarily exclusive, (ii) words in the singular include the plural and vice versa, and (iii) the use in this Agreement of a pronoun in reference to a Party hereto includes the masculine, feminine, or neuter, as the context may require. The Annex, Schedules, and Exhibits hereto will be deemed part of this Agreement and included in any reference to this Agreement.

13.12 Integration; Severability. This Agreement and the License Agreement, when executed, are the sole agreements with respect to the subject matter hereof and supersede all other agreements and understandings between the Parties with respect to same. If any provision of this Agreement (including the temporal and substantive scope of the restrictions set forth in Article 7) is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, such provision or portion thereof will be modified or deleted in such a manner so as to make this Agreement, as modified, legal and enforceable to the fullest extent permitted under Applicable Law, and it is the intention of the Parties that the remainder of the Agreement shall not be affected.

13.13 Further Assurances. Each of PTI and King agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including the filing of such additional assignments, agreements, documents, and instruments, that may be necessary or as the other Party hereto may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confirm unto such other Party its rights and remedies under, this Agreement.

[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the Parties have caused this Collaboration Agreement to be executed by their duly authorized representatives as of the Effective Date.


PAIN THERAPEUTICS, INC.

By:		/s/ Remi Barbier
Name:		Remi Barbier
Title:		President & CEO

KING PHARMACEUTICALS, INC.

By:		/s/ Brian A. Markison
Name:		Brian A. Markison
Title:		President and Chief Executive Officer

ANNEX A

DEFINITIONS TO COLLABORATION AGREEMENT

1. “AAA” has the meaning set forth in Section 2.3.3 of this Agreement.

2. “Action” has the meaning set forth in Section 10.1(e) of this Agreement.

3. “Affiliate” means any corporation, firm, partnership, or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. For purposes of this definition, “control” means ownership, directly or through one or more Affiliates, of (a) 50% or more of the shares or voting rights in the case of a corporation or limited company, (b) 50% or more of the shares of stock entitled to vote for the election of directors, in the case of a corporation, (c) 50% or more of the equity or controlling interests in the case of any other type of legal entity (including joint ventures) or status as a general partner in any partnership, or (d) any other arrangement whereby a Party controls or has the right to control the Board of Directors or equivalent governing body of an entity.

4. “Agreement” means this Collaboration Agreement, including all attached exhibits, schedules and annexes, as well as all amendments, supplements, and restatements thereof.

5. “API” means, with respect to a Product, the active pharmaceutical ingredient used in the Product.

6. “Applicable Law” means applicable U.S. and foreign laws, rules, regulations, guidelines, and standards, including those of the FDA and comparable foreign Regulatory Authorities.

7. “Bankruptcy Code” means the U.S. Bankruptcy Code, 11 U.S.C. §§ 101 et seq.

8. “Calendar Quarter” means, with respect to the first such Calendar Quarter, the period beginning on the Closing Date and ending on the last day of the calendar quarter within which the Closing Date falls and, thereafter, each successive period of three consecutive calendar months ending on March 31, June 30, September 30, or December 31. In the event that the termination of this Agreement does not fall on the last day of a Calendar Quarter, the “Final Calendar Quarter” shall mean the period from the last day of the most recent Calendar Quarter through the applicable date of termination of this Agreement.

9. “Calendar Year” means each successive twelve (12)-month period commencing on January 1 and ending on December 31; provided that the first such Calendar Year shall begin on the Closing Date and end on December 31, 2005. In the event that the termination of this Agreement does not fall on the last day of a Calendar Year, the “Final Calendar Year” shall mean the period from the last day of the most recent Calendar Year through the applicable date of termination of this Agreement.

10. “Claims” has the meaning set forth in Section 5.1 of this Agreement.

Annex A-1

11. “Closing” shall mean, subject to the satisfaction or waiver of the conditions set forth in Section 6.1.3 of this Agreement, the closing of the transactions contemplated by this Agreement.

12. “Closing Date” shall mean the earlier of: (a) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the expiration or termination of all applicable waiting periods under the HSR Act and the satisfaction of all the other conditions set forth in Section 6.1.3 of this Agreement or (b) the third day, unless the first day falls on a weekend or holiday, in which case it shall be the next business day, after the joint determination (by certification from each Party to the other) that notification under the HSR Act is not required and the satisfaction of all the other conditions set forth in Section 6.1.3 of this Agreement.

13. “CMC” means, with respect to a Product, the chemistry, manufacturing, and controls information that would typically be, or is, included in an IND or NDA for such Product.

14. “Co-Chairman” has the meaning set forth in Section 2.1 of this Agreement.

