UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

December 31, 2011 For the fiscal year ended December 31, 2011

OR

For the transition period from             to             .

Commission File Number: 000-50855

Auxilium Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

(484) 321-5900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

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

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

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

Indicate by check mark whether the registrant (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. ¨

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on The NASDAQ Global Market as of June 30, 2011, was approximately $920 million.

As of February 23, 2012, the number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 48,308,956.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2011.

AUXILIUM PHARMACEUTICALS, INC.

FORM 10-K

December 31, 2011

TABLE OF CONTENTS

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This Report on Form 10-K (the “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements of historical information contained herein are forward-looking statements and may contain projections relating to financial results, economic conditions, trends and known uncertainties. These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed in this Report. You should review the “Risk Factors” section of this Report for a discussion of the important factors that could cause actual results to differ materially from those described in or implied by the forward-looking statements contained in this Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly reissue these forward-looking statements to reflect events or circumstances that arise after the date hereof.

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

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

As used herein, the terms “Company”, “Auxilium”, “we”, “us”, or “our”, refer to Auxilium Pharmaceuticals, Inc.

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PART I

COMPANY OVERVIEW

We are a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences. We reported net revenues in 2011 of $264.3 million, an increase of 25% over the $211.4 million reported in 2010. Our net loss for 2011 was $32.9 million ($0.69 per share) compared to $51.2 million ($1.08 per share) of net loss in 2010. We are a fully integrated company and had approximately 530 employees at the end of 2011, including approximately 298 employees in our commercial organizations, 118 employees in manufacturing and quality, 68 employees in research and development and 46 employees in administrative support. As of December 31, 2011 we had $154.3 million in cash, cash equivalents and short-term investments and no debt.

We currently market two products: Testim^® testosterone gel and XIAFLEX^® (collagenase clostridium histolyticum). Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. XIAFLEX is a proprietary, injectable collagenase enzyme approved by the United States (“U.S.”) Food and Drug Administration (“FDA”) for the treatment of Dupuytren’s contracture (“Dupuytren’s”) in adult patients with a palpable cord.

Testim is approved in the U.S., Canada and much of Europe. We commercialize Testim in the U. S., while Ferring International Center S.A. (“Ferring”) and Paladin Labs Inc. (“Paladin”) market Testim on our behalf in certain European countries and Canada, respectively. Testim worldwide net revenues for 2011 were $207.9 million, an 8% increase over the $193.0 million recorded in 2010. Testim represents an attractive and profitable revenue platform in the Testosterone Replacement Therapies (“TRT”) market in the U.S. which was $1.6 billion in 2011 and exhibited growth of 24% as more large pharmaceutical companies launched products to this underserved market. The once daily gel segment of the TRT market in which Testim competes has experienced a 27% compound annual growth rate since 2007, and represents 88% or $1.4 billion of the total U.S. TRT market. Our sales force of approximately 150 representatives focuses on approximately 12% of the approximately 165,000 physicians in the U.S. who prescribe TRT products. These physicians are responsible for roughly half of all gel TRT prescriptions. Our strategy to focus on these high prescribing physicians combined with our tactics with select managed care organizations resulted in a minimal loss of market share in 2011, despite the new competitors in the market. Although our goal is to maximize our total TRT market share organically through 2012 in the face of aggressive competition, we will also continue to assess any opportunities that may arise to supplement our current targeted focus on the most prolific writers of gel TRT prescriptions.

Dupuytren’s is a condition that affects the connective tissue that lies beneath the skin in the palm. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient’s fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of Dupuytren’s in the U. S. in March 2010 with a sales force of approximately 65 employees and 15 reimbursement specialists. They are supported by a group of approximately 15 Medical Science Liaisons. We have partnered with Pfizer Inc. (“Pfizer”) for development and commercialization of XIAPEX^® (European Union (“EU”) tradename for XIAFLEX) for Dupuytren’s and Peyronie’s disease (“Peyronie’s”) in Europe and certain Eurasian countries. Pfizer received marketing authorization for Dupuytren’s by the European Commission on February 28, 2011 and began sales in certain countries of the EU in April 2011. We have partnered with Asahi Kasei Pharma Corporation (“Asahi Kasei”) for development and commercialization of XIAFLEX for Dupuytren’s and Peyronie’s in Japan. We have also partnered with Actelion Pharmaceuticals Ltd. (“Actelion”) for development and commercialization of XIAFLEX for Dupuytren’s and Peyronie’s in Australia, Brazil, Canada and Mexico.

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We are seeking a partner or partners for development and commercialization in the rest of the world. Worldwide net revenues for XIAFLEX were $56.4 million for the year ending December 31, 2011, compared to $18.4 million in 2010.

Our current product pipeline includes:

Phase III:

Phase IIa:

Phase Ib:

In addition to the above, we have an exclusive option for the exclusive rights to pursue any additional indications for XIAFLEX (other than dermal formulations labeled for topical administration).

Our vision is to build a rapidly growing, profitable and sustainable biopharmaceutical company. To achieve this vision we plan to:

In the short term we plan to focus on execution with respect to Testim, XIAFLEX for Dupuytren’s and bringing additional indications for XIAFLEX to market. We believe that we are well positioned to become a profitable and sustainable specialty biopharmaceutical company by executing on these few initiatives. Although our current sales forces for Testim and XIAFLEX have achieved 2011 U.S. revenues per employee of approximately $1.4 and $0.7 million respectively, we believe that we can further leverage this investment and our expertise in clinical development and regulatory strategy with the addition of new products. Because we do not believe we have to acquire additional products to achieve our vision, we plan to be opportunistic and nimble with respect to corporate development and licensing opportunities. We will be open to add marketed products and/or product opportunities that have a good strategic fit and which are fiscally responsible. Although we may seek products that have a therapeutic fit with XIAFLEX or Testim, we believe that the core competencies we have with respect to drug development and commercialization can be applied to a number of other specialty focused therapeutic areas.

MARKETED PRODUCTS

Testim

Testim is a proprietary, topical 1% testosterone once-a-day gel that treats hypogonadism by restoring normal testosterone blood levels for a 24-hour period following application and sustaining them in that range when used daily. Testim is packaged in convenient, easy-to-open, single-use tubes. Patients apply Testim once per day to the upper arms and shoulders, enabling Testim’s active ingredient, testosterone, to be absorbed through the skin and into the bloodstream.

Hypogonadism market. Hypogonadism, or low testosterone, is a disorder that affects millions of men in the U.S. A 2006 study showed that 39% of men over 45 years of age may have low testosterone (total testosterone levels below 300 ng/dL). Based on the 2010 U.S. Census Bureau estimates, we believe there are approximately 59 million U.S. men aged 45 and older with hypogonadism. The effects of low testosterone lead to symptoms

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such as low energy, diminished libido, adverse changes in body composition, irritability and poor concentration. Hypogonadism also affects a high percentage of men with certain co-morbidities regardless of age. The 2006 study documented associations with other co-morbidities such as: obesity (52%) and diabetes (50%). Other articles have highlighted associations with other conditions: AIDS (50%), hypertension (42%), hyperlipidemia (40%), erectile dysfunction (19%) and up to 74% of men being treated with high doses of opioids for chronic pain.

Testosterone replacement therapy (“TRT”) is the standard treatment for hypogonadism. The total number of prescriptions within the TRT market has grown from 1.0 million to 5.3 million between 2000 and 2011. Before 2000, the TRT market consisted of oral, injectable and patch therapies. In 2000, the first topical gel was introduced, and this product segment has been the driver of much of the total growth in the TRT market. The gel segment accounted for approximately 67% of the total prescriptions and 88% of the total value in the TRT market in 2011. Despite this growth, it was estimated in 2006 that only approximately 10% of men with hypogonadism currently were receiving TRT. According to our physician research, this low diagnosis rate stems primarily from low patient and physician awareness of the symptoms, treatment options and non-standardized screening methods.

Testim has captured a significant portion of the gel prescription growth since its launch in early 2003 and held a 20% prescription share of this market in December 2011. In 2011, prescriptions of Testim grew by 9% compared to 2010. The gel market continued to be a primary driver of the TRT market in 2011 and grew by 19% in December 2011 over the prior 12 months. All other formulations (injectables, patches, orals and buccals) combined increased 27% from 2010 to 2011.

Cost-effectiveness and convenience. We believe that, based on market feedback from physicians and an analysis of pharmacy prescription data, 9 out of 10 Testim patients stayed on their starting dose of 5g (one tube) after 12 months. The simplicity of a single daily 5g tube of Testim we believe provides controlled dosing, no complicated titration schedule, low rates of irritation and convenience for travel as the tube is small, discrete and TSA-compliant.

Broad prescription coverage. Currently, we have broad third-party payor reimbursement for Testim which is covered by the majority of reimbursement plans at tier 2 or 3 status.

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Regulation. On May 7, 2009, the FDA announced that it was requiring the manufacturers of two prescription topical testosterone gels, Abbott Laboratories Inc. (“Abbott”) and Auxilium, to make changes to the prescribing information and develop Risk Evaluation and Mitigation Strategies (“REMS”) for the products. The FDA stated that it was requiring this action after it became aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer from adult males using testosterone gel drug products (“transference”). The FDA considered this information to be “new safety information.” We believe that all topical testosterone gels have a potential for transference. Testim’s prescribing information has described the risk and procedures for avoidance of transference since the product was launched in 2003. The changes to the prescribing information for Testim include a “boxed warning”, which is used to highlight warning information that is especially important to the prescriber. The goal of the REMS is to inform patients about the serious risks of transference associated with the use of Testim and Abbott’s topical testosterone product, AndroGel^®. The REMS includes assessments and a Medication Guide to inform patients. The revised prescribing information and REMS for Testim were approved on September 18, 2009. The FDA approved a revised Medication Guide on November 11, 2011.

XIAFLEX for Dupuytren’s

On February 2, 2010, we received approval from the FDA to begin the sale in the U.S. of XIAFLEX for Dupuytren’s in adult patients with a palpable cord, and we commenced the commercial launch in the U.S. in March 2010.

Dupuytren’s market. XIAFLEX offers the first and only FDA-approved medical treatment option for physicians and patients who desire a minimally invasive alternative to surgery. We believe that every year in the U.S. approximately 300,000 people are diagnosed with Dupuytren’s. We also believe that approximately 70,000 Dupuytren’s surgical procedures occur every year. Common co-morbidities include diabetes, epilepsy, alcoholism, HIV or Peyronie’s. Dupuytren’s is most common in men. It usually starts in adult life, with a peak incidence in people aged 40 to 60 and an average of 2.2 joints are affected at diagnosis. In about 50% of patients, the disease affects both hands, and it is estimated that approximately 30-40% of patients undergo surgical procedures for multiple cords concurrently. Quality of life and daily activities can be significantly affected by a contracture and surgery has been the historical standard of care. Generally Dupuytren’s is treated by hand, plastic, orthopedic and general surgeons, as well as rheumatologists. Surgery has typically been reserved for the advanced disease due to potential complications, a long recovery period and possible recurrence which could require additional surgeries. Recurrence after surgical treatment is common (as high as 30% in the first two years post-surgery, and 55% within 10 years of surgery).

We believe that treatment with XIAFLEX offers benefits compared to surgery as it:

Prior to approval of XIAFLEX for Dupuytren’s, surgery was the only treatment option. Surgical techniques used to treat patients with Dupuytren’s fall into two major groups: fasciotomy, including needle aponeurotomy, which is simply cutting or puncturing the Dupuytren’s cord without cord removal and fasciectomy, which is removing the cords of the diseased tissue.

Reimbursement for XIAFLEX. In November 2011, the Center for Medicare and Medicaid Services (CMS) released payment rates for the 2012 Current Procedural Terminology (CPT^®) codes to be used with XIAFLEX

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for the treatment of adult Dupuytren’s patients with a palpable cord beginning January 1, 2012. The CPT codes will apply to the procedures only, and leave in place the separate XIAFLEX specific J code for reimbursement of the product that became effective January 1, 2011. Medicare payment rates for the CPT codes will vary based on geographical adjustments. The CPT codes, 20527 for the XIAFLEX injection procedure and 26341 for the finger extension or manipulation procedure, and J code, J0775, are used by physicians to identify XIAFLEX when billing to Medicare, Medicaid and commercial health plans for reimbursement.

Broad prescription coverage. Our internal estimates indicate that 96% of insured lives in the U.S. currently have access to XIAFLEX.

Regulation. As a condition of approval for XIAFLEX for Dupuytren’s, the FDA required a REMS. The goal of the REMS is to inform and train healthcare providers about the risks of tendon rupture, serious adverse reactions affecting the injected extremity, and the potential risk of serious hypersensitivity reactions (including the potential for anaphylaxis) associated with XIAFLEX. The REMS consists of a medication guide, a communication plan, and a timetable for submission of assessments of the REMS. The communication plan includes a Dear Healthcare Provider Letter and educational materials (i.e., training guide and procedure training video).

DEVELOPMENT PIPELINE

XIAFLEX Potential Future Indications

Peyronie’s

Disease state and market. Peyronie’s is characterized by a subdermal plaque or hard lump that occurs on the shaft of the penis. This plaque is primarily subtypes of collagen that we believe can be digested by the collagenases contained in XIAFLEX. It begins as a localized inflammation, which progresses to a hardened scar on the shaft of the penis that reduces flexibility and causes the penis to bend during erection. This may cause pain on erection and a deformity that may prevent sexual intercourse altogether. Our market research indicates that, aside from the physical consequences, depression and loss of self-esteem are common in men with Peyronie’s. The prevalence of Peyronie’s has been increasing during the last 30 years and we believe its prevalence with some degree of curvature is now approximately 5% of adult men. However, the actual prevalence may be higher because of patients’ reluctance to report this embarrassing condition to their physicians. The pathogenesis of Peyronie’s appears to be multifactorial, with an interplay of genetic predisposition, trauma and tissue ischemia. Generally, Peyronie’s is treated by urologists. To date, no medical therapy has been proven effective and received FDA approval for the treatment of Peyronie’s. Surgical treatment may be an option for some patients, although complications such as erectile dysfunction as well as loss of penile girth and length can occur. Administration of XIAFLEX, if approved, could be an in-office procedure in which the product is injected directly into the plaque that causes the penile curvature.

Current treatment options. There are no medical therapies approved for the treatment of Peyronie’s. However, a number of medical therapies have been used to treat Peyronie’s including Vitamin E, Colchicine, Potassium Aminobenzoate (Potaba), Tamoxifen, Interferon a2a and Corticosteroids. Current surgical therapies include the following procedures: plication (which involves gathering tissue on the outer side of the bend usually resulting in shortening and straightening of the penis), graft techniques (which involve replacing scar tissue with grafts of tissue from another site) and, for patients with severe erectile dysfunction, prosthetic implants (which involve synthetic cylinders implanted in the penis to produce a functional erection).

R&D status. We completed a phase IIb randomized, double-blind, placebo-controlled study designed to assess the safety and efficacy of XIAFLEX when administered two times a week every six weeks for up to three treatment cycles (2 x 3) in 145 subjects with Peyronie’s. The study was conducted at 12 sites throughout the U.S., and patients were monitored for 36 weeks following the first injection. The trial was designed to validate a proprietary Peyronie’s Disease Questionnaire (“PDQ”) which measures several domains of patients’ sexual quality of life over a 36 week period. The four domains measured by the PDQ are penile pain, Peyronie’s bother,

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intercourse discomfort and intercourse constraint. Patients had to have a penile contracture between 30 and 90 degrees to be included in the study. Patients were stratified by the degree of penile curvature (i.e., 30 degrees to 60 degrees versus 60 to 90 degrees) and then randomized into four treatment groups to receive either XIAFLEX or placebo with or without modeling of the penile plaque. Modeling refers to massaging of the plaque after the second injection of a treatment series and is intended to maximize the enzymatic effect of the XIAFLEX injection in the plaque. Patients were randomized in a 3:1 ratio of XIAFLEX to placebo and a 1:1 ratio to receive penile plaque modeling or no modeling.

Data demonstrated that XIAFLEX improved penile curvature when compared to placebo with a mean improvement of 29.7% vs. 11%, respectively (P=0.001). In addition, the PDQ domain of Peyronie’s symptom bother was significantly improved in XIAFLEX treated subjects compared to placebo. The use of modeling also demonstrated significant improvement in XIAFLEX subjects compared to placebo, 32.4% improvement in curvature compared to a 2.5% worsening of curvature in placebo subjects (p<0.001). In the no-modeling group, XIAFLEX subjects experienced a 27.1% mean improvement in penile curvature, which was not statistically different from the 27.9% mean improvement for subjects receiving the placebo. The most common adverse events reported in the phase IIb trial were injection site bruising, injection site pain, injection site edema, contusion, penile edema and penile pain. There was a total of five (3.4%) subjects who experienced eight non-fatal serious adverse events, none of which were considered to be related to XIAFLEX. We sought to accomplish two goals with this study. First, we wanted to validate the PDQ as a tool for use in future pivotal studies. Second, we aimed to establish an acceptable primary endpoint related to the PDQ for use in pivotal phase III trials.

Following discussions with the FDA where we achieved agreement that the PDQ was a valid tool for use in a pivotal phase III trial and the appropriate endpoint for such trials, we commenced our phase III studies. We completed enrollment in our phase III trial in March 2011 and, in August 2011, we announced that dosing had been completed in the largest ever global phase III program for the treatment of Peyronie’s. We anticipate reporting top-line results late in the second quarter of 2012. Our phase III plan for XIAFLEX for Peyronie’s consists of four clinical studies and is known by the acronym IMPRESS – The Investigation for Maximal Peyronie’s Reduction Efficacy and Safety Studies. There are two randomized, double-blind, placebo-controlled phase III studies, which enrolled over 800 patients at approximately 70 sites in the U.S. and Australia, with a 2:1 ratio of XIAFLEX to placebo. There is one open label study, which enrolled at least 250 patients, at approximately 30 sites in the U.S., EU and New Zealand, and one pharmacokinetic study, which enrolled 16 patients in the U.S. XIAFLEX was administered two times a week every six weeks for up to four treatment cycles (2 x 4). Each treatment cycle was followed by a penile modeling procedure. Patients will be followed for 52 weeks post-first injection in the double-blind studies and for 36 weeks in the open label trial. The trials’ co-primary endpoints are the mean change from baseline in the Peyronie’s bother domain of the PDQ compared to placebo and mean percent improvement from baseline in penile curvature compared to placebo. The remaining domains of the PDQ will be considered secondary endpoints. Safety measurements will include adverse event monitoring, immunogenicity testing and clinical labs.

Frozen Shoulder Syndrome

Disease state and market. Frozen Shoulder syndrome is a disorder of diminished shoulder motion, characterized by restriction in both active and passive range of motion of the shoulder joint. Frozen Shoulder syndrome usually affects patients aged 40 to 70 years. It is estimated that 3% of people develop Frozen Shoulder syndrome over their lifetime and that women tend to be affected more frequently than men. The condition may affect both shoulders, either simultaneously or in sequence, in up to 16% of patients. Recurrence of Frozen Shoulder syndrome is common within five years of the onset of the disorder. A higher incidence of Frozen Shoulder syndrome exists among patients with diabetes (10-20%) compared to the general population (2-5%) and incidence among patients with insulin-dependent diabetes is even higher (36%), with an increased frequency of bilateral shoulder involvement.

Current treatment options. The most common treatment for Frozen Shoulder syndrome is extensive physical therapy, corticosteroids and/or arthroscopy. Drugs are used to manage pain, but none have been demonstrated to have an impact on Frozen Shoulder syndrome.