15. “Collaboration” means the association of PTI and King established pursuant to this Agreement for the purpose of conducting the Development of Products so as to accomplish the Development objectives of the Development Program.

16. “Collaboration Costs” means the sum of each of the following costs incurred by or on behalf of a Party in fulfilling its responsibilities under the Development Program in accordance with the Program Plans for such Product, which costs must be documented and supported, calculated in accordance with Sections 3.3.2 and 3.7 of this Agreement, and included in the budget of a Program Plan or otherwise approved by King:

(a) all out-of-pocket costs, including amounts paid to Durect for materials and services PTI is obligated to obtain from Durect under the DLA and any capital expenses for equipment purchased for purposes of fulfilling PTI’s obligations under the Agreement (provided that the cumulative costs for such capital equipment shall not exceed [***] and provided further that King shall have title to any such capital equipment which it funds);

(b) all internal labor costs incurred by a Party in connection with its research employees dedicated to providing services relating to a Product, such costs to be calculated by multiplying the Hourly FTE Rate by the total number of hours expended by such Party’s personnel in performance of such services; provided that no time of PTI’s Chief Executive Officer, Chief Financial Officer, or any administrative personnel of PTI will be billed to the Collaboration; and

Except to the extent this Agreement expressly provides for payments that do not require such approval, and except to the extent King has approved any payment hereunder, neither Party shall (i) be obligated to incur any costs or expend any funds that have not been approved by such Party or (ii) have the authority to cause the other Party to incur any costs or expend any funds that have

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Annex A-2

not been approved by such other Party. Notwithstanding anything to the contrary contained herein, Collaboration Costs shall not include (A) except to the extent included in the FTE Rate, indirect costs, overhead, general, and administrative costs and other similar costs of a Party, or (B) any costs that relate to the business of a Party as a whole without specifically relating to a Product. In calculating the Collaboration Costs, the following principles shall apply: (1) there shall be no double counting of any costs or expenses or of any revenues; (2) when allocating costs and expenses under this Agreement, each Party shall utilize the same policies and principles as it utilizes consistently within its group and business units when making internal cost allocations; and (3) all costs and expenses shall be determined, and all calculations shall be made, in accordance with GAAP.

17. “Completion of Phase II” means completion of the final statistical results of clinical trials that collectively evaluate the safety and efficacy of a Product’s specific dosage strength in an indication the Product is intended to treat, which data enables the Parties to proceed with pivotal registration Phase III studies, without any objection from the FDA, as documented by FDA contact reports. For the avoidance of doubt, the “Completion of Phase II” for each Product in the Collaboration shall be independent events.

18. “Confidential Information” means all information, Technology, and Proprietary Materials that are disclosed to a Party (the “Receiving Party”) by or on behalf of the other Party (the “Disclosing Party”) hereunder or under the License Agreement or disclosed to any of the Receiving Party’s employees, Consultants, Affiliates, or Sublicensees, except to the extent that any such information (a) as of the date of disclosure is known to the Receiving Party or its Affiliates, as demonstrated by credible written documentation; (b) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party as demonstrated by credible written documentation. It is further agreed that PTI Technology shall be deemed the Confidential Information of PTI, King Technology shall be deemed the Confidential Information of King, and Joint Technology shall be deemed the Confidential Information of both Parties. During the Term hereof, neither Party shall disclose any of its own Confidential Information in such a manner that would reasonably be expected to adversely impact any intellectual property rights or commercial interests of the Development Program or the Products, unless such disclosure is subject to confidentiality obligations as strict as those contained in this Agreement or the License Agreement.

19. “Consultant” means a Third Party who has entered into or hereafter enters into a written agreement with PTI or King or both to provide consulting services that are material or are reasonably likely, in the judgment of the JOC, to become material to the Development Program, which written agreement shall (a) include an assignment of all right, title, and interest in and to all work product and all inventions arising from the performance of such agreement, and all intellectual property rights attaching thereto, to PTI or King, as applicable, and (b) bind the relevant Third Party by obligations of confidentiality and non-use with respect to all such work product, inventions, Confidential Information, and intellectual property rights that are at least as stringent as those set forth herein.

Annex A-3

20. “Consultation” means providing a Party with an opportunity to review and comment on the development of strategies and the implementation of Program Plans, permitting a Party to participate in, where practical, either by telephone or in person, and to examine formal minutes of, all meetings and telephone calls with respect to a matter under consideration, keeping a Party informed regarding the progress of all matters, and giving due consideration to the input and comments of a Party with respect to the matters under consideration.

21. “Control” or “Controlled” means, (a) with respect to Technology (other than Proprietary Materials) or Patent Rights, the possession by a Party of the ability to grant a license or sublicense of such Technology or Patent Rights as provided herein without the payment of additional consideration (other than any additional consideration to be paid pursuant to the DLA) and without violating the terms of any agreement or arrangement between such Party and any Third Party and, (b) with respect to Proprietary Materials, the possession by a Party of the ability to supply such Proprietary Materials to the other Party as provided herein without the payment of additional consideration and without violating the terms of any agreement or arrangement between such Party and any Third Party.

22. “[***]” means any dosage form that is covered by any patent or patent application set forth on Schedule 22 hereto (the “Existing Patents”), as well as any continuations, divisionals, continuations-in-part (to the extent any claims thereof are entitled to claim priority to the filing date of any of the Existing Patents), patents of addition, and substitutions of the Existing Patents, together with all registrations, reissues, reexaminations or extensions of any kind with respect to any of the foregoing patents, in each case to the extent same are owned or controlled by PTI. In the event PTI reasonably believes that any claims of a continuation-in-part application of any of the Existing Patents, which claims are not entitled to claim priority to the filings date of any of the Existing Patents, cover only an incremental improvement to the subject matter described and claimed in the Existing Patents, PTI shall have the right to request that King permit such additional claims to be included within the definition of [***], and King shall consider such request in good faith. Notwithstanding the foregoing, with respect to United States Application Serial Nos. [***], and any applications or patents that claim priority to either of same, to the extent that any claims cover a dosage form of an opioid agonist alone or a method or process of using or making such a dosage form, such claims shall not be within the definition of [***], but shall be considered PTI Technology and PTI Patent Rights (and such applications and issued patents will be included on the schedule of PTI Patent Rights solely to such extent).

23. “[***]” means any dosage form of a [***] that (a) contains [***] as the only opioid agonist API and (b) is covered by the rights granted to PTI under the DLA.

24. “CTM” or “Clinical Trial Materials” means any Product manufactured, packaged, and labeled as required by Applicable Law to be used as an investigational drug or placebo for use in the conduct of clinical trials in humans.

25. “Debtor Party” has the meaning set forth in Section 9.4.1(a) of this Agreement.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Annex A-4

26. “Default” means (a) a material breach, default, or violation, (b) for purposes of Section 5.3 of this Agreement only, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would constitute a material breach, default, or violation or cause any material mortgages, liens, security interests, charges, covenants, options, claims, restrictions, and encumbrances of any kind to arise, or (c) for purposes of Section 3.8 of this Agreement only, the occurrence of an event that with or without the passage of time or the giving of notice, or both, would give rise to a right of termination, renegotiation, or acceleration or a material right to receive damages or a payment of material monies or penalties of or under such contract by a party other than a Party.

27. “Defaulting Party” has the meaning set forth in Section 3.8 of this Agreement.

28. “Designated Product” means a Product being developed by PTI as of the Effective Date (i.e., the first three (3) products specified in Section 3.1.1 of this Agreement, namely one (1) Product having oxycodone as the opioid API (Remoxy), one (1) Product having [***] as the opioid API, and one (1) Product having [***] as the opioid API); and “Designated Products” means, collectively, all of the foregoing Products.

29. “Development” or “Develop” means, with respect to a Product, all research, pre-clinical, pharmaceutical, clinical, and regulatory activities and all other activities undertaken in order to obtain Regulatory Approval of such Product in accordance with this Agreement prior to Regulatory Approval of such Product. These activities shall include, among other things: test method development, CMC methods and reports (including formulation, process development, development-stage manufacturing, manufacturing scale-up, technical transfer, quality assurance, and quality control), pre-clinical pharmacology and toxicology studies and associated reports, planning and conduct of clinical studies, protocols, clinical study reports, statistical analysis plans, and clinical quality assurance prior to obtaining Regulatory Approvals, obtaining Regulatory Approvals, and regulatory affairs related to the foregoing.

30. “Development Plans” means the written plans (which shall include detailed strategy, budget, and proposed timelines) describing the pre-clinical and clinical Development activities and the regulatory activities, including a general overview of the expected schedule of meetings, discussions, and correspondence with Regulatory Authorities to be carried out for each Product during each Calendar Year pursuant to this Agreement, which plans shall include the expected Regulatory Filings to be completed and maintained by the Collaboration for each Product. The Development Plans will be amended from time to time to include statistical analysis plans, protocols, case report forms, clinical study reports, audit reports, and similar matters, as such matters are developed during the Collaboration. Without limiting the foregoing, such plans shall include, at a minimum, the activities required to remain in compliance with the terms and obligations applicable to PTI under the DLA. Each Development Plan will be set forth in a written document prepared by the Parties pursuant to Section 3.4 of this Agreement, and a separate Development Plan will be generated and approved with respect to each Product.