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R&D status. BioSpecifics Technologies Corporation (“BioSpecifics”), from whom we have licensed exclusive worldwide rights to develop, market and sell certain products containing the collagenase enzyme, has conducted a phase II clinical trial using XIAFLEX for the treatment of Frozen Shoulder syndrome. Three different doses of the enzyme were compared to placebo in this prospective, randomized, 60-subject trial. The results from this trial suggest that local injection of the enzyme is well-tolerated and may be effective in patients suffering from Frozen Shoulder syndrome.

We commenced a phase IIa escalation trial in December 2011 to assess the safety and efficacy of XIAFLEX in the treatment of Frozen Shoulder syndrome in comparison to an exercise-only control group. This study involved two doses (0.29 mg and 0.58 mg) of XIAFLEX given under ultrasound guidance and involves approximately 50 subjects across 4 cohorts. Up to three injections will be given 21 days apart and the subjects will be followed for 90 days. The endpoint will be range of motion parameters for the affected shoulder. We expect to announce top-line results in the first half of 2013.

Cellulite

Disease state and market. Cellulite, also known medically as edematous fibrosclerotic panniculopathy, describes a pathologic inflammatory condition, in which lobules of subcutaneous adipose tissue extend into the dermal layer. These changes can visibly affect the shape of the epidermis and resemble an orange peel-like dimpling of the skin. In the normal subcutaneous fat layer directly under the skin, there are both perpendicular columnar and net-like fibrous connective tissue called septae. These fibrous septae, made of types I and III collagen, connect the epidermis to the dermis and create a network of compartmentalized adipose deposits. Women tend to have a higher proportion of columnar septae that are perpendicular to the epidermis, while men tend to have more of the net-like system. In cellulite, the subcutaneous fat cells swell and push upwards. As a result, the skin between the septae is pushed up and the perpendicular septae act as an anchor to pull the epidermis downwards and form the classic cellulite dimple. The surrounding adipose tissue forms small bulges under the epidermis around the dimple that can give skin an orange peel-like texture. Cellulite has been reported to occur in 85 to 98% of post-pubertal females and rarely in men. The condition is prevalent in women of all races.

Current treatment options. Current treatments for cellulite include creams, light-based procedures or liposuction. None have been demonstrated to have a significant impact on eliminating cellulite.

R&D Status. BioSpecifics has granted us an exclusive license to research, develop, manufacture and use XIAFLEX in connection with the treatment of edematous fibrosclerotic panniculopathy, more commonly known as cellulite, and we have the exclusive option, upon completion of such early stage development and upon our payment to BioSpecifics of a one-time $500,000 license fee, to add the treatment of cellulite to our licensed indications under the BioSpecifics Agreement (as defined below).

We filed an Investigational New Drug (“IND”) with the FDA in November 2011. A phase Ib clinical trial designed to assess the safety and efficacy of XIAFLEX in the treatment of cellulite commenced in the first quarter of 2012. The phase Ib study is a single site, open label dose-escalation study that is targeted to enroll 63 women between 21 and 60 years of age. The objectives of the study are to assess the safety, effectiveness, and pharmacokinetics of XIAFLEX for the treatment of cellulite. We expect to announce top-line results in the fourth quarter of 2012.

Other

Under our agreement with BioSpecifics, we have exclusive worldwide rights to develop, market and sell products containing XIAFLEX, other than dermal formulations labeled for topical administration. We may expand our agreement with BioSpecifics, at our option, to cover other indications as they are developed by us or BioSpecifics. We plan to prioritize our development of additional pipeline indications for XIAFLEX. In addition to the indications mentioned above, other areas of interest could include canine and human lipomas, which BioSpecifics is expected to begin studying.

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STRATEGIC RELATIONSHIPS

We have entered into agreements for the licensing of technology and products. We intend to pursue other licensing agreements and collaborations in the future. We have secured collaboration partners for the sale of products in geographic locations where we do not have our own sales force. We may pursue other collaborations in the future.

Testim

License from FCB

In May 2000, Bentley Pharmaceuticals, Inc. (“Bentley”) granted us an exclusive, worldwide, royalty-bearing license to make and sell products incorporating its patented transdermal gel formulation technology that contains testosterone (the “May 2000 License”). We produce Testim under the May 2000 License. The term of the May 2000 License is determined on a country-by-country basis and extends until the later of patent right expiration in a country or 10 years from the date of first commercial sale. Under this agreement, we were required to make up-front and milestone payments upon contract signing, the decision to develop the underlying product, and the receipt of FDA approval. In June 2008, CPEX Pharmaceuticals, Inc. (“CPEX”) was spun out of Bentley and became the assignee of certain Bentley assets, including the license agreement governing the May 2000 License and patents we licensed under that agreement. In April 2011, CPEX was acquired by FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, and the licensed patents were assigned to FCB. The rights and obligations under the license agreement described above inure to FCB and continue to be effective, as will our rights and obligations thereunder. See “Patents and Proprietary Rights” for a discussion of the patents we license from FCB.

License to Ferring

In November 2008, we entered into a distribution and license agreement with Ferring (the “Ferring Agreement”). Pursuant to the Ferring Agreement, we appointed Ferring as our exclusive distributor of Testim in Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and the U.K. (the “Ferring Territory”). We also granted Ferring an exclusive, royalty-bearing license to import, market, sell and distribute Testim in the Ferring Territory. Ferring is required to purchase all Testim supply from us and to make certain sales milestone and royalty payments. In addition, Ferring was required to make certain up-front and milestone payments to us related to the transfer to Ferring of the marketing authorizations in each country within the Ferring Territory.

License to Paladin

We entered into a license and distribution agreement with Paladin in December 2006. We granted Paladin an exclusive license to use and sell Testim in Canada. The terms of this agreement require Paladin to purchase all Testim supply from us and to make up-front, milestone and royalty payments.

XIAFLEX

License from BioSpecifics

In June 2004, we entered into a development and license agreement with BioSpecifics and amended the agreement in May 2005, December 2005, December 2008 and August 2011 (the “BioSpecifics Agreement”). Under the BioSpecifics Agreement, we have exclusive worldwide rights to develop, market and sell certain products containing collagenase enzyme, which we refer to as XIAFLEX. Our licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration, and currently, our licensed rights cover the indications of Dupuytren’s, Peyronie’s, Frozen Shoulder syndrome and, upon our optional payment of $500,000 to BioSpecifics, cellulite. We may further expand our rights under the BioSpecifics Agreement, at our option, to cover other indications as they are developed by us or BioSpecifics.

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The BioSpecifics Agreement extends, on a country-by-country and product-by-product basis, for the longer of any applicable patent life, the expiration of any regulatory exclusivity period or 12 years. Either party may terminate this agreement in the event of bankruptcy or insolvency by the other party. Additionally, either party may terminate this agreement if the other party is in material breach of its obligations under the agreement which continues for a period of 90 days following receipt of written notice of such material breach. We may terminate this agreement in its entirety, or on a country-by-country basis, on an indication-by-indication basis, or on a product-by-product basis, at any time upon 90 days prior written notice to BioSpecifics. If this agreement is properly terminated by us, we will retain a non-exclusive license for these rights. See “Patents and Proprietary Rights” below for a discussion of the patents we license from BioSpecifics.

We are responsible, at our own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products.

We have been and will be obligated to make contingent milestone payments to BioSpecifics upon the filing of regulatory applications and receipt of regulatory approval. We have paid BioSpecifics $22.2 million under the BioSpecifics Agreement, of which we paid $4.6 million in 2011. These 2011 payments included a payment of approximately $3.8 million, which represented BioSpecifics’ share of the net $41.1 million which Pfizer paid to us as milestone payments under the Pfizer Agreement (as described below). These 2011 payments also included a payment of approximately $0.8 million, which represented BioSpecifics’ share of the $15 million which Asahi Kasei paid to us as milestone payments under the Asahi Agreement (as described below). After we receive the $10 million up-front payment from Actelion under the Actelion Agreement (as described below), which we expect will occur in the first quarter of 2012, we will owe BioSpecifics approximately $0.6 million. Additional milestone obligations will be due to BioSpecifics upon further acceptance of filings, approvals and achievement of certain sales levels by our partners. Additionally, if we exercise an option to develop and license XIAFLEX for additional medical indications, an exercised indication fee will be due. Pursuant to the BioSpecifics Agreement, the exercised indication fee for each additional indication, including cellulite, is $500,000.

Under the BioSpecifics Agreement, we have the exclusive right to manufacture any pharmaceutical product containing the collagenase enzyme as an active ingredient:

We have the non-exclusive right to manufacture any pharmaceutical product containing the collagenase enzyme as an active ingredient:

BioSpecifics currently retains the right to manufacture:

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We are responsible, at our cost, for performing early stage development activities for the treatment of edematous fibrosclerotic panniculopathy, more commonly known as cellulite. BioSpecifics has granted us an exclusive license to research, develop, manufacture and use XIAFLEX in connection with this development, and we have the option, upon completion of such early stage development and upon its payment to BioSpecifics of a one-time $500,000 license fee, to add the treatment of cellulite to our licensed indications under the BioSpecifics Agreement.

In the event that we sublicense the right to sell XIAFLEX in any country outside of the U.S., the EU and certain Eurasian countries or Japan – as we did in February 2012 to Actelion for Australia, Brazil, Canada and Mexico—we must pay BioSpecifics a specified fraction of the royalty we receive from such sublicense, and a specified mark-up on our cost of goods related to supply of XIAFLEX (subject, in both the case of the royalty and the mark-up, to specified caps).

License to Pfizer

In December 2008, we entered into a development, commercialization and supply agreement with Pfizer (the “Pfizer Agreement”). Under the Pfizer Agreement, we granted to Pfizer the right to develop and commercialize, with the right to sublicense, XIAPEX (EU tradename for XIAFLEX) for the treatment of Peyronie’s and Dupuytren’s upon receipt of the applicable regulatory approvals in the 27 member countries of the EU as it existed as of the effective date of the Pfizer Agreement (Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK), as well as Albania, Armenia, Azerbaijan, Belarus, Bosnia & Herzegovina, Croatia, Georgia, Iceland, Kazakhstan, Kirghiz Republic, Macedonia, Moldova, Montenegro, Norway, Serbia, Switzerland, Tajikistan, Turkey and Uzbekistan (the “Pfizer Territory”). Subject to each party’s termination rights, the term of the Agreement extends on a country-by-country and product-by-product basis from the date of the Agreement until the latest of (i) the date on which the product is no longer covered by a valid claim of a patent or patent application in such country, (ii) the 15th anniversary of the first commercial sale by Pfizer of XIAPEX in a given country after the receipt of required regulatory approvals and (iii) a generic entry or competitive product containing the same active ingredient with respect to XIAPEX in such country.

Pfizer received marketing authorization by the European Commission on February 28, 2011 and XIAPEX is now available in Austria, Denmark, Finland, Germany, Norway, Spain, Switzerland, Sweden, and the UK.

Pfizer is obligated to make certain regulatory and milestone payments to us as well as a specified royalty on net sales of XIAPEX in the Pfizer Territory. As of December 31, 2011, Pfizer had paid us $135 million in up-front and regulatory milestone payments under the Pfizer Agreement. Of this $135 million, Pfizer paid us $45 million in 2011 in connection with the achievement of the regulatory milestones upon the first commercial sales of XIAPEX in Germany, Spain and the UK, net of certain development and regulatory costs amounting to $3.9 million that Pfizer was contractually allowed to recoup. Pfizer may pay us up to an additional $350 million upon the achievement of certain specified additional regulatory and commercial milestones for XIAFLEX (on an indication-by-indication basis or for the product as a whole, as the case may be). We will also owe BioSpecifics 8.5% of any future regulatory or commercial milestone payments received from Pfizer.

Pfizer is required to obtain XIAPEX exclusively from us. We were primarily responsible for development activities prior to granting of product approval, and Pfizer has been primarily responsible for development activities in the Pfizer Territory since approval. We control product development at all times outside of the Pfizer Territory. Pfizer is responsible for preparation of regulatory materials necessary for obtaining and maintaining regulatory approvals in the Pfizer Territory, and for the associated regulatory costs. Pfizer is solely responsible for commercializing XIAPEX in the Pfizer Territory during the term of the Pfizer Agreement and is solely responsible for costs associated with commercializing XIAPEX in the Pfizer Territory.

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Either party may terminate the Pfizer Agreement as a result of the other party’s breach or bankruptcy. Initially, Pfizer may terminate the Pfizer Agreement only upon certain specified conditions. After this initial period, Pfizer may terminate the Pfizer Agreement at will.

License to Asahi Kasei

On March 22, 2011, we entered into a development, commercialization and supply agreement with Asahi Kasei (the “Asahi Agreement”). Under the Asahi Agreement, we granted Asahi Kasei the exclusive right to develop and commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Japan upon receipt of the applicable regulatory approvals. We also granted Asahi Kasei the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in Japan during the term of the Asahi Agreement. Asahi Kasei paid us an up-front payment of $15 million in March 2011. In addition, Asahi Kasei may make up to $247 million in potential payments, with $37 million tied to development and regulatory milestones and $210 million tied to achievement of aggregate annual net sales thresholds. In addition, the Asahi Agreement provides for quarterly royalty payments based on a specified percentage of net sales of XIAFLEX in Japan. This royalty percentage increases upon the achievement of a specified threshold of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in Japan.

Under the Asahi Agreement, Asahi Kasei will be responsible for all clinical development, regulatory and commercialization activities for XIAFLEX for the treatment of Dupuytren’s and Peyronie’s for the Japanese market and we will be reimbursed for all costs we may incur in connection with these activities. We will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for the Japanese market. Subject to each party’s termination rights, the term of the Asahi Agreement extends on a product-by-product basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15^th anniversary of the first commercial sale of the product, or (iii) the entry of a generic to XIAFLEX in the Japanese market.

License to Actelion

On February 22, 2012, we entered into a collaboration agreement with Actelion (the “Actelion Agreement”). Under the terms of the Actelion Agreement, we granted Actelion exclusive rights to develop and commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Australia, Brazil, Canada and Mexico upon receipt of the applicable regulatory approvals. We also granted Actelion the right of first negotiation to obtain exclusive rights to commercialize any new XIAFLEX indications in these countries during the term of the Actelion Agreement. Actelion will pay us an up-front payment of $10 million in the first quarter of 2012. Actelion may make up to $58.5 million in potential payments, with $16 million tied to regulatory, pricing, and reimbursement milestones and $42.5 million tied to achievement of aggregate annual net sales thresholds. In addition, the Actelion Agreement provides for quarterly royalty payments based on a specified percentage of net sales of XIAFLEX in these countries. This royalty percentage increases upon the achievement of specified thresholds of aggregate annual net sales of XIAFLEX and decreases if a generic to XIAFLEX is marketed in these countries.

Under the Actelion Agreement, Actelion will be responsible for all clinical development, regulatory and commercialization activities for XIAFLEX for the treatment of Dupuytren’s and Peyronie’s for Australia, Brazil, Canada and Mexico and Actelion will reimburse us for all out-of-pocket costs we may incur in connection with these activities. We will be responsible for all clinical and commercial manufacturing and supply of XIAFLEX for these countries. Subject to each party’s termination rights, the term of the Actelion Agreement extends on a product-by-product and country-by-country basis from the date of the agreement until the last to occur of (i) the date on which the product is no longer covered by a valid claim of a patent, (ii) the 15^th anniversary of the first commercial sale of the product, (iii) the achievement of a specified market share of generic versions of the product in such country or (iv) loss of certain marketing rights or data exclusivity in such country.

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MANUFACTURING

We produce the active pharmaceutical ingredient of XIAFLEX, and we currently use, and expect to continue to depend on, contract manufacturers to manufacture Testim and handle certain aspects of the manufacture of XIAFLEX. We also may depend on contract manufacturers to manufacture any products for which we receive marketing approval and to produce sufficient quantities of our product candidates for use in preclinical and clinical studies. We and our contract manufacturers are subject to an extensive governmental regulation process. Regulatory authorities in our markets require that drugs be manufactured, packaged and labeled in conformity with current Good Manufacturing Practices (“cGMP”). The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. We have established an internal quality control and quality assurance program, including a set of standard operating procedures and specifications, that we believe is cGMP-compliant.

Testim

DPT. Testim is manufactured for us by DPT Laboratories, Ltd. (“DPT”) pursuant to a manufacturing and supply agreement that expires on December 31, 2015, unless terminated earlier by either party. The manufacturing agreement automatically renews for 18-month periods unless either party gives written notice not to renew at least 18 months prior to the expiration of the initial term or any renewal term. During the term of the agreement, DPT is required to manufacture, and we are required to purchase, a specified percentage of our annual requirements for Testim.

The manufacturing agreement may be terminated by either us or DPT upon: (1) the failure of either party to comply with its obligations under the manufacturing agreement, if such failure is not remedied within sixty (60) days after written notice; or (2) notice by either party to the other upon the insolvency or bankruptcy of the other party. In addition, we may terminate the manufacturing agreement immediately upon written notice, if: (1) a failure to supply the required product continues for more than ninety (90) days after the delivery date; (2) an applicable regulatory authority refuses to grant, or withdraws, marketing approval; (3) we decide to discontinue the marketing of the product in the U.S.; or (4) DPT’s manufacturing license is revoked or suspended. In the event of termination under certain circumstances, we will be required to pay DPT for certain costs and accrued expenses.

We have qualified Contract Pharmaceuticals Limited Canada (“CPL”) as a back-up supplier.

XIAFLEX

Horsham. We lease a 50,000 square foot biological manufacturing facility in Horsham, Pennsylvania that we use to produce the active ingredient of XIAFLEX. The initial term of the lease expires on January 1, 2017. In 2009, we also leased approximately 56,000 square feet of laboratory, warehouse and office space in two other Horsham locations. We believe we have sufficient capacity to manufacture our commercial supply needs for the foreseeable future, and we have the ability to increase capacity at our Horsham facilities if needed.

We currently are the sole supplier of the active pharmaceutical ingredient for commercial supply of XIAFLEX.

Jubilant HollisterStier. We use a contract manufacturer, Jubilant HollisterStier LLC (“JHS”), to fill and lyophilize the XIAFLEX bulk drug substance that we manufacture and produce sterile diluent. In June 2008, we entered into a supply agreement with JHS pursuant to which JHS provides these services. The initial term of the supply agreement was three years, and it automatically renews for subsequent two year terms, unless terminated earlier.

Catalent. We use a contract packager, Catalent Pharma Solutions, LLC, to label and package XIAFLEX.

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DEPENDENCE ON CERTAIN CUSTOMERS

We sell our products to wholesale drug distributors, specialty pharmacies, specialty distributors and chain drug stores who generally sell products to retail pharmacies, hospitals and other institutional customers. We do not promote our products to these customers, and they do not determine product demand. However, over 90% of our product shipments during the period covered by this Report were to only three customers: AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation. Our business would be harmed if any of these customers refused to distribute our products or refused to purchase our products on commercially favorable terms to us.

COMPETITION

TRT Market Competition

The TRT market is highly competitive. Our success will depend, in part, on our ability to grow our prescription volume and protect our share of the market from the competition. Potential competitors in North America, Europe and elsewhere include major pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies.

AndroGel. The primary competition for Testim in the TRT market is AndroGel (testosterone gel) 1% CIII, marketed by Abbott. In the second quarter of 2011, AndroGel 1.62% was approved by the FDA, and launched in the U.S. For the year ended December 31, 2011, the 1.62% formulation accounted for 7.9% of the overall AndroGel franchise prescription volume. For the year ended December 31, 2011, the AndroGel franchise accounted for 73.2% of the prescriptions in the gel TRT market.

Axiron. During the fourth quarter of 2010, Eli Lilly and Company received approval from the FDA for Axiron (testosterone solution) 2% CIII. Subsequently, the product was launched in the U.S. in the first quarter of 2011. For the year ended December 31, 2011, Axiron accounted for 4.9% of the prescriptions in the gel TRT market.

Fortesta. During the fourth quarter of 2010 Endo Pharmaceuticals Inc. (“Endo”) received approval from the FDA for Fortesta (testosterone gel) 2% CIII. Subsequently, the product was launched in the U.S. in the first quarter of 2011. For the year ended December 31, 2011, Fortesta accounted for 1.6% of the prescriptions in the gel TRT market.

Generic Competition. Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe our patents or other proprietary rights. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of the patent rights that we in-license. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products or allow physicians to substitute AB-rated generics.

In July 2003, Watson Pharmaceuticals, Inc. (“Watson”) and Par Pharmaceutical Companies, Inc. (“Par”) filed Abbreviated New Drug Applications (“ANDAs”) with the FDA to be approved as generics for AndroGel. In response to these ANDAs, Solvay Pharmaceuticals, Inc., Abbott’s predecessor in interest, filed patent infringement lawsuits against these two companies to block the approval and marketing of the generic products. In 2006, all the subject companies reached an agreement pursuant to which Watson and Par agreed not to bring a generic of AndroGel to the market until August 2015. During this time frame, Abbott, Watson and Par will co-promote AndroGel.

In June 2009, Perrigo Israel Pharmaceuticals, Inc. (“Perrigo”) filed an ANDA with a paragraph IV certification seeking the approval of a generic version of AndroGel in the U.S., and the FDA subsequently rejected that ANDA as non-approvable. In the fourth quarter of 2011, Perrigo filed a 505(b)(2) New Drug

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Application (a “505(b)(2) application”) with a paragraph IV certification seeking the approval of a generic version of AndroGel in the U.S., and, in response, Abbott filed patent infringement litigation against Perrigo. That litigation was dismissed on December 28, 2011.

In January 2011, Teva Pharmaceuticals USA Inc. (“Teva”) filed a 505(b)(2) application with a paragraph IV certification seeking the approval of a generic version of AndroGel in the U.S., and in April 2011, Abbott filed patent infringement litigation against Teva. On December 28, 2011, Abbott and Teva jointly agreed to dismiss the litigation. In February 2012, the FDA approved a testosterone gel (Bio-T-Gel^™) for male hypogonadism developed by BioSante Pharmaceuticals/Teva.

The introduction of a generic version of AndroGel would likely have an adverse impact on the branded gel market, including taking a significant portion of branded AndroGel business. Although Testim has a BX rating, meaning that pharmacists are prohibited from substituting Testim with AndroGel, or a generic version of AndroGel, a less expensive generic testosterone gel product could still have a material adverse effect on Testim market share and/or Testim’s formulary status, and therefore could have a material negative impact on our financial condition and results of operations.

In October 2008, we and our licensor, CPEX (FCB’s predecessor in interest to Testim), received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of CPEX’s U.S. Patent No. 7,320,968 (the “’968 Patent”). The ’968 Patent covers a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male using Testim and is listed in the Approved Drug Products with therapeutic Equivalence Evaluations (commonly known as the “Orange Book”). The paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by Upsher-Smith’s manufacture, use or sale of the product for which the ANDA was submitted. In December 2008, we filed a patent infringement lawsuit against Upsher-Smith (the “Upsher-Smith Litigation”). Upsher-Smith has alleged that its proposed generic version of Testim would not infringe the ’968 Patent, and that the ’968 Patent is invalid. The district court has issued a protective order prohibiting disclosure of confidential information relating to the litigation. On December 13, 2011, the district court issued an order administratively closing the case. This administrative closure has effectively stayed the case, but has not dismissed it. All discovery obligations of the parties continue to be in effect. Upsher-Smith will also not be able to lawfully launch a generic version of Testim in the U.S. without the necessary final approval from the FDA.

In February 2009, we filed a Citizen’s Petition with the FDA requesting that Upsher-Smith be required to perform a variety of studies to demonstrate that the inactive ingredients and formulation of the proposed product do not compromise its safety or efficacy. The FDA responded to our Citizen’s Petition in August 2009. The FDA agreed with some of the statements made in the Citizen’s Petition regarding the testing required for generic versions of Testim and disagreed with other statements. Although not commenting upon any filing in particular, the FDA did state that “the practical effect of this determination is that any application for a testosterone gel product that has different penetration enhancers than the reference listed drug cannot be submitted as an abbreviated new drug application (“ANDA”) and, instead, will have to be submitted as a New Drug Application (“NDA”) under section 505(b) of the Act.”

In October 2010, the FDA issued a response to a Citizen’s Petition submitted on behalf of Abbott regarding testosterone gel products. In its response, the FDA stated that an application for a potential generic testosterone gel with a different penetration enhancer than the originator must be submitted as a 505(b)(2) NDA rather than as an ANDA. The FDA further stated that such an NDA would be treated as a separate application requiring independent patent certification and notification and would be clocked for regulatory purposes from the time it is provided, potentially resulting in a new 30-month stay.

Other Delivery Options. Testim also competes with other non-gel TRT products such as short-acting injectables, patches, orals, a buccal tablet and implantable pellets. Watson received approval from the FDA and subsequently launched a second generation Androderm transdermal patch in the fourth quarter of 2011. The impact from this product on the TRT market is expected to be nominal given the historically low adoption of patches in the U.S. For the year ended December 31, 2011, non-gel TRT products comprised 33% of the TRT market on a prescription basis and 12% of the TRT market on a value basis.

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Future Delivery Options

In addition to potential generic competition, several other pharmaceutical companies have TRT products in development that may be approved for marketing in the U.S. and the rest of the world. Based on publicly available information, we believe that these products are in the development phases noted below.

Phase III

Endo’s current plans for Aveed^TM (previously known as “Nebido” in the U.S.) are unclear. In 2011, the FDA issued a complete response letter stating that the product was not approved. The regulatory pathway for Aveed remains unclear at this time; however Endo has given reports of continuing dialog with the FDA.

Compleo (Trimel BioPharma Inc.) has an intranasal delivery system. Compleo is a single daily application via nasal delivery, which involves a small amount of gel that is placed in each nasal cavity and is usually absorbed between eight to 10 minutes. The product is then absorbed by the patient quickly and delivered without the typical adverse side effects that are common with drugs delivered orally or topically. Compleo (Trimel) initiated phase III trials in September 2011 and expects results and to file an NDA in the second half of 2012.

Clarus Therapeutics, Inc. is developing Oritex an oral testosterone (soft gelatin capsule). Phase III enrollment initiated in August 2011. Clarus Therapeutics, Inc., reports that NDA submission is expected in the second half of 2013 with a potential launch in late 2014 or early 2015.

Phase II

Androxal^® from Repros Therapeutics, Inc. (“Repros”) is designed to restore normal testosterone production in males rather than externally replacing testosterone like the current alternatives. Androxal is an oral product in development and is expected to restore normal pituitary response in men resulting in normalization of testosterone and luteinizing hormone levels. During the fourth quarter of 2011, Repros reported positive top-line interim results from a placebo-controlled Phase II trial of Androxal in hypogonadal men with Type II diabetes. The results showed a statistically significant increase in testosterone levels and a reduction in HbA1c in the Androxal arms. Repros reports that a type B meeting with the FDA for Phase III is expected to take place late in the first quarter of 2012. Repros reports that the launch of Androxal is expected in 2015.

Other

Abbott and originator Lipocine are developing LPCN-1021, an oral form of testosterone, formulated using Lipocine’s oral Lip’ral technology, as a potential androgen replacement therapy and for the potential treatment of male hypogonadism. A related Phase I was completed at the end of October 2011

Other new treatments are being sought for TRT, including a new class of drugs called Selective Androgen Receptor Modulators, as well as enhanced hydroalcoholic gel formulation of hydrotestosterone. These products are in development and their future impact on the treatment of testosterone deficiency is unknown.

Competition for XIAFLEX for Dupuytren’s

Halozyme Therapeutics (“Halozyme”) is researching HTI-501, a human lysosomal proteinase that degrades collagen and other proteins under certain physiologic conditions. According to Halozyme, HTI-501 may be useful in the treatment of both medical and aesthetic dermatologic conditions such as cellulite, Dupuytren’s and Peyronie’s, and pre-clinical investigations are ongoing.

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Also, although preliminary observations suggest that intralesional interferon gamma may reduce the size of Dupuytren’s cords, further data are needed to assess whether it offers any clinical benefits.

In March 2010, the Patient Protection and Affordable Care Act and the associated reconciliation bill (“PPACA”) became law. Among other provisions, the new law includes provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA; however, any repeal or modification of the law may affect this biologics exclusivity. The new law also establishes an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX.

Other Competition

We face extensive competition in the acquisition or in-licensing of pharmaceutical products or small companies to enhance our portfolio of products. A number of more established companies, which have strategies to in-license or acquire products, may have competitive advantages, as may other emerging companies taking similar or different approaches to product acquisitions. In addition, a number of established research-based pharmaceutical and biotechnology companies may acquire products in late stages of development to augment their internal product lines. These established companies may have a competitive advantage over us due to their size, resources and experience.

GOVERNMENT REGULATION

Government authorities in the U.S., at the federal, state, and local level, and foreign countries extensively regulate, among other things, the following areas relating to our products and product candidates:

All of our products require regulatory approval by government agencies prior to commercialization. Testim has been approved for marketing for the indication of male hypogonadism in the U.S., Canada, Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the UK. XIAFLEX has been approved for the treatment of adult Dupuytren’s patients with a palpable cord in the U.S. and as XIAPEX in Austria, Denmark, Finland, Germany, Norway, Spain, Switzerland, Sweden and the UK.

Human therapeutic products are subject to rigorous preclinical and clinical trials to demonstrate safety and efficacy and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, labeling, distribution, storage and record-keeping related to such products and their promotion and marketing.

Regulation in the U.S.

In the U.S., drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, promotion and marketing and distribution of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject a company to administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, and total or

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partial suspension of product marketing and/or approvals. In addition, non-compliance may result in the FDA’s refusal to approve pending NDAs or Biologic License Applications (BLAs) or supplements to approved NDAs or BLAs or in the withdrawal of an NDA or BLA.

The steps ordinarily required before a new pharmaceutical product containing a new chemical entity may be marketed in the U.S. include: (1) preclinical laboratory tests, preclinical studies in animals and formulation studies; (2) the submission to the FDA of a notice of claimed investigational exemption for a new drug, which must become effective before clinical testing may commence; (3) adequate and well-controlled clinical human trials to establish the safety and efficacy of the drug for each indication; (4) the submission of an NDA or BLA to the FDA; and (5) FDA review and approval of the NDA or BLA 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 and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice regulations. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 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 cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expense.

Clinical trials to support NDAs or BLAs are typically conducted in three sequential phases, but the phases may overlap. In phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to (1) assess the efficacy of the drug in specific, targeted indications, (2) assess dosage tolerance and optimal dosage and (3) identify possible adverse effects and safety risks. If a compound is found to be potentially effective and to have an acceptable safety profile in phase II evaluations, phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites.

After successful completion of the required clinical testing, generally an NDA or BLA is submitted. FDA approval of the NDA or BLA is required before marketing may begin in the U.S. The FDA reviews all NDAs or BLAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA or BLA for filing. In such an event, the NDA or BLA 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 or BLA. The FDA generally has 10 months in which to review the NDA or BLA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. In the last few years, FDA review times have lengthened. 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 evaluation of the NDA or BLA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or BLA or issue a not approvable letter, outlining the deficiencies in the submission and often requiring additional testing or information. If FDA evaluations of the NDA or BLA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or a complete response letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA or BLA. 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. Furthermore, approval may entail ongoing requirements for post-marketing studies, and marketed products, manufacturers and manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product.

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Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a disease or condition that affects populations of fewer than 200,000 individuals in the U.S. or disease whose incidence rates number more than 200,000 where the sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. The sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for use of that drug for the orphan indication for a period of seven years. XIAFLEX for the treatment of Dupuytren’s and Peyronie’s has been granted orphan drug status.

The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls, prescription and order form requirements and restrictions on prescription refills on some kinds of pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule I, II, III, IV or V substance, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest. Testosterone, the active drug substance in Testim, has been scheduled under the Controlled Substances Act as a Schedule III substance. All regular Schedule III drug prescriptions must be signed by a physician and may not be refilled. Furthermore, the amount of Schedule III substances we can obtain for clinical trials and commercial distribution is limited by the Drug Enforcement Agency (“DEA”), and our quota may not be sufficient to complete clinical trials or meet commercial demand, if any. In addition to federal scheduling, Testim is subject to state- controlled substance regulation and may be placed in more restrictive schedules than those determined by the DEA and the FDA. However, to date, with the exception of the State of New York, which has given testosterone a Schedule II classification, testosterone has not been placed in a more restrictive schedule by any state.

Regulation Outside of the U.S.

Outside the U.S., the ability to market a drug is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. Currently, foreign marketing authorizations are applied for at a national level, although within the EU procedures are available to companies wishing to market a product in more than one EU member state. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above.

Furthermore, we must obtain pricing approval in addition to regulatory approval prior to launching the product in the approving country.

Fraud and Abuse Laws

We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws, false claims laws and physician self-referral laws. Violations of these laws are punishable by criminal, civil and/or administrative sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid and veterans’ health programs. Because of the far-reaching nature of these laws, there can be no assurance that the occurrence of one or more violations of these laws would not result in a material adverse effect on our business, financial condition and results of operations.

Anti-Kickback Laws. Our operations are subject to federal and state anti-kickback laws. Certain provisions of the Social Security Act prohibit entities such as us from knowingly and willingly offering, paying, soliciting or receiving any form of remuneration (including any kickbacks, bribe or rebate) in return for the referral of items or services for which payment may be made under a federal health care program, or in return for the recommendation, arrangement, purchase, lease or order of items or services for which payment may be made under a federal health care program. Violation of the federal anti-kickback law is a felony, punishable by

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criminal fines and imprisonment for up to five years or both. In addition, the Department of Health and Human Services may impose civil penalties and exclude violators from participation in federal health care programs such as Medicare and Medicaid. Many states have adopted similar prohibitions against payments intended to induce referrals of products or services paid by Medicaid or other third party payors.

Physician Self-Referral Laws. We also may be subject to federal and/or state physician self-referral laws. Federal physician self-referral legislation (the “Stark law”) prohibits, subject to certain exceptions, a physician from referring Medicare or Medicaid patients to an entity to provide designated health services, including, among other things, certain radiology and radiation therapy services and clinical laboratory services in which the physician or a member of his immediate family has an ownership or investment interest or has entered into a compensation arrangement. The Stark law also prohibits the entity receiving the improper referral from billing any good or service furnished pursuant to the referral. The penalties for violations include a prohibition on payment by these government programs and civil penalties for participation in a circumvention scheme. Various state laws also contain similar provisions and penalties.

False Claims. The federal False Claims Act imposes civil and criminal liability on individuals or entities who submit, cause the submission of, or conspire to file false or fraudulent claims for payment to the government. Violations of the federal False Claims Act may result in penalties equal to three times the damages which the government sustained, an assessment, civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs.

The federal False Claims Act also allows a private individual to bring a qui tam suit on behalf of the government against an individual or entity for violations of the False Claims Act. In a qui tam suit, the private plaintiff is responsible for initiating a lawsuit that may eventually lead to the government recovering money of which it was defrauded. After the private plaintiff has initiated the lawsuit, the government must decide whether to intervene in the lawsuit and become the primary prosecutor. In the event the government declines to join the lawsuit, the private plaintiff may choose to pursue the case alone, in which case the private plaintiff’s counsel will have primary control over the prosecution (although the government must be kept apprised of the progress of the lawsuit). In return for bringing the suit on the government’s behalf, the statute provides that the private plaintiff is entitled to receive up to 30% of the recovered amount from the litigation proceeds if the litigation is successful plus reasonable expenses and attorneys’ fees. Recently, the number of qui tam suits brought against entities in the health care industry has increased dramatically. In addition, a number of states have enacted laws modeled after the False Claims Act that allow those states to recover money which was fraudulently obtained from the state.

Other Fraud and Abuse Laws. The Health Insurance Portability and Accountability Act of 1996 created, in part, two new federal crimes: Health Care Fraud and False Statements Relating to Health Care Matters. The Health Care Fraud statute prohibits the knowing and willful execution of a scheme or artifice to defraud any health care benefit program. A violation of the statute is a felony and may result in fines and/or imprisonment. The False Statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.

An increasing number of states are passing legislation requiring the reporting and disclosure of gifts or other value given to health care providers, the disclosure of certain advertising and promotion expenditures, the disclosure of product pricing information, the licensing of sales representatives, the adoption of codes of conduct that meet state requirements and the posting of our compliance plan on our Web site.

The Federal Physician Payment Sunshine Provisions were passed as part of the PPACA passed last year. The provisions require pharmaceutical manufacturers to report certain payments or transfer of value to a physician or teaching hospital to the federal government. This includes the cost of meals provided to a physician.

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It also includes fees and reimbursed expenses associated with contracted services such as speaker programs, advisory boards, and consulting and clinical trial services. The Federal Physician Payment Sunshine Provisions also require that companies report on drug samples distributed by the company. The first report is due on March 31, 2013. This report must summarize spending that took place in 2012. The statute requires the federal government to make reported information available to the public starting September 2013.

We are required to report pricing information to the Federal and state governments as part of our participation in programs such as the Medicaid Drug Rebate Program, Medicare Part B, and programs run by the Public Health Service, and the Department of Defense. If these reports are not filed in a timely and accurate fashion, we could be subjected to fines and liability under the False Claims Act.

Compliance Program

The healthcare laws and fraud and abuse laws applicable to our business are complex and subject to variable interpretations. We maintain certain compliance review, education and training and other programs to further our commitment to high standards of ethical and legal conduct and to minimize the likelihood that we would engage in conduct or enter into arrangements in violation of applicable authorities. For example, we have (i) established a compliance team consisting of representatives from our Legal, Human Resources, Regulatory Affairs, Quality Assurance and Medical Affairs/Safety departments that meets regularly; (ii) established a compliance hotline that permits our employees to report anonymously any compliance issues that may arise; and (iii) instituted other safeguards intended to help prevent any violations of the applicable fraud and abuse laws and healthcare laws, and to remediate any situations that could give rise to violations. We also review our transactions and agreements, both past and present, to help assure they are compliant. Through our compliance efforts, we constantly strive to structure our business operations and relationships with our customers to comply with all applicable legal requirements.

THIRD-PARTY REIMBURSEMENT AND PRICING CONTROLS

In the U.S. and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors increasingly are challenging the prices charged for medical products and services and implementing other cost containment mechanisms. It is, and will be, time consuming and expensive for us to go through the process of maintaining or seeking reimbursement to the consumer for our products from Medicaid, Medicare and private payors. Our products may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis, potentially resulting in contract changes with these major payors.

Our representatives are supplemented with field-based reimbursement specialists and a reimbursement hotline available to assist physicians with reimbursement questions and issues. For patients who may have difficulty affording XIAFLEX, we established a patient assistance program and support a co-pay foundation.

In many foreign markets, including the countries in the EU, pricing of pharmaceutical products is subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control.

For a discussion of the J code and CPT codes relating to XIAFLEX, see the discussion above under “MARKETED PRODUCTS – XIAFLEX for Dupuytren’s—Reimbursement for XIAFLEX”.