31. “Development Program” means, collectively, (a) the collaborative development program in the Field conducted by PTI and King and (b) the marketing program in the Field conducted by King, in each case, commencing on the date hereof and conducted pursuant to this Agreement and the Program Plans.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Annex A-5

32. “Discretionary Funding” has the meaning set forth in Section 3.7.3 of this Agreement.

33. “Durect License Agreement” or “DLA” means the Development and License Agreement, dated as of December 19, 2002, by and among PTI, DURECT Corporation (“Durect”), and Southern BioSystems, Inc., a copy of which has been provided to King, as it may be amended from time to time hereafter in accordance with Section 2.4 of the License Agreement.

34. “Effective Date” has the meaning set forth in the first paragraph of this Agreement.

35. “Existing Management Team” means not less than [***] percent ([***]%) of the individuals who, as of the date that is one year prior to the commencement of any case by or against PTI under the Bankruptcy Code, are designated as “Officers” of PTI under Rule 16a-1(f) promulgated pursuant to the Securities Exchange Act of 1934, as amended.

36. “FDA” means the United States Food and Drug Administration or any successor agency.

37. “Field” means pharmaceutical formulations for use in humans that contain no more than one opioid API formulated using the SABER Technology, in accordance with the DLA.

38. “First Commercial Sale” means, with respect to any product, the first arm’s-length sale by King, its Affiliates, or Sublicensees to a Third Party for end-use or consumption, including any sale to a wholesaler or distributor, of such product in a country after the applicable Regulatory Authority has granted Regulatory Approval. For purposes of this definition, any sale to an Affiliate or Sublicensee will not constitute a First Commercial Sale.

39. “Force Majeure Event” means an event beyond the reasonable control of a Party that prevents the performance, in whole or in part, by the Party of any of its obligations hereunder, including by reason of any act of God, flood or other inclement weather patterns, fire, explosion, earthquake, or war, terrorist act, revolution, civil commotion, acts of public enemies, blockage or embargo, or the like, or any injunction, law, order, ordinance, or requirement of any government or of any subdivision, authority, or representative of any such government, if, and only if, the Party affected shall have used commercially reasonable efforts to avoid the effects of such occurrence and to remedy it promptly if it has occurred.

40. “FTE Rate” means a rate of [***] U.S. dollars ($[***]) per [***] hours of work performed by personnel during Calendar Years 2005 and 2006, said rate to be increased as of January 1, 2007, and annually thereafter to reflect actual increases in the applicable Party’s expenses.

41. “GAAP” means United States generally accepted accounting principles of the Party performing the applicable work, consistently applied.

***	Confidential treatment request pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission.

Annex A-6

42. “Good Clinical Practices” means the international ethical and scientific quality standards for designing, conducting, recording, and reporting trials that involve the participation of human subjects. In the U.S. Territory, Good Clinical Practices are established through FDA guidances (including ICH E6).

43. “Good Laboratory Practices” means the minimum standards for conducting non-clinical laboratory studies that support or are intended to support applications for research or marketing permits for products regulated by the FDA or equivalent foreign Regulatory Authority, including food and color additives, animal food additives, human and animal drugs, medical devices for human use, biological products, and electronic products. In the U.S. Territory, Good Laboratory Practices are established through FDA regulations (including 21 CFR Part 58), FDA guidances, FDA current review and inspection standards, and current industry standards.

44. “Good Manufacturing Practices” means the minimum standards for methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a drug to assure that such drug meets the requirements of the Federal Food, Drug and Cosmetic Act of 1938, or its foreign equivalent, as amended, as to safety, and has the identity and strength and meets the quality and purity characteristics that it purports or is represented to possess. In the U.S. Territory, Good Manufacturing Practices are established through FDA regulations (including 21 CFR Parts 210-211), FDA guidances, FDA current review and inspection standards, and current industry standards.

45. “Hourly FTE Rate” means the hourly rate obtained by dividing the FTE Rate by [***] hours.

46. “HSR Act” means the Hart-Scott-Rodino Act of 1976, as amended.

47. “IND” means (a) an Investigational New Drug Application (as defined in 21 CFR § 312.3) that is required to be filed with the FDA before beginning clinical testing of a Product in human subjects, or any successor application or procedure, or (b) any counterpart of a U.S. Investigational New Drug Application that is required in any other country or region in the Territory before beginning clinical testing of a Product in human subjects in such country or region.

48. “Indemnified Party” has the meaning set forth in Section 11.3 of this Agreement.

49. “Indemnifying Party” has t