PATENTS AND PROPRIETARY RIGHTS

Our success will depend in part on our ability to protect our existing products and the products we acquire or in-license by obtaining and maintaining a strong proprietary position both in the U.S. and in other countries. To

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develop and maintain such a position, we intend to continue relying upon patent protection, trade secrets, know-how, continuing technological innovations and licensing opportunities. In addition, we intend to seek patent protection whenever appropriate for any products or product candidates and related technology we develop or acquire in the future.

The scope of the intellectual property rights held by pharmaceutical firms involves complex legal, scientific and factual questions and consequently is generally uncertain. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a result, we do not know whether any of our currently pending patent applications, or the products or product candidates we develop, acquire or license will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or will be challenged, circumvented or invalidated. Because patent applications in the U.S. and some other jurisdictions are sometimes maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office (“USPTO”) to determine priority of invention, or in opposition proceedings in a foreign patent office, either of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the patents, if issued and challenged, in a court of competent jurisdiction would be found valid or enforceable. An adverse outcome in any such proceeding, or a successful assertion of third-party rights could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology.

Although we believe our issued and granted patents, owned or in-licensed, and our pending patent applications, if they issue as patents, will provide a competitive advantage, the patent positions of pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions. We may not be able to develop patentable products or processes and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In the U.S., issued patent claims may be broadened, narrowed, or even canceled as a result of post-issuance procedures instituted by us or third parties, including reissue, reexamination, and the new supplemental examination procedure enacted as part of the Leahy-Smith America Invents Act. In addition, any patents or patent rights we obtain may be circumvented, challenged or invalidated by our competitors.

While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights. Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third-parties may obtain other patents without our knowledge prior to the issuance of patents relating to our product candidates which they could attempt to assert against us.

Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management’s attention away from our core business and could also prevent us from marketing our products. To enforce patents issued to us or in-licensed or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings, which could result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be litigation in our industry regarding patent and other intellectual property rights.

We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets.

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It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

Testim

We have licensed the underlying technology for Testim from FCB. The patents and patent applications that we license from FCB for Testim cover methods, compositions and formulations for administering drugs, such as testosterone, across the skin and mucus membranes. In the U.S., the ’968 Patent covers a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male using Testim and is listed in the Orange Book. The ’968 Patent expires in January 2025. Eight additional U.S. patents issued covering use of Testim between October 2009 and November 2011 and have been listed in the Orange Book. They expire in April 2023. FCB also has filed continuation applications that are pending. In Canada, there are two patents covering Testim, one that expired in January 2010 and another that expires in April 2023. The patent issued by the European Patent Office covering Testim expires in April 2023. FCB also has filed a patent application in Japan that is awaiting examination. Patents have been granted in several countries worldwide, and patent applications in several other countries throughout the world are in various stages of prosecution. All of these patents and any patents that issue from the pending applications are included in the FCB License or are owned directly by us. Testosterone, the active ingredient in Testim, does not have patent protection and is included in competing TRT products.

In October 2008, we and our licensor, CPEX (FCB’s predecessor in interest to Testim), received notice that Upsher-Smith filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of ’968 Patent. See “–Competition–TRT Market Competition–Generic Competition” above for discussion of the Upsher-Smith Litigation and Upsher-Smith’s efforts to obtain approval of a generic version of Testim. An adverse outcome in the Upsher-Smith Litigation or any such legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ’968 Patent in January 2025. The introduction of a generic version of Testim could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue to develop our product pipeline and therefore could have a material negative impact on our financial condition and results of operations.

XIAFLEX

We licensed the collagenase enzyme in XIAFLEX, our product for the treatment of Dupuytren’s, and product candidate for the treatment of Peyronie’s and Frozen Shoulder syndrome and we also have the option upon certain conditions to license cellulite and other indications, from BioSpecifics. In addition to the marketing exclusivity which comes with its orphan drug status in the U.S. as a treatment for Dupuytren’s and Peyronie’s, use of the enzyme underlying XIAFLEX is covered by two use patents in the U.S., one for the treatment of Dupuytren’s and one for the treatment of Peyronie’s. The Dupuytren’s patent expires in 2014, and the Peyronie’s patent expires in 2019. Both patents are limited to the use of the enzyme for the treatment of Dupuytren’s and Peyronie’s, respectively, within certain dose ranges. While we believe that trials in Peyronie’s will demonstrate that effective dosing will fall within the patented range, currently, there is not enough data to establish whether the ultimate approved product will be covered by the patents. On October 12, 2010, the U.S. Patent and Trademark Office issued U.S. Patent No. 7,811,560 (the “’560 Patent”) covering XIAFLEX with independent claims that recite a drug product, a process for producing the drug product, and pharmaceutical formulations comprising the drug product. As a result, we expect XIAFLEX to have patent protection through 2028.

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On August 31, 2011, we and BioSpecifics entered into a settlement agreement (the “Settlement Agreement”), pursuant to which the parties settled all pending litigation and resolved other outstanding disputes between them. Pursuant to the Settlement Agreement, we reserve certain rights and the parties have agreed to certain clarifications as to intellectual property matters and amounts owed between the parties. As a result of this settlement, we and BioSpecifics are now co-owners of the ’560 Patent.

While XIAFLEX does not have orphan drug status for any indication in Europe, foreign patents cover these products in certain countries and, on approval of XIAFLEX for a first indication in Europe, we believe the product will benefit from ten years of market exclusivity and eight years of data exclusivity. We may obtain an additional year of market exclusivity if the regulatory authorities approve an additional indication that they determine to represent a significant clinical benefit.

In January 2005, a patent application was filed with regard to XIAFLEX for the treatment of Frozen Shoulder syndrome. If this patent is granted, it would expire in 2026 or later if patent term adjustments are granted.

In October 2011, we filed a provisional U.S. patent application relating to the treatment of cellulite with XIAFLEX. If granted, this patent would expire in 2032 or later if patent term adjustments are granted.

In January 2012, we filed a provisional U.S. patent relating to certain sequences of the collagenase enzyme used in XIAFLEX. If granted, this patent would expire in 2033 or later if patent term adjustments are granted.

Orphan Drug Status

The Orphan Drug provisions of the Federal Food, Drug, and Cosmetic Act provide incentives to drug and biologics suppliers to develop and supply drugs for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the U.S. or, for a disease that affects more than 200,000 individuals in the U.S. where there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for such disease or condition will be recovered from its sales in the U.S. Under these provisions, a supplier of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. The marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug for the same indication except under limited circumstances. It would not prevent other drugs from being approved for the same indication.

The FDA granted orphan drug status to XIAFLEX in the U.S. for each of the treatments of Dupuytren’s and Peyronie’s in 1996. The designations for the treatment of Dupuytren’s and Peyronie’s have been transferred to us. Orphan drug status means that, because XIAFLEX was the first product to receive FDA approval for the orphan indication of Dupuytren’s, another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to seven years in the U.S. With an approval date of February 2, 2010, the orphan status exclusivity period for XIAFLEX for Dupuytren’s would expire February 2, 2017.

The Hatch-Waxman Act

Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs and indications benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active ingredient. The Hatch-Waxman Act prohibits an ANDA where the applicant does not own or have a legal right of reference to all the data required for approval, to be submitted by another company for another version of such drug during the five-year exclusive period. Protection under the Hatch-Waxman Act will not prevent the filing or approval of another full NDA, however, the applicant would be

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required to conduct its own pre-clinical, adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new NDAs with new clinical trials for previously approved drugs and supplemental NDAs, for example, for new indications, dosages, or strengths of an existing drug, if new clinical investigations are essential to the approval. This three-year exclusivity covers only the new changes associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient or indications.

If an ANDA applicant were to file a paragraph IV certification under the Hatch-Waxman Act in connection with the submission to the FDA of an ANDA for approval of a generic version of any of our products for which we believed we held a valid patent, then we could initiate a lawsuit against the applicant claiming patent infringement and defending the relevant patent’s validity and enforceability. Depending on the facts and circumstances, the FDA may stay the approval of the ANDA for a generic version of any of our products for 30 months so long as we initiate litigation against the filer of the ANDA within 45 days of receiving the paragraph IV certification. If a court found that one of our patents was invalid or not infringed, then the FDA would be permitted to approve the competitor’s ANDA resulting in a competitive generic product. In the event that the FDA did not grant the 30 month stay, the FDA would be permitted to approve the competitor’s ANDA; however, we could engage in legal proceedings, such as an injunction, to attempt to preclude the generic competitor from entering the market during the pendency of the patent litigation, but we may not prevail in which event the competitor could enter the market, despite the ongoing patent litigation.

The Hatch-Waxman Act also permits a patent extension term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and it must be applied for prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for patent term extension.

EMPLOYEES

We are a fully integrated company and had approximately 530 employees at the end of 2011, including approximately 298 employees in our commercial organizations, 118 employees in manufacturing and quality, 68 employees in research and development and 46 employees in administrative support. We believe that our relations with our employees are good, and we have no history of work stoppages. Generally, our employees are at-will employees. However, we have entered into employment agreements with certain of our executive officers.

RESEARCH AND DEVELOPMENT SPENDING

Over the last three fiscal years, we have spent approximately $161.3 million on company-sponsored research and development activities. We spent $51.4 million in 2009, $48.0 million in 2010 and $61.9 million in 2011. For additional discussion on these activities, see “Results of Operation” in Part II, Item 7 below.

REVENUE FROM CUSTOMERS IN THE U.S. AND OUTSIDE THE U.S.

The information under “Results of Operation – Years Ended December 31, 2011 and 2010 – Net Revenues” and under “Results of Operation – Years Ended December 31, 2010 and 2009 – Net Revenues” in Part II, Item 7 is incorporated herein by reference.

SEASONALITY

The total volume of procedures to treat Dupuytren’s have exhibited significant seasonality. Procedure volume is historically at its lowest in the second and third quarters and peaks in the fourth and first quarters. The rationale for this seasonality is uncertain.

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In the nearly two years since launch, sales of XIAFLEX have exhibited their strongest growth in the fourth quarters of 2010 and 2011; however, to date, sales of XIAFLEX have not shown the same significant ebbing and flowing seasonality as the historical trends of total volume of Dupuytren’s procedures. We cannot predict whether XIAFLEX sales will begin to exhibit a similar seasonality in the future.

FINANCIAL INFORMATION

The information under Part II, Item 8 is incorporated herein by reference.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F. Street, N.E., Washington, DC 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. You may also obtain our SEC filings free of charge from the SEC’s Internet Web site at www.sec.gov.

Our Internet Web site address is www.auxilium.com. We make available free of charge through our Web site’s “For Investors” page most of our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information. These reports and information are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

Our Board of Directors has various committees including an audit and compliance committee, compensation committee and nominating and corporate governance committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines and a Code of Conduct. Copies of these charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, can be obtained free of charge from our Web site. The references to our Web site and the SEC’s Web site are intended to be inactive textual references only, and the contents of those Web sites are not incorporated by reference herein.

In addition, you may request a copy of the foregoing filings, charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, at no cost by writing us at the following address or telephoning us at the following telephone number:

Auxilium Pharmaceuticals, Inc.

40 Valley Stream Parkway

Malvern, PA 19355

Attention: Investor Relations

Telephone: (484) 321-5900

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In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or results of operations. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we projected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also impair our business or financial position.

Risks Related to Commercialization

If medical doctors do not prescribe our products or the medical profession or patients do not accept our products, our ability to grow or maintain our revenues will be limited.

Our business is dependent on market acceptance of our products by physicians, healthcare payors, patients and the medical community. Medical doctors’ willingness to prescribe, and patients’ willingness to accept, our products depend on many factors, including:

Even though we have received regulatory approval for Testim^® for the treatment of hypogonadism and XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord, and even if we receive regulatory approval and satisfy the above criteria for any of our product candidates, physicians may not prescribe, and patients may not accept, our products if we do not promote our products effectively. If any of our products or product candidates fails to achieve market acceptance, we may not be able to market and sell the products successfully, which would limit our ability to generate revenue and could harm our business.

Our products and any of our product candidates, if approved, may face competition from lower cost generic or follow-on products and such generic competition could have a material adverse effect on our business.

Testim is approved under the provisions of the U.S. Food, Drug and Cosmetic Act that renders it susceptible to potential competition from generic manufacturers via the Abbreviated New Drug Application (“ANDA”) procedure. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator’s data regarding safety and efficacy. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical companies who have incurred substantial expenses associated with the research and development of the drug product.

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The ANDA procedure includes provisions allowing generic manufacturers to challenge the effectiveness of the innovator’s patent protection long before the generic manufacturer actually commercializes their products through the paragraph IV certification procedure. In recent years, generic manufacturers have used paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and we expect this trend to continue and to implicate drug products with even relatively small total revenues.

In October 2008, we and our licensor, CPEX (FCB’s predecessor in interest to Testim), received notice that Upsher-Smith filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the ’968 Patent. See “Competition–TRT Market Competition–Generic Competition” in Part I, Item 1 above for discussion of the Upsher-Smith Litigation and Upsher-Smith’s efforts to obtain approval of a generic version of Testim. Upsher-Smith will not be able to lawfully launch a generic version of Testim in the U.S. without the necessary approval from the FDA. Although it would seem unlikely based on the FDA’s public statements in its responses to the Citizen’s Petitions submitted by each of us and Abbot and Upsher-Smith’s public stance that its generic product has different penetration enhancers than Testim, the FDA could approve Upsher-Smith’s proposed generic product. With FDA approval, even if the Upsher-Smith Litigation remains pending, Upsher-Smith may nevertheless choose to launch its generic product, if approved, at risk of infringing the ’968 patent. Although administratively closed in December 2011, the Upsher-Smith Litigation has not been dismissed or finally resolved and could also result in a finding that Upsher-Smith’s proposed testosterone product does not infringe the ’968 Patent or that the ’968 Patent is invalid and/or unenforceable. An adverse outcome in the Upsher-Smith Litigation or any such legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ’968 Patent in January 2025. Since Testim and XIAFLEX for Dupuytren’s are currently our only products, the introduction of a generic version to Testim or Abbot’s AndroGel could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue the commercialization of XIAFLEX for Dupuytren’s.

Enacted in March 2010, the Patient Protection and Affordable Care Act and the associated reconciliation bill include provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA (although this could change as the regulations are enacted). The Patient Protection and Affordable Care Act also establishes an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX. As a result, we could face competition from other pharmaceutical companies that develop biosimilar versions of our biological product XIAFLEX that do not infringe our patents or other proprietary rights. Similar legislation has also been adopted in the EU.

Inventories produced during a launch period may not be needed and could result in additional charges for excess inventories.

Predicting demand for a new product that is designed to change a treatment paradigm can be very difficult. We must balance between ensuring adequate supply of product and the possibility that inventory produced will expire prior to being sold. With a wide variety of sales curves possible, we decided to ensure that we would not run out of stock during the XIAFLEX launch, even in the most aggressive of all scenarios. Prior to approval and launch of XIAFLEX, we produced finished packaged inventory sufficient to meet a significant demand. In 2010, we concluded that $3.9 million of this inventory may expire prior to its expected sale and charged this cost to Cost of goods sold for 2010. During 2011, $2.8 million of this reserve was utilized in the physical disposal of such expiring inventory. While we believe that potential additional potential obsolescence was not probable, as of December 31, 2011, it is possible that we may be required, in future periods, to record additional charges for additional excess inventories given the limited historical information with the recent launch of XIAFLEX.

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We make business decisions based on forecasts of future sales of our products and product candidates that may be inaccurate.

Our market estimates are based on many assumptions, including, but not limited to, reliance on external market research, our own internal research, population estimates, estimates of disease diagnostic rates, treatment trends, and market estimates by third parties. Any of these assumptions can materially impact our forecasts and we cannot assure you that the assumptions are accurate. If the market for any of our products or product candidates is less than this data would suggest, the potential sales for the product or product candidate in question could be adversely affected.

If third-party payors do not adequately reimburse customers for our products or any of our product candidates that are approved for marketing, they might not be used or purchased, and our revenues and profits will not grow.

Our revenues and profits depend heavily upon the availability of adequate coverage and reimbursement for the use of our products, and any of our product candidates that are approved for marketing, from third-party healthcare and state and federal government payors, both in the U.S. and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination the product is:

Since reimbursement approval for a product is required from third-party and government payors, seeking this approval, particularly when seeking approval for a preferred form of reimbursement over other competitive products, is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a basis similar or preferred to competitive products or at all. If reimbursement is approved, it may be at prices below that which we believe to be appropriate. Once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely or we may lose the similar or better reimbursement we receive compared to competitive products. As reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved.

In November 2011, the CMS released payment rates for CPT codes to be used with XIAFLEX for the treatment of adult Dupuytren’s patients with a palpable cord beginning January 1, 2012. The CPT codes will apply to the procedures only, and leave in place the separate XIAFLEX specific J code for reimbursement of the product that was effective January 1, 2011. The CPT codes, 20527 for the XIAFLEX injection procedure and 26341 for the finger extension or manipulation procedure, and J code, J0775, are used by physicians to identify XIAFLEX when billing to Medicare, Medicaid and commercial health plans for reimbursement. Failure of the existence of the XIAFLEX-specific J code and CPT codes to spur demand may have a material adverse effect on our business. In addition, physicians may perceive the reimbursement levels associated with the XIAFLEX-specific J code and CPT codes to be inadequate, which could affect the use of such codes by physicians and have a material adverse effect on our business.

If product liability lawsuits are brought against us, we may incur substantial liabilities.

The commercialization of our products and the clinical testing, manufacture and commercialization of our product candidates, if approved, involves significant exposure to product liability claims. We have clinical trial and product liability insurance that covers our products and the clinical trials of our product candidates that we

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believe is adequate in both scope and amount and has been placed with what we believe to be reputable insurers. We are self-insured for the first $1.0 million of liability under these policies. Our product liability policies have been written on a claims-made basis. If any of our product candidates are approved for marketing, we may seek additional coverage. We cannot predict all of the adverse health events that our products or product candidates may cause. As a result, our current and future coverages may not be adequate to protect us from all the liabilities that we may incur. If losses from product liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, we may not be able to maintain our clinical trial insurance or product liability insurance at an acceptable cost, if at all, and this insurance may not provide adequate coverage against potential claims or losses. If we are required to pay a product liability claim, we may not have sufficient financial resources and our business and results of operations may be harmed. Whether or not we are ultimately successful in product liability litigation, such litigation could also consume substantial amounts of our financial and managerial resources, and might result in adverse publicity, all of which would impair our business. Additionally, we enter into various agreements where we indemnify third parties such as manufacturers, investigators and collaborative partners for certain product liability claims related to our products. These indemnification obligations may require us to pay significant sums of money for claims that are covered by these indemnifications.

Testim competes in a very competitive market, and if we are unable to compete effectively with the other companies that produce products for the treatment of urologic or sexual health disorders, our ability to generate revenues will be limited.

The TRT market is highly competitive. Our success will depend, in part, on our ability to grow our prescription volume and protect our share of the market from the competition. Potential competitors in North America, Europe and elsewhere include major pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms, universities and other research institutions and government agencies.

Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe our patents or other proprietary rights, and, as a result, our business may be adversely affected. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of the patent rights that we in-license. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products. The strategies that we deploy to make Testim price-competitive with lower cost generic products may reduce our profit margins on Testim significantly. Consequently, increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in revenue from Testim and adversely affect our business. Increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in revenue from Testim.

In addition to potential generic competition, two additional competing TRT products were launched in the U.S. in the first quarter of 2011 and several other pharmaceutical companies have TRT products in development that may be approved for marketing in the U.S. and the rest of the world.

For a discussion of competition in the TRT market, see “Competition – TRT Market Competition” in Part I, Item 1 above.

If testosterone replacement therapies are perceived, or are found, to create health risks, our sales of Testim may decrease and our operations may be harmed.

Publications have, from time to time, suggested potential health risks associated with TRT. Potential health risks are described in various articles, including a 2002 article published in Endocrine Practice and a 1999 article published in the International Journal of Andrology. The potential health risks detailed are fluid retention, sleep apnea, breast tenderness or enlargement, increased red blood cells, development of clinical prostate disease, including prostate cancer, increased cardiovascular disease risk and the suppression of sperm production. In April 2009, the FDA informed the Company that it had become aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer (transference) from adult males using testosterone gel drug products. The FDA considered

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this information to be “new safety information” and requested changes to the prescribing information for Testim, including a “boxed warning”, which is used to highlight warning information that is especially important to the prescriber. The FDA also required a REMS that includes assessments and a Medication Guide to inform patients. It is possible that studies on the effects of TRT could demonstrate these or other health risks. This, as well as negative publicity about the risks of hormone replacement therapy, including TRT, could adversely affect patient or prescriber attitudes and impact Testim sales. These factors could adversely affect our business.

International commercialization of our products and our product candidates faces significant obstacles.

We may commercialize some of our products, and product candidates, if approved, internationally on our own or through collaborative relationships with foreign partners. Our foreign regulatory, clinical and commercial resources are limited, and accordingly our ability to expand our business outside of the U.S. on our own is limited. We may not be able to enter into collaboration agreements with appropriate partners for important foreign markets on acceptable terms, or at all. Future and current collaborations with foreign partners may not be effective or profitable for us. Any international commercialization may carry risks that we do not foresee due to our limited international resources.

Risks Related to the Manufacture of XIAFLEX

We have limited experience in manufacturing pharmaceutical and biologic products and may encounter difficulties in the manufacture of the active ingredient of XIAFLEX at our facilities in Horsham, Pennsylvania which could materially adversely affect our results of operations or delay or disrupt manufacture of XIAFLEX.

The manufacture of pharmaceutical and biologic products requires significant expertise and capital investment. Although we leased our facilities in Horsham in order to have direct control over the manufacturing of the active ingredient of XIAFLEX, for which we are the sole supplier, we have limited experience in manufacturing XIAFLEX or any other pharmaceutical product. Biologics, such as XIAFLEX, require processing steps that are highly complex and generally more difficult than those required for most chemical pharmaceuticals. We may encounter difficulties with the manufacture of the active ingredient of XIAFLEX, which could delay or disrupt our manufacture of XIAFLEX, require write-offs which may affect our financial results, result in product recalls or product liability claims or otherwise materially affect our results of operations. These problems with manufacturing may include:

Furthermore, our manufacturing operations expose us to a variety of significant risks, including:

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If we are unable to maintain regulatory approval for XIAFLEX, we may not have an alternate use for our Horsham facilities but will be required to make payments under our lease.

We have entered into leases for our facilities in Horsham, the first of which expires on January 1, 2017. If we are unable to maintain regulatory approval for XIAFLEX for Dupuytren’s, we may not have an alternate use for the Horsham facilities but will be required to make payments under our leases. As of December 31, 2011, the total future minimum lease payments of these leases during their initial noncancellable terms are approximately $22.6 million.

Our Horsham facilities are subject to regulatory oversight, which may delay or disrupt our development and commercialization efforts for XIAFLEX.

We must ensure that all of the processes, methods, equipment and facilities employed in the manufacture of XIAFLEX at our Horsham facility are compliant with the current cGMP requirements. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. Compliance with cGMP requires record keeping and quality control to assure that the clinical and commercial product meets applicable specifications and other requirements. If we fail to comply with these requirements, we may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them. Our manufacturing facilities are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that there are deficiencies including non-compliance with regulatory requirements, we could be required to take remedial actions, stop production or close our Horsham facilities, which would disrupt the manufacturing processes, limit the supplies of XIAFLEX and delay clinical trials and subsequent licensure.

Future noncompliance with any applicable regulatory requirements may result in refusal by regulatory authorities to allow use of XIAFLEX made at our Horsham facilities in clinical trials, refusal of the government to allow distribution of XIAFLEX for commercialization, criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts.

Risks Related to Our Dependence on Third-Party Manufacturers, Service Providers, Testing Laboratories and Suppliers

Since we currently rely on third-party manufacturers, suppliers and packagers, we may be unable to control the availability or cost of manufacturing and packaging our products, which could adversely affect our results of operations.

We currently do not manufacture Testim or any of our product candidates, except for the active ingredient for XIAFLEX for which we are the sole source of supply. JHS fills and lyophilizes the XIAFLEX bulk drug substance that we manufacture and produces sterile diluent. Catalent packages and finishes the XIAFLEX products. Testim is manufactured for us by DPT, under a contract that expires on December 31, 2015, and we have qualified CPL as a back-up supplier. We also rely on third parties for certain packaging services for our products.

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The manufacture of pharmaceutical products requires significant expertise and capital investment. JHS, Catalent, DPT, CPL or any other third-party manufacturer or packager may encounter difficulties in production. These problems may include:

JHS, Catalent, DPT, CPL or any of our other third-party manufacturers and packagers may not perform as agreed. Likewise, we may not perform as agreed under our contracts with these manufacturers and packagers. In either event, the applicable manufacturer or packager or we, as the case may be, may terminate the applicable agreement, which would adversely impact our ability to produce and sell our products or produce our product candidates for use in clinical trials. Also, any of our third-party manufacturers and packagers could become insolvent or cease operations. The number of third-party manufacturers with the expertise, required regulatory approvals and facilities to manufacture bulk drug substance on a commercial scale is limited, and it would take a significant amount of time to arrange and receive regulatory approval for alternative arrangements. We may not be able to contract for the manufacturing of our products or any of our product candidates on acceptable terms, if at all, which would materially impair our business.

Any of these factors could increase our costs and result in our being unable to effectively commercialize or develop our products. Furthermore, if any third-party manufacturer fails to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices, we may be unable to meet the demand for our products and we may lose potential revenues.

Because we depend on third parties to conduct certain laboratory tests, clinical trials and other critical services, we have limited control and may encounter delays in our efforts to develop product candidates.

We commonly rely on third parties to conduct laboratory tests, clinical trials and other critical services for us. If we are unable to obtain these services on acceptable terms, we may be unable to complete our product development efforts in a timely manner. Also, to the extent we will rely on third parties for laboratory tests and clinical trials, we will have limited control over these activities and may be unable to manage them appropriately. Communicating with third parties can also potentially lead to mistakes as well as difficulties in coordinating activities. Third parties may:

These third parties may not complete the tests or trials on our schedule, and the tests or trials may be methodologically flawed, may not comply with applicable laws or may be otherwise defective. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult. Our contracts with the contract research organizations on which

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we currently rely are generally terminable upon 30-days prior written notice. If we must replace any of these contract research organizations or any other contract research organization we may use in the future to conduct our clinical trials, our trials may have to be suspended until we find another contract research organization that offers comparable services. The time that it takes us to find alternative organizations may cause a delay in the commercialization of our product candidates or may cause us to incur significant expenses to replicate data that may be lost. Although we do not believe that the contract research organizations on which we rely offer services that are not available elsewhere, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

Our third-party manufacturers are subject to regulatory oversight, which may delay or disrupt our development and commercialization efforts.

Third-party manufacturers of our products or product candidates must ensure that all of the processes, methods and equipment are compliant with cGMP, and conduct extensive audits of vendors, contract laboratories and suppliers. If they fail to comply with these requirements, we also may be required to curtail the clinical trials of our product candidates, which are also supplied by these manufacturers, and may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them. Manufacturing facilities are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that there are deficiencies, third-party manufacturers could be required to take remedial actions, stop production or close the facility, which would disrupt the manufacturing processes and limit the supplies of Testim or our product candidates.

We currently rely on single source suppliers for certain raw materials and services for manufacturing XIAFLEX and for two of the primary ingredients for Testim, and the loss of any of these suppliers could prevent us from selling XIAFLEX or Testim, which would materially harm our business.

We rely on third-party suppliers for our supply of raw materials for the manufacture of the XIAFLEX bulk drug substance and for our supply of testosterone and cyclopentadecanolide (“CPD”), two key ingredients of Testim. Certain raw materials are available to us from only limited sources and are sole sourced. We rely on one supplier for lyophilization and sterile diluent and we rely on one other supplier for labeling and packaging of XIAFLEX drug product. Testosterone is available to us from only three sources, and we rely exclusively on one outside source for our supply of CPD. We do not have supply agreements in place with all of our raw material suppliers, including our suppliers of testosterone and CPD. If any of the suppliers stops manufacturing, or if we are unable to procure raw materials or services on commercially favorable terms, or if we are not able to obtain them in a timely manner, we may be unable to continue to produce or sell XIAFLEX or Testim on commercially viable terms, if at all. In addition, the limited number of suppliers of these raw materials and services with whom we do not have supply agreements in place may provide such companies with greater opportunity to raise their prices. Any increase in price for these raw materials or services may reduce our gross margins.

Risks Related to Collaborators

We are dependent upon our collaborative relationships with third parties to further develop and commercialize XIAFLEX outside of the U.S. There may be circumstances that delay or prevent any of these third parties’ ability to develop and commercialize XIAFLEX.

We have entered into agreements with each of Pfizer, Asahi Kasei and Actelion under which we have granted them the right to develop and commercialize XIAFLEX in Europe and certain Eurasian countries, and in Japan, and in Australia, Brazil, Canada and Mexico, respectively. In addition, we may seek to enter into similar arrangements with other third parties with respect to the development and commercialization of XIAFLEX in the rest of the world. We are subject to a number of risks associated with our dependence on our collaborative relationship with these third parties, including:

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Due to these factors and other possible disagreements with a third party, including disputes over intellectual property ownership, we may be delayed or prevented from further developing, manufacturing or commercializing XIAFLEX outside the U.S., or we may become involved in litigation or arbitration, which would be time consuming and expensive.

If a third party were to unilaterally terminate its collaboration agreement with us, we would need to undertake development and marketing activities for XIAFLEX in that third party’s territory solely at our own expense and/or seek another partner for some or all of these activities in that territory. If we pursued these activities in that territory on our own, it would significantly increase our capital and infrastructure requirements, and might limit the indications we are able to pursue and could prevent us from effectively developing and commercializing XIAFLEX. If we sought to find another pharmaceutical company partner for some or all of these activities, we may not be successful in such efforts, or they may result in a collaboration that has us expending greater funds and efforts than the relationship with the terminating third party.

In general, we cannot control the amount and timing that our third party partners may devote to our collaboration. We are relying on our third-party partners to obtain regulatory approvals for and successfully commercialize XIAFLEX in the relevant territories. If a third party fails to adequately market and promote XIAFLEX in its territory, we may be unable to obtain any remedy against that third party and sales of XIAFLEX may be harmed, which would negatively impact our business, results of operations, cash flows and liquidity due to reduced milestone and royalty payments under the applicable third party agreement.

We do not control the actions of our collaborators, and breaches of our agreements by any of them could affect our business, our regulatory approvals or our reputation.

We have agreements in place with our collaborators, including Pfizer, Asahi Kasei, Actelion and BioSpecifics, and we expect that any future collaborators would similarly be engaged under contract. Nevertheless, for reasons that we may not have an ability to foresee or control, any of our collaborators may breach their respective agreements. Depending on its nature, a breach could affect our regulatory approvals for our products and could affect our reputation if the consequences of a breach are imputed to us. We may need to engage in costly litigation to enforce our rights, and we may not prevail in such litigation. A breach by one of our collaborators may lead to termination of the applicable agreement, which, in the case of a license agreement, may affect the scope of our license, such as modifying an exclusive license to a non-exclusive license. Any such breach and its consequences could have a material adverse effect on our business and financial condition.

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We may not be able to license XIAFLEX for development and commercialization in the rest of the world on commercially reasonable terms or at all.

Reaching agreement or agreements with one or multiple partners for development and commercialization of XIAFLEX in areas of the world outside the U.S. and the territories covered by our collaboration agreements with Pfizer, Asahi Kasei and Actelion is uncertain. We may not be able to timely find interested or suitable partners for such collaboration, and any such collaboration may not be as profitable as planned or profitable at all. If we are unable to license XIAFLEX for development and commercialization in areas of the world outside the U.S. and the territories covered by our collaboration agreements with Pfizer, Asahi Kasei and Actelion on commercially reasonable terms of at all, it could have an adverse effect on our ability to commercialize XIAFLEX worldwide and on our financial condition.

Risks Related to Business Development

Our failure to successfully in-license or acquire additional technologies, product candidates or approved products could impair our ability to grow.

We intend to in-license, acquire, develop and market additional products and product candidates so that we are not solely reliant on sales from our currently approved products for our revenues. The success of this strategy depends upon our ability to identify, select and acquire the right pharmaceutical product candidates, products and technologies. We have a limited number of product candidates in our development pipeline. We may not be able to acquire or in-license the rights to additional product candidates and approved products on terms that we find acceptable, or at all. We face extensive competition in the acquisition or in-licensing of pharmaceutical products or small companies to enhance our portfolio of products. A number of more established companies, which have strategies to in-license or acquire products, may have competitive advantages, as may other emerging companies taking similar or different approaches to product acquisitions. In addition, a number of established research-based pharmaceutical and biotechnology companies may acquire products in late stages of development to augment their internal product lines. These established companies may have a competitive advantage over us due to their size, resources and experience. If we are unable to in-license or acquire additional commercial products or product candidates, we may be reliant solely on sales of our currently approved products for revenues. As a result, our ability to grow our business or increase our profits could be severely limited.

If we engage in any acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.

If we undertake an acquisition, the process of integrating any newly acquired business, technology, service or product into our existing operations could be expensive and time consuming and may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons, such as an acquired product candidate proving to not be safe or effective in later clinical trials or not reaching its forecasted commercial potential. We may fund any future acquisition by issuing equity or debt securities, which could dilute your ownership percentage or limit our financial or operating flexibility as a result of restrictive covenants related to new debt. Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential acquisitions that are never completed. In pursuing our acquisition strategy, we may expend significant management time, consulting costs and legal expenses without consummating a transaction.

Risks Related to Regulatory Approval of Our Products and Product Candidates

We are subject to numerous complex regulatory requirements and failure to comply with these regulations, or the cost of compliance with these regulations, may harm our business.

Our products and product candidates are subject to regulation by numerous governmental authorities in the U.S., Europe and the rest of the world. These regulations govern or affect the research and development, testing, manufacturing, labeling, distribution, safety, storage, record-keeping, approval, advertising, promotion,

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sampling, marketing and import and export of our products and our product candidates, as well as safe working conditions and the experimental use of animals. Noncompliance with any applicable regulatory requirements can result in refusal of the government to approve facilities for testing or manufacture of products as well as refusal to approve products for commercialization. Noncompliance with any applicable regulatory requirements also can result in criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, prohibitions or limitations on the commercial sale of products or refusal to allow the entering into of federal and state supply contracts. The FDA and comparable governmental authorities have the authority to withdraw product approvals that have been previously granted. Currently, there is a substantial amount of congressional and administrative review of the FDA and the regulatory approval process for drug candidates in the U.S. As a result, there may be significant changes made to the regulatory approval process in the U.S. In addition, the regulatory requirements relating to the manufacturing, testing, labeling, promotion, marketing and distribution of our products may change in the U.S. or the other jurisdictions in which we may have obtained or be seeking regulatory approval for our products or product candidates. Such changes may increase our costs and adversely affect our operations.

Additionally, failure to comply with, or changes to, the regulatory requirements that are applicable to our products or our other product candidates may result in a variety of consequences, including the following:

Testosterone is listed by the DEA as a Schedule III substance under the Controlled Substances Act of 1970. The DEA classifies substances 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. Scheduled substances are subject to DEA regulations relating to manufacturing, storage, distribution, and physician prescription procedures. For example, all regular Schedule III drug prescriptions must be signed by a physician and may not be refilled. Furthermore, the amount of Schedule III 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, if any. In addition to federal scheduling, Testim is subject to state-controlled substance regulation and may be placed in more restrictive schedules than those determined by the DEA and the FDA. However, to date, with the exception of the State of New York, which has given testosterone a Schedule II classification, testosterone has not been placed in a more restrictive schedule by any state.

Entities must be registered annually with the DEA to manufacture, distribute, dispense, import, export and conduct research using controlled substances. State controlled substance laws also require registration for similar activities. In addition, the DEA requires entities handling controlled substances to maintain records, file reports, follow specific labeling and packaging requirements, and provide appropriate security measures to control against diversion of controlled substances. Failure to follow these requirements can lead to significant civil and/or criminal penalties and possibly even lead to a revocation of a DEA registration.

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Products containing controlled substances may generate public controversy. As a result, these products may have their marketing rights or regulatory approvals withdrawn. Political pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of our product candidates. For some scheduled substances or any product, the FDA may require us to develop a comprehensive risk management program to reduce the inappropriate use of our products and product candidates, including the manner in which they are marketed and sold, so as to reduce the risk of improper patient selection and diversion or abuse of the product. Developing such a program in consultation with the FDA may be a time-consuming process and could delay approval of any of our product candidates. Such a program or delays of any approval from the FDA could increase our product development costs and may allow our competitors additional time to develop or market competing products.

In addition, in many foreign markets, including the countries in the EU, pricing of pharmaceutical products is subject to governmental control. In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. Failure to obtain pricing approval in a timely manner or approval of pricing which would support an adequate return on investment or generate a sufficient margin to justify the economic risk might delay or prohibit the commercial launch of the product in those countries.

As a condition for approval of XIAFLEX for Dupuytren’s, we are required to comply with post-marketing requirements. Failure to comply with these requirements or any future post-marketing requirements, or the cost of compliance with such requirements, may harm our business.

The FDA can establish requirements for approved products with which we must comply. For example, the law allows the FDA to require us as the sponsor of a marketing application to conduct and report the results of certain studies or clinical trials for certain purposes (“post-marketing requirements”) if the FDA makes certain findings required by the statute. Failure to report or conduct the studies is considered a violation and can result in enforcement action. Additionally, the FDA can request that we voluntarily conduct studies or clinical trials to address questions or concerns (“post-marketing commitments”). These studies or clinical trials could be time-consuming and costly and the results could have negative effects on our ability to market the product.

As a condition of approval for XIAFLEX for Dupuytren’s, the FDA required a single post-marketing requirement and several post-marketing commitments. The post-marketing requirement is to conduct a study to evaluate the potential for antibodies to XIAFLEX to interfere with certain other human proteins that are similar to the proteins in XIAFLEX. No new clinical studies are required as part of this evaluation. The post-marketing commitments are generally related to the manufacturing and testing of XIAFLEX. The results of the required and voluntary investigations could be time-consuming and costly and the results could have negative effects on our ability to market the product.

For XIAFLEX for Dupuytren’s and Testim, we are required to implement a REMS. Failure to comply, or the cost of compliance with such REMS or any future REMS, may harm our business.

The FDA is authorized to require us as the sponsor of an approved or unapproved marketing application to submit a proposed REMS if the FDA determines that a REMS is necessary to ensure that the benefits of a drug outweigh the risks of the drug. Failure to comply with the requirements of the approved REMS can render the drug misbranded. A violation of a REMS requirement is subject to civil penalties. Complying with the requirements of a REMS can be costly and time-consuming and adversely affect our operations.

As a condition of approval for XIAFLEX for Dupuytren’s, the FDA required a REMS. The goal of the REMS is to inform and train healthcare providers about the risks of tendon rupture, serious adverse reactions affecting the injected extremity, and the potential risk of serious hypersensitivity reactions (including the potential for anaphylaxis) associated with XIAFLEX. The REMS consists of a medication guide, a

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communication plan, and a timetable for submission of assessments of the REMS. The communication plan includes a Dear Healthcare Provider Letter and educational materials (i.e., training guide and procedure training video).

On May 7, 2009, the FDA announced that it was requiring the manufacturers of two prescription topical testosterone gels, Solvay S.A. (since acquired by Abbott) and Auxilium, to make changes to the prescribing information and develop REMS for the products. The FDA stated that it was requiring this action after it became aware, through spontaneous post-marketing adverse event reports and peer-reviewed biomedical literature, of cases of secondary exposure of children to testosterone due to drug transfer from adult males using testosterone gel drug products (“transference”). The FDA considered this information to be “new safety information.” We believe that all topical testosterone gels have a potential for transference. Testim’s prescribing information has described the risk and procedures for avoidance of transference since the product was launched in 2003. The changes to the prescribing information for Testim include a “boxed warning”, which is used to highlight warning information that is especially important to the prescriber. The goal of the REMS is to inform patients about the serious risk of transference or secondary exposure associated with the use of Testim and Abbot’s AndroGel. The REMS includes assessments and a Medication Guide to inform patients. The revised prescribing information and REMS for Testim was approved in September 2009.

We may not be able to obtain or maintain orphan drug exclusivity for our products or product candidates, and our competitors may obtain orphan drug exclusivity prior to us, which could significantly harm our business.

Some jurisdictions, including Europe and the U.S., may designate drugs intended to treat relatively small patient populations as orphan drugs. The FDA granted orphan drug status to XIAFLEX in the U.S. for the treatment of Dupuytren’s and Peyronie’s. Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation may not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the U.S., specific tax credits. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to 10 years in Europe and for a period of seven years in the U.S. Maintaining orphan drug designations and orphan drug exclusivity for XIAFLEX for the treatment of Dupuytren’s and Peyronie’s may be critical to their success. Our competitors may obtain orphan drug exclusivity for products competitive with our product candidates before we do, in which case we would be excluded from that market. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it. For example, if a competitive product is shown to be different or clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product. In addition, even if we obtain orphan drug exclusivity for any of our product candidates, a viable commercial market may never develop and we may never derive any meaningful revenues from the sales of these products.

We may not be able to develop product candidates into viable commercial products, which would impair our ability to grow and could cause a decline in the price of our stock.

The process of developing product candidates, such as XIAFLEX for the treatment of Peyronie’s, Frozen Shoulder syndrome, or cellulite, involves a high degree of risk and may take several years. Developing product candidates is very expensive and will have a significant impact on our ability to generate profits. Product candidates may fail to reach the market for several reasons, including:

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Success in the preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Currently, there is substantial congressional and administration review of the regulatory approval process for drug candidates in the U.S. Any changes to the U.S. regulatory approval process could significantly increase the timing or cost of regulatory approval for our product candidates making further development uneconomical or impossible.

Our product development efforts also could result in large and immediate write-offs, significant milestone payments, incurrence of debt and contingent liabilities or amortization of expenses related to intangible assets, any of which could negatively impact our financial results. Additionally, if we are unable to develop our product candidates into viable commercial products, we will be reliant solely on sales of our currently approved products for our revenues, potentially limiting our growth opportunities.

If clinical trials for our product candidates are delayed, we would be unable to commercialize our product candidates on a timely basis, which could materially harm our business.

Clinical trials that we may conduct, or that may be conducted by our partners, may not begin on time or may need to be restructured or temporarily suspended after they have begun. Clinical trials can be delayed or may need to be restructured for a variety of reasons, including delays or restructuring related to:

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We have three projects currently in clinical development, specifically XIAFLEX for the treatment of Peyronie’s, Frozen Shoulder syndrome and cellulite. Completion of clinical trials for each product candidate will be required before commercialization. If we experience delays in, or termination of, clinical trials, or fail to enroll patients in clinical trials in a timely manner, or if the cost or timing of the regulatory approval process increases, our financial results and the commercial prospects for our product candidates will be adversely impacted. In addition, our product development costs would increase and our ability to generate additional revenue from new products could be impaired.

Risks Related to Intellectual Property

We have only limited patent protection for our products and our product candidates, and we may not be able to obtain, maintain and protect proprietary rights necessary for the development and commercialization of our products or our product candidates.

Our business and competitive positions are dependent upon our ability to obtain and protect our proprietary position for our products and our product candidates in the U.S., Canada, Europe and elsewhere throughout the world. We attempt to protect our intellectual property position by filing or obtaining licenses to patents and patent applications and, where appropriate, patents and patent applications in other countries related to our proprietary technology, inventions and improvements that are important to the development of our business.

Our and our licensors’ patents and patent applications may not protect our technologies and products because, among other things:

If we fail to obtain adequate patent protection for our products, our ability to compete could be impaired.

We may not control the patent prosecution, maintenance or enforcement of our in-licensed technology. Consequently, such licensed patents could be held invalid or unenforceable or could have claims construed in a manner adverse to our interests in litigation, which we would not control or to which we would not be a party. If any of the intellectual property rights of our licensors is found to be invalid, this could have a material adverse impact on our operations.

Testosterone, the active ingredient in Testim, is off-patent and is included in competing TRT products. In the U.S., the ’968 Patent covers a method for maintaining blood serum testosterone levels for treating a hypogonadal male using Testim and is listed in the Orange Book. The ’968 Patent expires in January 2025. Eight

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additional U.S. patents issued between 2009 and 2011 covering the use of Testim and have been listed in the Orange Book. They expire in April 2023. Our licensor, FCB, also has filed continuation applications that are pending.

We are currently party to patent infringement litigation with Upsher-Smith relating to Upsher-Smith’s intention to market a generic version of Testim prior to the January 2025 expiration of the ’968 Patent. See “Competition–TRT Market Competition–Generic Competition” in Part I, Item 1 above for discussion of the Upsher-Smith Litigation. An adverse outcome in the Upsher-Smith Litigation or any other such potential legal action could result in one or more generic versions of Testim being launched in the U.S. before the expiration of the ’968 Patent in January 2025. Since Testim and XIAFLEX for Dupuytren’s are currently our only products, the introduction of a generic version to Testim or Abbott’s AndroGel could have a material adverse effect on our ability to successfully execute our business strategy to maximize the value of Testim as we continue the commercial launch of XIAFLEX for Dupuytren’s.

The standards that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. Limitations on patent protection in some countries outside the U.S. and the differences in what constitutes patentable subject matter in these countries may limit the protection we seek outside of the U.S. In the U.S., issued patent claims may be broadened, narrowed, or even canceled as a result of post- issuance procedures instituted by us or third parties, including reissue, reexamination, and the new supplemental examination procedure enacted as part of the Leahy-Smith America Invents Act. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the U.S. Also, some countries will not grant patents on patent applications that are filed after the public sale or disclosure of the material claimed in the patent application. Failure to obtain adequate patent protection for our proprietary product candidates and technology would impair our ability to be commercially competitive in these markets. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or others.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and collaborators upon the commencement of a relationship with us. However, we may not obtain these agreements in all circumstances. Nor can we guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, or that we will have an adequate remedy for any such breach. In addition, adequate remedies may not exist in the event of unauthorized use or disclosure of this information. Others may have developed, or may develop in the future, substantially similar or superior know-how and technology. In addition, our research collaborators and scientific advisors may have contractual rights to publish our data and other proprietary information, subject to our prior review. Publications by our research collaborators and scientific advisors containing such information, either with our permission or in contravention of the terms of their agreements with us, may impair our ability to obtain patent protection or protect our proprietary information. The loss or exposure of our trade secrets, know-how and other proprietary information, as well as independent development of similar or superior know-how, could harm our operating results, financial condition and future growth prospects. Many of our employees and consultants were, and many of our consultants may currently be, parties to confidentiality agreements with other companies. Although our confidentiality agreements with these employees and consultants require that they do not bring to us, or use without proper authorization, any third party’s proprietary technology, if they violate their agreements, we could suffer claims or liabilities.

If we breach any of the agreements under which we license development or commercialization rights to products or technology from others, we could lose license rights that are critical to our business.

We are a party to a number of license and other agreements by which we have rights to use the intellectual property of third parties that are necessary for us to operate our business. In particular, we have obtained the exclusive right to develop and commercialize Testim pursuant to a license agreement with FCB. FCB may

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unilaterally terminate the agreement if we fail to make payments under this agreement and this failure continues for a period of 30 days following written notice to us by FCB. If the agreement is properly terminated by FCB, we may not be able to manufacture or sell Testim.

We have also obtained exclusive worldwide rights from BioSpecifics to develop, market and sell products, other than dermal formulations labeled for topical administration, that contain BioSpecifics’ enzyme, which we refer to as XIAFLEX, for the treatment of Dupuytren’s, Peyronie’s, Frozen Shoulder syndrome and cellulite. Either party may terminate this agreement in the event of bankruptcy or insolvency by the other party. Additionally, either party may terminate this agreement if the other party is in material breach of its obligations under the agreement which continues for a period of 90 days following receipt of written notice of such material breach. We may terminate this agreement in its entirety, or on a country-by-country basis, on an indication-by-indication basis, or on a product-by-product basis, at any time upon 90 days prior written notice to BioSpecifics. If this agreement is properly terminated by BioSpecifics, we may not be able to execute our strategy to commercialize XIAFLEX for Dupuytren’s or to develop and commercialize XIAFLEX for the treatment of Peyronie’s, Frozen Shoulder syndrome, cellulite or future product candidates utilizing BioSpecifics’ enzyme. If this agreement is properly terminated by us, we will retain a non-exclusive license for these rights.

We expect to enter into additional licenses and other similar agreements in the future. These licenses and agreements may impose various development, commercialization, funding, royalty, diligence or other obligations on us. If we breach any of these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which could make it impossible for us to develop, manufacture or sell the products covered by the license.

Disputes may arise with respect to our licensing and other agreements regarding manufacturing, development and commercialization of any products relating to our in-licensed intellectual property. These disputes could lead to delays in or termination of the development, manufacture and commercialization of our products or our product candidates or to litigation and could have a material adverse effect on our business.

If our products or our future products infringe the intellectual property of our competitors or other third parties, we may be required to pay license fees or cease these activities and pay damages, which could significantly harm our business.

Even though our products and our product candidates may be covered by patents, they may nonetheless infringe the patents or violate the proprietary rights of third parties. In these cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to sell and use our products and develop and commercialize our product candidates. We may not, however, be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we were able to obtain rights to a third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors potential access to the same intellectual property.

Third parties may assert patent or other intellectual property infringement claims against us, or our licensors or collaborators, with respect to technologies used in potential product candidates. For example, we are aware of competing intellectual property relating to the TRT gel market. While we currently believe that we have freedom to operate in the TRT gel market, others may challenge our position in the future. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages. We may not have sufficient resources to effectively litigate these claims. Even if we were to prevail, any litigation could be costly and time-consuming and could divert the attention of our management and key personnel from business operations. In addition, any patent claims brought against our licensors or collaborators could affect their ability to carry out their obligations to us.

Furthermore, if a patent infringement suit were brought against us, or our licensors or collaborators, the development, manufacture or potential sale of product candidates claimed to infringe a third party’s intellectual

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property may have to cease or be delayed. Ultimately, we may be unable to commercialize one or more of our product candidates, our patent claims may be substantially limited or may have to cease some portion of our operations as a result of patent infringement claims, which could severely harm our business.

We may have to engage in costly litigation to enforce or protect our proprietary technology or to defend challenges to our proprietary technology by our competitors or collaborators, which may harm our business, results of operations, financial condition and cash flow.

The pharmaceutical field is characterized by a large number of patent filings involving complex legal and factual questions, and, therefore, we cannot predict with certainty whether our licensed patents will be enforceable. Competitors or collaborators may have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests that may have been issued to others. Litigation may be necessary to protect our proprietary rights, and we cannot be certain that we will have the required resources to pursue litigation or otherwise to protect our proprietary rights.

Competitors or collaborators may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement lawsuits, which are expensive and time-consuming. In any such proceeding, a court may decide that a patent of ours or one that we have licensed is not valid or is unenforceable, may narrowly interpret our patent claims or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. In particular, if a competitor were to file a paragraph IV certification under the Hatch-Waxman Act in connection with that competitor’s submission to the FDA of an ANDA for approval of a generic version of any of our products for which we believed we held a valid patent, then we could initiate a lawsuit against such competitor claiming patent infringement and defending the relevant patent’s validity and enforceability. Depending on the facts and circumstances, the FDA may stay the approval of the ANDA for a generic version of any of our products for 30 months so long as we initiate litigation against the filer of the ANDA within 45 days of receiving the paragraph IV certification. If a court found that one of our patents was invalid or not infringed, then the FDA would be permitted to approve the competitor’s ANDA resulting in a competitive generic product. In the event that the FDA did not grant the 30 month stay, the FDA would be permitted to approve the competitor’s ANDA; however, we could engage in legal proceedings, such as an injunction, to attempt to preclude the generic competitor from entering the market during the pendency of the patent litigation, but we may not prevail in which event the competitor could enter the market, despite the ongoing patent litigation. For example, in October 2008, we and our licensor, CPEX (FCB’s predecessor in interest to Testim), received notice that Upsher-Smith filed an ANDA containing a paragraph IV certification seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the ’968 Patent. See “Competition–TRT Market Competition–Generic Competition” in Part I, Item 1 above for discussion of the Upsher-Smith Litigation and Upsher-Smith’s efforts to obtain approval of a generic version of Testim.

Risks Related to Healthcare Reform

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

In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our products profitably. In March 2010, the Patient Protection and Affordable Care Act and the associated reconciliation bill became law (collectively, the Healthcare Reform Law), and it includes a number of healthcare reform provisions and requires most U.S. citizens to have health insurance. Effective January 1, 2010, the Healthcare Reform Law increased the minimum Medicaid drug rebates for pharmaceutical companies, expands the 340B drug discount program, and makes changes to affect the Medicare Part D coverage gap, or “donut hole.” The law Healthcare Reform Law also revised the definition of “average manufacturer price” for reporting purposes (effective October 1, 2010), which could increase the amount of the Company’s Medicaid drug rebates to states. The Healthcare Reform Law

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also imposed a significant annual fee on companies that manufacture or import branded prescription drug and biological products, which began in 2011. Substantial new provisions affecting compliance were also added, which may require us to modify our business practices with healthcare practitioners.

In addition, the Healthcare Reform Law included provisions covering biological product exclusivity periods and a specific reimbursement methodology for biosimilars. As a new biological product, we expect that XIAFLEX will be eligible for 12 years of marketing exclusivity from the date of its approval by the FDA (although this is subject to change as the regulations are enacted). The Healthcare Reform Law also established an abbreviated licensure pathway for products that are biosimilar to or interchangeable with FDA-approved biological products, such as XIAFLEX. As a result, we could face competition from other pharmaceutical companies that develop biosimilar versions of our biological product XIAFLEX that do not infringe our patents or other proprietary rights.

The full effects of the Healthcare Reform Law cannot be known until these provisions are fully implemented and the Centers for Medicare & Medicaid Services and other federal and state agencies issue applicable regulations or guidance. Furthermore, legislation repealing, replacing or modifying all or part of the Healthcare Reform Law may be enacted or courts may issue rulings suspending, interpreting or otherwise affecting all or part of the Healthcare Reform Law, and these changes could significantly alter any advantages or disadvantages to the Company currently stemming from the Healthcare Reform Law. Specifically, any repeal or modification of the exclusivity for biological products could have an adverse effect on our business. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products.

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

Lastly, the Healthcare Reform Law provisions known as the “Physicians Payments Sunshine Act” require reporting to the federal government of all payments in excess of $10 or that aggregate to $100 annually that we make to physicians, including honoraria, consulting fees, payment for research, gifts, speakers’ fees, fees paid for conducting clinical trials, entertainment, travel, education and royalties. Required data submission includes a recipient’s name, address, medical specialty, amount received, date of payment, type of payment (cash, stock, items, or services), and if the payment is related to a specific drug or medical product. Several states currently have similar laws and more states may enact similar legislation. Reporting and potential public disclosure of these expenses may make it more difficult to recruit physicians for assistance with activities that would be helpful or necessary to our business. Tracking and reporting the required expenses may result in considerable expense.

Risks Related to Compliance

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.

We are a relatively small company and we rely heavily on third parties to conduct many important functions. As a biopharmaceutical company, we are subject to a large body of legal and regulatory requirements. In addition, as a publicly traded company we are subject to significant regulations, some of which have either only recently been adopted or are currently proposals subject to change. We cannot assure you that we are or will be in compliance with all potentially applicable laws and regulations. Failure to comply with all potentially applicable federal, state, and foreign laws and regulations could lead to the imposition of fines, result in our exclusion from participation in state and federal healthcare programs, cause the value of our common stock to decline, impede our ability to raise capital or lead to the de-listing of our stock.

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Our controls over external financial reporting may fail or be circumvented.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under the Sarbanes-Oxley Act of 2002, as amended, to report annually on our internal control over financial reporting. If we, or our independent registered public accounting firm, determine that our internal control over financial reporting is not effective, this shortcoming could have an adverse effect on our business and financial results and the price of our common stock could be negatively affected. This reporting requirement could also make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulation concerning control and procedures could have a material effect on our business, results of operation and financial condition. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and as executive officers.

We could be negatively impacted by future interpretation or implementation of federal and state fraud and abuse laws, including anti-kickback laws, false claims laws and federal and state anti-referral laws.

We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws, false claims laws and physician self-referral laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, Department of Defense and Veterans’ health programs. To date, we have not been challenged by a governmental authority under any of these laws.

However, because of the far-reaching nature of these laws, we may be required to alter one or more of our practices to be in compliance with these laws. Health care fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated. Any violations of these laws could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations.

We could become subject to false claims litigation under federal or state statutes, which can lead to civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in federal health care programs. These false claims statutes include the federal False Claims Act, which allows any person and/or the government to bring suit alleging the false or fraudulent submission of claims for payment under federal programs or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action. We could also become subject to similar false claims litigation under state statutes. If we must defend any such action and/or if we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations.

We are required to report pricing information to the Federal and state governments as part of our participation in programs such as the Medicaid Drug Rebate Program, Medicare Part B, and programs run by the Public Health Service, and the Department of Defense. If these reports are not filed in a timely and accurate fashion, we could be subjected to fines and liability under the False Claims Act.

We may be exposed to liability claims associated with the use of hazardous materials and chemicals.

Our research and development activities and our commercial product, Testim, involve the use of testosterone and large amounts of alcohol which are classified as hazardous materials and chemicals. XIAFLEX,

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approved in the U.S. for the treatment of Dupuytren’s, and in development for the treatment of Peyronie’s, Frozen Shoulder syndrome and cellulite, is a biologic product. Biologic products may present a manufacturing health hazard due to risk of infection with the bacterial cell line used to produce the product or with potential bacteriophage contamination with the fermentation. Although we believe that our safety procedures for using, storing, handling, manufacturing and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business and financial condition. To our knowledge, we have not been the subject of any investigation by any agency or authority for failure to comply with any rules or regulations applicable to hazardous materials or chemicals. We do not maintain specific insurance for the handling of biological, hazardous and radioactive materials. We have contracts with third-party providers for the storage and disposal of hazardous waste and believe that any claims against us in these areas would be the responsibility of these third parties. However, we may be held responsible for these claims despite the fact that we have contracted with third parties for the storage and disposal of hazardous waste. If we are exposed to these types of claims, we could be held responsible for liabilities that exceed our financial resources, which could severely affect our operations.

Risks Related to Our Financial Results, Our Need for Additional Financing and Our Stock Price

We incurred significant losses since our inception and may not achieve profitability in the foreseeable future.

We have incurred significant losses since our inception, including net losses of $32.9 million for the twelve months ended December 31, 2011. As of December 31, 2011, we had an accumulated deficit of $408.1 million. We expect to continue to incur substantial expenses and, accordingly, we may continue to incur additional losses. In order to achieve and maintain profitability, we will need to generate significantly greater revenues from Testim and XIAFLEX for Dupuytren’s and from our pipeline. If we fail to achieve profitability within the time frame expected by investors, the value of our common stock may decline substantially.

Our future results are unpredictable, and therefore, our common stock is a highly speculative investment.

Our future results are unpredictable and our success is dependent upon many factors. Accordingly, you must consider our prospects in light of the risks and difficulties we may encounter. Our stock price may be volatile and you may lose some or all of your investment. For the foreseeable future, if we are unable to grow sales of our products and out-licensing revenues, we will be unable to increase our revenues or achieve profitability and we may be forced to delay or change our current plans to develop our product candidates.

Our results of operations and earnings may not meet guidance or expectations.

We provide public guidance on our expected results of operations for future periods. This guidance is comprised of forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this Report on Form 10-K and in our other public filings and public statements, and is based necessarily on assumptions we make at the time we provide such guidance. Our guidance may not always be accurate. If, in the future, our results of operations for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could decline significantly

If our financial resources and sources of liquidity are not sufficient, we may be required to limit, scale back or cease our operations.

Based on our current plans and expectations, we believe that our existing financial resources and sources of liquidity will be sufficient to meet our anticipated operating requirements until such time as we are profitable. If

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our existing resources are insufficient to satisfy our liquidity requirements, we may need to borrow money or sell additional equity or debt securities. We may not be able to borrow money on commercially reasonable terms. Moreover, the terms of the sale of any equity or debt securities may not be acceptable to us and could result in substantial dilution of your investment. If we are unable to obtain this additional financing, we may be required to:

We may become subject to stockholder activism efforts that each could cause material disruption to our business.

Certain influential institutional investors and hedge funds have taken steps to involve themselves in the governance and strategic direction of certain companies due to governance or strategic related disagreements between such companies and such stockholders. If we become subject to such stockholder activism efforts, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business and adversely affect the market price of our common stock.

Outstanding options could result in substantial dilution.

At the end of the period covered by this Report, stock options to purchase 7,262,718 shares of common stock were outstanding. In addition, as of December 31, 2011, a total of 3,541,968 stock options are available for grant under our 2004 Equity Compensation Plan amended and restated as of June 16, 2011. A total of 1,555,595 of the outstanding options were “in the money” and exercisable as of December 31, 2011. “In the money” means that the current market price of the common stock is above the exercise price of the shares subject to the option. The issuance of common stock upon the exercise of these options could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.

Provisions in our certificate of incorporation and bylaws and under Delaware law may prevent or frustrate a change in control in management that stockholders believe is desirable.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

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The affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least two-thirds of our shares of capital stock entitled to vote.

In addition, Section 203 of the General Corporation Law of the State of Delaware prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

None.

Malvern. We currently lease approximately 62,100 square feet of space for our headquarters in Malvern, Pennsylvania, of which approximately 57,100 square feet is dedicated to office space and approximately 5,000 square feet is dedicated to warehousing and packaging operations. The initial term of this lease ends on December 31, 2013.

Horsham. In Horsham, Pennsylvania, we lease an approximately 50,000 square foot biological manufacturing facility that we are using to produce the active ingredient of XIAFLEX. We also lease approximately 56,000 square feet of laboratory, warehouse and office space in two other Horsham locations. The initial terms of these leases end on January 1, 2017, March 31, 2017 and July 31, 2022, respectively. In general, our properties are well maintained, adequate and suitable for the purposes for which they are used.

On December 4, 2008, we and CPEX (predecessor in interest to FCB) filed a lawsuit against Upsher-Smith for infringement of the ’968 Patent, which covers Testim. The lawsuit was filed in the United States District Court for the District of Delaware. We and FCB are seeking a judgment (1) declaring that Upsher-Smith’s act of filing the Abbreviated New Drug Application seeking approval from the FDA to market a generic version of Testim prior to the January 2025 expiration of the ’968 Patent is an act of infringement, (2) declaring that the making, using or selling of the product for which Upsher-Smith is seeking approval infringes the ’968 Patent, (3) ordering that the effective date of the FDA’s approval of the product not be until the expiration of the ’968 Patent, (4) enjoining Upsher-Smith from making, using or selling the product for which it seeks approval until the expiration of the ’968 Patent, and (5) awarding Auxilium and FCB their costs and expenses in the action. We and CPEX filed this lawsuit under the Hatch-Waxman Act in response to the notice from Upsher-Smith of its filing of an ANDA with the FDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for testosterone gel. Upsher-Smith has alleged that its proposed generic version of Testim would not infringe the ’968 Patent, and that the ’968 Patent is invalid. The Paragraph IV certification notice states that Upsher-Smith does not believe that the testosterone gel product for which it is seeking approval infringes the ’968 Patent and that it seeks to market its generic product before the expiration of the ’968 Patent. The ’968 Patent is listed in the Orange Book, published by the FDA, and will expire in January 2025. The district court has issued a protective order prohibiting disclosure of confidential information relating to the litigation. On December 13, 2011, the district court issued an order administratively closing the case. This administrative closure has effectively stayed the case, but has not dismissed it. All discovery obligations of the parties continue to be in effect. See “Competition–TRT Market Competition–Generic Competition” included in Part I, Item 1 above for discussion of the Upsher-Smith Litigation and Upsher-Smith’s efforts to obtain approval of a generic version of Testim.

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On February 15, 2011, we filed a complaint in the Court of Common Pleas, Chester County, Pennsylvania against BioSpecifics alleging that BioSpecifics had breached the 2008 license agreement between us and them by its commencement of clinical trials for the use of injectable collagenase to treat canine lipomas without the prior knowledge and approval of the parties’ joint development committee. Also, on May 2, 2011, BioSpecifics filed a complaint in the Supreme Court of the State of New York, Nassau County, Commercial Division, against Recipharm AB, RecipharmCobra Holdings Limited (the Recipharm entities, collectively “Cobra”) and us claiming that we had breached an oral contract with BioSpecifics and interfered with a contract BioSpecifics has with Cobra. On August 31, 2011, Auxilium and BioSpecifics entered into a settlement agreement (the “Settlement Agreement”), pursuant to which the parties settled all pending litigation and resolved other outstanding disputes between them. Pursuant to the Settlement Agreement, we reserved certain rights and the parties have agreed to certain clarifications as to intellectual property matters and amounts owed between the parties. As a result of this settlement, Auxilium and BioSpecifics will be co-owners of the ‘560 Patent. The effectiveness of the Settlement Agreement was conditioned, in part, upon the execution by the parties of the amended and restated BioSpecifics Agreement which was also executed on August 31, 2012. For a discussion of the BioSpecifics Agreement, see above under “Strategic Relationships/XIAFLEX/License from BioSpecifics.

Not applicable.

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PART II

Market Information

Our common stock is traded on The NASDAQ Global Market under the symbol “AUXL.” The following table sets forth the high and low closing sales prices per share for our common stock for the periods indicated, as reported by The NASDAQ Global Market:

Holders of Record

As of February 23, 2012, there were approximately 74 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

Dividends

We have never paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

The information under the heading “Equity Compensation Plan Information” in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on June 21, 2012 to be filed with the SEC, is incorporated herein by reference.

Recent Sales of Unregistered Securities

During the quarter ended December 31, 2011, we did not issue any unregistered shares of our common stock.

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Issuer Purchases of Equity Securities

The following table summarizes the Company’s purchases of its common stock for the three months ended December 31, 2011:

(1) Represents shares purchased from Alan Wills, Executive Vice President- Corporate Development of the Company, pursuant to the Company’s 2004 Equity Compensation Plan to satisfy such individual’s tax liability with respect to the vesting of resticted stock issued in accordance with Rule 16 b-3 of the Securities Exchange Act of 1934.

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Comparative Stock Performance Graph

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total stockholder return of (i) the NASDAQ Composite Index, and (ii) the NASDAQ Biotechnology Index, assuming an investment of $100 on December 31, 2006, in each of our common stock; the stocks comprising the NASDAQ Composite Index; and the stocks comprising the NASDAQ Biotechnology Index.

Comparison of Cumulative Total Return* Among Auxilium Pharmaceuticals, Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index

*Total return assumes $100 invested on December 31, 2006 in our common stock, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index and reinvestment of dividends through fiscal year ended December 31, 2011.

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ITEM 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except share and per share data)

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Report. The consolidated statements of operations data for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 have been derived from our audited consolidated financial statements, which are included elsewhere in this Report. The consolidated statement of operations data for the years ended December 31, 2008 and 2007 and the consolidated balance sheet data as of December 31, 2009, 2008 and 2007 have been derived from audited financial statements which do not appear in this Report. The historical results presented are not necessarily indicative of results to be expected in any future period.

(2) The increase in weighted average common shares outstanding is primarily the result of the issuances of common shares in the September 2009 public offering.

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You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a specialty biopharmaceutical company with a focus on developing and marketing products to predominantly specialist audiences. We reported net revenues in 2011 of $264.3 million, an increase of 25% over the $211.4 million reported in 2010. Our net loss for 2011 was $32.9 million ($0.69 per share) compared to $51.2 million ($1.08 per share) of net loss in 2010. We are a fully integrated company and had approximately 530 employees at the end of 2011, including approximately 298 employees in our commercial organizations, 118 employees in manufacturing and quality, 68 employees in research and development and 46 employees in administrative support. As of December 31, 2011 we had $154.3 million in cash, cash equivalents and short-term investments and no debt.

We currently market two products: Testim^® testosterone gel and XIAFLEX^® (collagenase clostridium histolyticum). Testim is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration. XIAFLEX is a proprietary, injectable collagenase enzyme approved by the United States (“U.S.”) Food and Drug Administration (“FDA”) for the treatment of Dupuytren’s contracture (“Dupuytren’s”) in adult patients with a palpable cord.

Testim is approved in the U.S., Canada and much of Europe. We commercialize Testim in the U. S., while Ferring International Center S.A. (“Ferring”) and Paladin Labs Inc. (“Paladin”) market Testim on our behalf in certain European countries and Canada, respectively. Testim worldwide net revenues for 2011 were $207.9 million, an 8% increase over the $193.0 million recorded in 2010. Testim represents an attractive and profitable revenue platform in the Testosterone Replacement Therapies (“TRT”) market in the U.S. which was $1.6 billion in 2011 and exhibited growth of 24% as more large pharmaceutical companies launched products to this underserved market. The once daily gel segment of the TRT market in which Testim competes has experienced a 27% compound annual growth rate since 2007, and represents 88% or $1.4 billion of the total U.S. TRT market. Our sales force of approximately 150 representatives focuses on approximately 12% of the approximately 165,000 physicians in the U.S. who prescribe TRT products. These physicians are responsible for roughly half of all gel TRT prescriptions. Our strategy to focus on these high prescribing physicians combined with our tactics with select managed care organizations resulted in a minimal loss of market share in 2011, despite the new competitors in the market. Although our goal is to maximize our total TRT market share organically through 2012 in the face of aggressive competition, we will also continue to assess any opportunities that may arise to supplement our current targeted focus on the most prolific writers of gel TRT prescriptions.

Dupuytren’s is a condition that affects the connective tissue that lies beneath the skin in the palm. As the disease progresses, the collagen deposits form a cord that stretches from the palm of the hand to the base of the finger. Once this cord develops, the patient’s fingers contract and the function of the hand is impaired. Prior to approval of XIAFLEX, surgery was the only effective treatment. We launched XIAFLEX for the treatment of Dupuytren’s in the U. S. in March 2010 with a sales force of approximately 65 employees and 15 reimbursement specialists. They are supported by a group of approximately 15 Medical Science Liaisons. We have partnered

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with Pfizer Inc. (“Pfizer”) for development and commercialization of XIAPEX^® (European Union (“EU”) tradename for XIAFLEX) for Dupuytren’s and Peyronie’s disease (“Peyronie’s”) in Europe and certain Eurasian countries. Pfizer received marketing authorization for Dupuytren’s by the European Commission on February 28, 2011 and began sales in certain countries of the EU in April 2011. We have partnered with Asahi Kasei Pharma Corporation (“Asahi Kasei”) for development and commercialization of XIAFLEX for Dupuytren’s and Peyronie’s in Japan. We have also partnered with Actelion Pharmaceuticals Ltd. (“Actelion”) for development and commercialization of XIAFLEX for Dupuytren’s and Peyronie’s in Australia, Brazil, Canada and Mexico. We are seeking a partner or partners for development and commercialization in the rest of the world. Worldwide net revenues for XIAFLEX were $56.4 million for the year ending December 31, 2011, compared to $18.4 million in 2010.

Our current product pipeline includes:

Phase III:

Phase IIa:

Phase Ib:

In addition to the above, we have an exclusive option for the exclusive rights to pursue any additional indications for XIAFLEX (other than dermal formulations labeled for topical administration).

Our vision is to build a rapidly growing, profitable and sustainable biopharmaceutical company. To achieve this vision we plan to:

In the short term we plan to focus on execution with respect to Testim, XIAFLEX for Dupuytren’s and bringing additional indications for XIAFLEX to market. We believe that we are well positioned to become a profitable and sustainable specialty biopharmaceutical company by executing on these few initiatives. Although our current sales forces for Testim and XIAFLEX have achieved 2011 U.S. revenues per employee of approximately $1.4 and $0.7 million respectively, we believe that we can further leverage this investment and our expertise in clinical development and regulatory strategy with the addition of new products. Because we do not believe we have to acquire additional products to achieve our vision, we plan to be opportunistic and nimble with respect to corporate development and licensing opportunities. We will be open to add marketed products and/or product opportunities that have a good strategic fit and which are fiscally responsible. Although we may seek products that have a therapeutic fit with XIAFLEX or Testim, we believe that the core competencies we have with respect to drug development and commercialization can be applied to a number of other specialty focused therapeutic areas.

The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes several phases of nonclinical and clinical study to collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease indication. There are many difficulties and uncertainties inherent in research and development and the

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introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and incurs significant cost. Failure can occur at any point in the process, including after the product is approved based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. Consequently, it can be very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval, and which will be commercially viable and generate profits for the Company. Successful results in preclinical or phase I/II clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.

Phase I Clinical Trials

Phase I human clinical trials begin when regulatory agencies allow a request to initiate clinical investigations of a new drug or product candidate and usually involve small numbers of healthy volunteers or subjects. The trials are designed to determine the safety, metabolism, dosing and pharmacologic actions of a drug in humans, the potential side effects of the product candidates associated with increasing drug doses and, if possible, to gain early evidence of the product candidate’s effectiveness. Phase I clinical studies generally take from 6 to 12 months or more to complete.

Phase II Clinical Trials

Phase II clinical trials are conducted on a limited number of patients with the targeted disease, usually involving no more than several hundred patients, to evaluate appropriate dosage and the effectiveness of a drug for a particular indication or indications and to determine the common short-term side effects and risks associated with the drug. An initial evaluation of the drug’s effectiveness on patients is performed and additional information on the drug’s safety and dosage range is obtained. Our Phase II clinical trials typically include up to 200 patients and may take approximately two years to complete.

Phase III Clinical Trials

Phase III clinical trials are performed after preliminary evidence suggesting effectiveness of a drug has been obtained. Phase III clinical trials are intended to gather additional information about the effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. They typically include controlled multi-center trials and involve a larger target patient population, typically including from several hundred to several thousand patients to ensure that study results are statistically significant. During Phase III clinical trials, physicians monitor patients to determine efficacy and to gather further information on safety. These trials are generally global in nature and are designed to generate data necessary to submit the product to regulatory agencies for marketing approval. Phase III testing varies and can often last from 2 to 5 years.

Regulatory Review

If a product successfully completes a Phase III clinical trial and is submitted to governmental regulators, such as the FDA in the United States or the EMA in the European Union, the time to final marketing approval can vary from six months (for a U.S. filing that is designated for priority review by the FDA) to several years, depending on a number of variables, such as the disease state, the strength and complexity of the data presented, the novelty of the target or compound, risk-management approval and the time required for the agency(ies) to evaluate the submission. There is no guarantee that a potential treatment will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.

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Operational Highlights

XIAFLEX

2011 sales of XIAFLEX in the U.S. represented approximately 13,900 vials of XIAFLEX compared to approximately 4,500 vials in 2010, an increase of approximately 207%.

Beginning January 1, 2011, a new XIAFLEX-specific J-code (J0775) was available for use in the U.S. to identify XIAFLEX for obtaining reimbursement from Medicare, Medicaid and commercial health plans. Also, beginning January 1, 2012, new XIAFLEX-specific Current Procedural Terminology (CPT^®) codes became available for use in the U.S. These CPT codes are used by physicians for reimbursement of their time and skills required for the XIAFLEX injection and manipulation procedures.

On March 9, 2011, we exceeded the target enrollment for the double-blind placebo-controlled phase III program of XIAFLEX for the treatment of Peyronie’s. In excess of 800 patients have been enrolled in the two double blind placebo controlled phase III trials. Top-line data is expected in the first half of 2012.

On March 22, 2011, we announced that we had granted Asahi Kasei exclusive rights to commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Japan. Asahi Kasei will be primarily responsible for the clinical development, regulatory and commercialization activities for XIAFLEX in Japan. We received a $15 million up-front payment from Asahi Kasei in the first quarter of 2011 and we paid BioSpecifics Technologies Corp. (BioSpecifics) approximately $0.8 million as its share of this up-front payment.

On April 11, 2011 we announced that we earned a $30 million regulatory milestone payment (net of contractual deductions) from our EU partner, Pfizer, following the first sale of XIAPEX in the United Kingdom, the first major EU market. In addition, during 2011, we also announced additional regulatory milestones amounting to $15.0 million for the Pfizer launch of XIAPEX in Germany and in Spain. In total, we received $41.1 million in payments from Pfizer, representing the $45.0 million of milestones, net of certain development and regulatory costs that Pfizer was contractually allowed to recoup upon achievement of the UK milestone. XIAPEX is now available for sale in Austria, Denmark, Finland, Germany, Norway, Spain, Sweden, Switzerland and the UK. We are eligible to receive up to $15.0 million in additional regulatory milestone payments for this indication, which will be payable in $7.5 million increments, following Pfizer’s first sale of XIAPEX in each of the remaining major markets of the EU. In addition, we paid BioSpecifics approximately $3.8 million as its share of the $45.0 million of milestone payments.

On June 30, 2011, we announced results from the three-year CORDLESS extension study in Dupuytren’s contracture patients with a nominal recurrence rate of 34.8% for joints previously treated successfully with XIAFLEX. Additionally, 93% of joints that were successfully treated with XIAFLEX did not receive any medical or surgical intervention through three years of follow-up.

On August 31, 2011, we and BioSpecifics announced dismissal of all pending litigation and plans to develop additional indications using XIAFLEX. In connection with this settlement, we and BioSpecifics entered into the Second Amended and Restated Development and License Agreement (the Second Amended and Restated BioSpecifics Agreement), which amended the Amended and Restated Development and License Agreement, dated as of December 17, 2008, between BioSpecifics and us (the Amended and Restated BioSpecifics Agreement). For a further description of the Second Amended and Restated BioSpecifics Agreement, see our Current Report on Form 8-K, dated September 1, 2011.

On September 1, 2011, the Company announced that the active dosing phase for the double-blind placebo-controlled phase III program of XIAFLEX for the treatment of Peyronie’s was completed by the end of August. Top-line data is expected in the second quarter of 2012.

On October 3, 2011, we announced that the first patient had been enrolled in a XIAFLEX phase IIIb Dupuytren’s contracture multicord study. The study is anticipated to enroll approximately 60 patients and top-line results are expected in the second half of 2012.

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On December 1, 2011, we announced that the first patient had been dosed in our open-label phase IIa trial of XIAFLEX for Frozen Shoulder syndrome. Top-line data are expected in the first half of 2013.

On January 26, 2012, we announced that the first cohort of patients has been dosed in our phase Ib trial of XIAFLEX for the treatment of edematous fibrosclerotic panniculopathy, commonly known as cellulite. Top-line results are expected in the second half of 2012.

On February 23, 2012, we announced that we had granted Actelion exclusive rights to commercialize XIAFLEX for the treatment of Dupuytren’s and Peyronie’s in Australia, Brazil, Canada and Mexico. Actelion will be primarily responsible for the clinical development, regulatory and commercialization activities for XIAFLEX in these markets. We expect to receive a $10 million up-front payment from Actelion in the first quarter of 2012, and, when received, we will be required to pay BioSpecifics approximately $0.6 million of this up-front payment.

Testim

Worldwide revenues for Testim were $207.9 million for the year ending December 31, 2011, up 8% over 2010. Testim U.S. revenues were up 8% over the prior year to a record $205.1 million. Testim U.S. prescriptions grew by 9% over 2010. Total prescriptions for the testosterone replacement gel market segment grew 15% in 2011. Testim’s total prescription market share of the once daily gel segment at the end of December 2011 was 20%, compared to 22% at the end of December 2010.

For a discussion on the expected increase in competition in the TRT market, see “Competition – TRT Market Competition” above.”

Healthcare Reform Legislation

On March 23, 2010, the PPACA was enacted in the United States, which contains several provisions that impact our business. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include:

Beginning in 2011, PPACA required that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap, which is known as the “donut hole.” Also, beginning in 2011, we were assessed our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and Veterans Administration and PHS discount programs) made during the previous year. This new legislation did not have a material effect on our results of operations or financial position for 2011 and, based on our current understanding, we expect that its impact for 2012 will also not be material. The U.S. government is currently drafting rules and regulations for provisions of the law which we will provide further guidance on the full effects of the new legislation.

Section 6002 of the PPACA, known as the “Physician Payment Sunshine Provision,” requires reporting by pharmaceutical manufacturers to the federal government of certain payments and other transfers of value to physicians and teaching hospitals in excess of $10 or that aggregate to $100 per recipient annually. Examples of

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such payments or transfers of value include honoraria, consulting fees, payment for research, gifts, speakers’ fees, fees paid for conducting clinical trials, entertainment, travel, education and royalties. Several states currently have similar laws and more states may enact similar legislation.

Net revenues

We record product sales net of allowances for prompt payment discounts, fees to wholesalers based on shipment activity under the terms of wholesaler service agreements, managed care contract rebates and government health plan charge backs, product coupons and product returns. To date, all of our net revenues have been generated by the sales and out-licensing of two products- Testim and XIAFLEX. We sell Testim in the U.S. to pharmaceutical wholesalers. We do not anticipate that sales of Testim outside of the U.S., pursuant to our current agreements for international distribution rights of Testim, will have a material impact on our revenues or profitability. We began selling XIAFLEX in the U.S. through a network of wholesalers, specialty distributors and specialty pharmacies in March 2010. In the first quarter of 2011, we began recognizing revenue at the time of shipment to these customers. Prior to 2011, we deferred the recognition of revenue, and related product costs, of XIAFLEX product shipments until the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowance of $0.1 million) and the net loss for 2011 includes a benefit of $1.7 million, or $0.4 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

Our revenues from product sales may fluctuate due to:

We use a third-party logistics company, ICS, a division of AmerisourceBergen Corporation (“ABC”) for commercial distribution of Testim and XIAFLEX. The majority of Testim sales in the U.S. are to pharmaceutical wholesalers that, in turn, distribute product to chain and other retail pharmacies, hospitals, mail-order providers and other institutional customers. All XIAFLEX sales in the U.S. are to a small network of third party specialty distributors and specialty pharmacies that will generally distribute XIAFLEX to hospitals and to physician practices. Over 90% of our product sales are to three customers: ABC, Cardinal Health, Inc. and McKesson Corporation.

Outside of the U.S., we currently rely on third parties to market, sell and distribute our products. For Canada, we have an agreement with Paladin to market and distribute Testim. We also have an agreement with Ferring to market and distribute Testim in Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and the U.K. In December 2008, we entered into a development, commercialization and supply agreement with Pfizer (the “Pfizer Agreement”) under which we sub-licensed our commercialization rights for Dupuytren’s and Peyronie’s for the 27 countries which at that time were included in the EU and 19 additional Eastern European and Eurasian countries (the “Pfizer Territory”). In March 2010, we entered into a development, commercialization and supply agreement with Asahi Kasei (the “Asahi Agreement”) under which we sub-licensed our commercialization rights for Dupuytren’s and Peyronie’s for the Japanese market. In February 2012, we entered into a collaboration agreement with Actelion (the “Actelion Agreement”) for development and commercialization of XIAFLEX for Dupuytren’s and Peyronie’s in Australia, Brazil, Canada and Mexico. We are currently evaluating our options for selling XIAFLEX in other indications and territories throughout the rest of the world.

The up-front and milestone payments we have received under our out-licensing agreements with Pfizer and Asahi Kasei are being amortized to revenue, net of associated transaction costs, over the estimated term of the related agreement. We expect that the up-front payment we expect to receive under our out-licensing agreement

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with Actelion will be similarly amortized. When a milestone payment is earned under the respective contract, we record as revenue a cumulative catch-up adjustment for the period of time since contract commencement through the date of the milestone and the remaining amount of the milestone is amortized over the remaining estimated term of the contract. These agreements also include payment of increasing, tiered, double-digit royalties on all revenues recorded by the licensee in its territory. These royalty payments are recognized when earned as payment for the product supplied to the licensee. The up-front and milestone payments we have received from Ferring and Paladin are also being amortized to revenue over the respective contact life of each of these agreements.

Under contractual agreements, we pay a fee for service to our wholesaler, specialty distributor and specialty pharmacy customers based on shipment activity. The agreements also provide for targeted levels of required inventory. Otherwise, distributors independently manage their inventories with no intervention by us. Aside from the service fees required under these agreements, we do not offer incentives for wholesalers to take shipment of product.

Cost of goods sold

Costs of goods consist of the following types of costs:

We do not anticipate any material changes in our gross margin rate on Testim sales in the U.S. In 2012, we anticipate our gross margins for Testim sales outside the U.S. will continue to be significantly lower than those seen in the U.S. This is due to a combination of factors which include the terms of our distribution agreements.

Gross margin on XIAFLEX product sales for 2011 reflects the benefit of past claims from our licensor of approximately $1.9 million which by contract we were allowed to offset the royalty payable to BioSpecifics. Since no further such benefit exists, the gross margin rate will decrease for 2012. As we continue to market XIAFLEX, we may experience variability in our gross margin rate and it is difficult to estimate when we will achieve a more predictable steady state. Factors influencing the gross margin on XIAFLEX will include the selling price per vial and the cost of product manufactured. Although we utilize a manufacturing resource planning system for production planning and inventory control, it is not uncommon in biologics manufacturing to experience unusual charges and write-offs in the initial years of commercial production. See “Risk Factors—Inventories produced during a launch period may not be needed and could result in additional charges for excess inventories” and “Risks Related to the Manufacture of XIAFLEX—We have limited experience in manufacturing pharmaceutical and biologic products and may encounter difficulties in the manufacture of the active ingredient of XIAFLEX at our facilities in Horsham, Pennsylvania which could materially adversely affect our results of operations or delay or disrupt manufacture of XIAFLEX.”

It is our policy to continually evaluate and provide reserves for inventory on hand that is in excess of expected future demand. In making this evaluation, we must make judgments concerning future product demand and monitor the expiration dates of our products. Prior to the approval and launch of XIAFLEX, we produced finished packaged inventories sufficient to meet a significant demand. In 2010, we concluded that $3.9 million of this inventory may expire prior to its expected sale and charged this cost to Cost of goods sold for 2010. During 2011, $2.8 million of this reserve was utilized in the physical disposal of such expiring inventory. While we

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believe that additional potential obsolescence was not probable as of December 31, 2011, it is possible that we may be required in future periods to record additional charges for additional excess inventories given the limited historical information with the recent launch of XIAFLEX. It is also our policy to limit the amount of Horsham overhead costs capitalized as inventory to those amounts consistent with normal capacity levels and record as period costs those overhead costs that represent excess or idle capacity. To date, we have not experienced production below normal capacity levels. However, it is possible in the future that production could fall below normal capacity and result in recognition of period expense for excess or idle capacity. The incurrence of such costs would decrease overall XIAFLEX margins compared to those reported in 2011 and prior years since manufacturing overhead representing excess capacity will be immediately expensed as cost of goods sold.

Under our license with BioSpecifics, we paid BioSpecifics 8.5% of the up-front and milestone payments received from Pfizer under the Pfizer Agreement and 5.0% of the up-front payment received under the Asahi Agreement, and we expect to pay BioSpecifics a specified percentage of the up-front payment we expect to receive under the Actelion Agreement. These payments to BioSpecifics relating to the Pfizer Agreement and the Asahi Agreement are, and we expect the payment relating to the Actelion Agreement to be, amortized as a cost of goods sold on a straight-line basis over the estimated life of the respective contract. When a milestone payment is earned, BioSpecifics’ share of the milestone payment is recognized as cost of goods sold, or deferred costs, in proportion to the related amount revenue catch-up adjustment or deferral. We are obligated to pay BioSpecifics 8.5% of all future milestone payments and XIAPEX sales under the Pfizer Agreement, a specified percentage (dependent on indication) of all future milestone payments and XIAFLEX sales under the Asahi Agreement and the Actelion Agreement, and, on a country-by-country and product-by-product basis, a specified royalty percentage of all other XIAFLEX sales.

Research and development

Our research and development expenses consist of:

Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, the cost to complete projects in development cannot be reasonably estimated. XIAFLEX is in phase III of development for the treatment of Peyronie’s disease, Phase II for Frozen Shoulder syndrome and Phase I for cellulite. Results from clinical trials may not be favorable. Further, data from clinical trials is subject to varying interpretation, and may be deemed insufficient by the regulatory bodies reviewing applications for marketing approvals. As such, clinical development and regulatory programs are subject to risks and changes that may significantly impact cost projections and timelines. See “Risk Factors—We may not be able to develop product candidates into viable commercial products, which would impair our ability to grow and could cause a decline in the price of our stock.” We expect our research and development expenses in 2012 for our current product pipeline to be comparable to spending in 2011. However, the current regulatory and political environment at the FDA, could lead to increased data requirements which could impact regulatory timelines and costs. We could also experience further significant increases in our expenditures to develop any other potential new product candidates that we would in-license or acquire.

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Selling, general and administrative

Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel, marketing and promotion costs, professional fees and facilities costs. We anticipate increases in selling, general and administrative expenses principally due to sales and marketing costs associated with Testim and XIAFLEX, and increases in information technology expense and other administrative activities.

Results of Operation

Years Ended December 31, 2011 and 2010

Change in XIAFLEX Revenue Recognition

As discussed in Note 1 (e) to the consolidated financial statements contained herein, in the first quarter of 2011 we began recognizing revenue for XIAFLEX sales at the time of shipment to its specialty distributor, specialty pharmacy and wholesale customers. In 2010, we deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. As a result of this change in revenue recognition, net revenues for 2011 include a benefit of $1.8 million (representing revenue previously deferred, net of allowances of $0.1 million) and the net loss for 2011 includes a benefit of $1.7 million, or $0.04 per share (representing the net revenue benefit partially offset by the related cost of goods sold).

Net revenues. Net revenues for the two years ended December 31, 2011 comprise the following:

Testim

The increase in Testim net U.S. revenues for 2011 compared to 2010 resulted primarily from growth in Testim prescriptions resulting from increased demand and increases in pricing, partially offset by an increase in revenue allowances. According to NPA data from IMS, a pharmaceutical market research firm, Testim total prescriptions for 2011 grew 9% compared to 2010. We believe that Testim prescription growth in the 2011 period over the 2010 period was driven by physician and patient acceptance that Testim provides better patient outcomes, and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians, as well as our tactics with select managed care organizations. Testim net U.S. revenues for 2011 also benefited from price increases having a cumulative impact of 9% over 2010. International

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contract revenues shown in the above table represent the amortization of deferred up-front, milestone payments and royalty payments we previously received under our out-licensing agreements.

XIAFLEX

Including the change in revenue recognition discussed above, total revenues for XIAFLEX for 2011 were $56.4 million compared to $18.4 million for the comparable period of 2010. Net revenues for 2011 include $42.2 million of net U.S. product sales of XIAFLEX compared to the $14.1 million for 2010. XIAFLEX international contract revenues relate to our out-licensing agreements for XIAFLEX and represent cumulative catch-up adjustments for milestone payments received during the period, the ongoing amortization of deferred up-front and milestone payment amounts and royalties received. The increase in XIAFLEX international contract revenue for 2011 compared to 2010 is principally due to cumulative catch-up revenue adjustments aggregating $4.8 million related to the $45.0 million of regulatory milestones earned under the Pfizer Agreement during 2011, and incremental revenue amortization relating to these milestone payments and the $15.0 million up-front payment received under the Asahi Agreement.

Revenue allowances

Revenue allowances as a percentage of gross U.S. revenues for 2011 compared to 2010 increased due to higher levels of managed care contract rebates and government health plan charge-backs resulting from certain new managed care contracts for Testim acquired in 2011 and from 2011 price increases, partially offset by a lower revenue allowance percentage on XIAFLEX gross U.S. revenues.

Cost of goods sold. Cost of goods sold were $55.7 million and $49.7 million for the years ended December 31, 2011 and 2010, respectively. Cost of goods sold reflects the cost of product sold, royalty obligations due to our licensors, and the amortization of the deferred costs associated with the Pfizer Agreement and Asahi Agreement. The increase in cost of goods sold in 2011 over 2010 was directly attributable to the increase in products sold, offset in part by a non-recurring $3.9 million provision taken in 2010 for short dated XIAFLEX inventory. The gross margin rate on our net revenues was 79% for 2011 compared to 76% for 2010. The increase in the gross margin rate is principally due to the non-recurring $3.9 million inventory provision taken in 2010 and increased high margin XIAFLEX product sales in 2011, offset by the net negative impact of higher Testim rebates and year-over-year price increases on U.S. Testim revenues.

Research and development expenses. We currently have only one product in development, XIAFLEX. A significant portion of the research and development expenses are for the internal personnel and infrastructure costs common to the support of these development efforts. Since we do not allocate these common costs to individual projects for external reporting purposes, we do not report research and development cost by project.

Research and development expenses were $61.9 million and $48.0 million for the years ended December 31, 2011 and 2010, respectively. This increase in expense results principally from activities related to the phase III XIAFLEX clinical trials for Peyronie’s disease, phase IIa trial for Frozen Shoulder syndrome, planning for new XIAFLEX indications and costs related to development of a larger scale XIAFLEX production process.

Selling, general and administrative expenses. Selling, general and administrative expenses were $179.9 million and $164.7 million for the years ended December 31, 2011 and 2010, respectively. The increase in 2011 over 2010 was due primarily to selling and marketing expenses increasing by $13.6 million as a result of the promotional and training activity in support of the launch of XIAFLEX, and targeted XIAFLEX direct-to-consumer spending for Dupuytren’s in the U.S. General and administrative expenses increased by $1.6 million as a result of termination costs related to management changes, offset in part by lower stock-compensation expense.

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Interest income. Interest income was $0.5 million and $0.2 million for the years ended 2011 and 2010, respectively, and relates primarily to interest earned on investment of available cash.

Interest expense. Interest expense in 2011 and 2010 relates primarily to the costs associated with the Company’s two year $30 million revolving credit line which expired under its terms in August 2011.

Income Taxes. At December 31, 2011, we had Federal tax return net operating loss carryforwards of approximately $198.6 million, which will expire in 2021 through 2030, if not utilized, and Federal Orphan Drug and research and development credits of approximately $49.9 million, which will expire in 2020 through 2031, if not utilized. In addition, we had overall state tax return net operating loss carryforwards of approximately $154.3 million, of which $88.3 million relate to Pennsylvania, which will expire 2012 through 2031 if not utilized. Future utilization of Pennsylvania net operating losses is limited to the greater of 20% of Pennsylvania taxable income or $3.0 million per year. The Tax Reform Act of 1986 (the “Act”) provides for a limitation on the annual use of net operating loss and credit carryforwards following certain ownership changes (as defined in the Act) that could limit our ability to utilize these carryforwards. We have conducted a study to determine whether we have experienced any such ownership changes. Based on this study, we have concluded that we have undergone multiple ownership changes in previous years. Accordingly, our ability to utilize the aforementioned carryforwards will be limited on an annual basis. In addition, approximately $10.7 million and $9.4 million of Federal and state net operating loss carryforwards, respectively, may expire prior to utilization.

Years Ended December 31, 2010 and 2009

Net revenues. Net revenues for the two years ended December 31, 2010 comprise the following:

Testim

The increase in Testim net U.S. revenues for 2010 compared to 2009 resulted primarily from substantial growth in Testim prescriptions resulting from increased demand and increases in pricing. According to NPA data from IMS, a pharmaceutical market research firm, Testim total prescriptions for 2010 grew 11% compared to 2009. This prescription growth was consistent with prescription growth of the overall gel market. We believe that Testim prescription growth in the 2010 period over the 2009 period was driven by physician and patient acceptance that Testim provides better patient outcomes, and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Testim net U.S. revenues for 2010 also benefited from price increases having a cumulative impact of 9% over 2009. International contract revenues shown in the above table represent the amortization of deferred up-front and milestone payments and

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royalties we have received under its out-licensing agreements. Testim international contract revenues for 2010 decreased compared to 2009 as a result of the termination of the license and distribution agreement with Ipsen Pharma GmbH (Ipsen) in late 2009. During 2009, the remaining $6.4 million balance of milestone payments previously received from Ipsen was recognized as revenue in connection with this contract termination.

XIAFLEX

Net revenues for 2010 include $14.1 million of U.S. product sales of XIAFLEX for Dupuytren’s which was launched in March 2010. As discussed above regarding our change in revenue recognition, in 2010, we deferred the recognition of revenues, and related product costs, on XIAFLEX product shipments until the time the product was shipped to physicians for administration to patients. Such revenues were reduced for estimated discounts and allowances based on the contractual terms of sales. As of December 31, 2010, the amount of deferred XIAFLEX revenues was approximately $1.8 million. The increase in XIAFLEX international contract revenue for 2010 over 2009 was related to the $15 million European MAA milestone payment we received from Pfizer during the first quarter of 2010, which is being amortized to revenue over the estimated contract life of the Pfizer Agreement.

Revenue allowances

Revenue allowances as a percentage of gross U.S. revenues for 2010 compared to 2009 decreased principally as a result of a lower revenue allowance percentage on XIAFLEX gross U.S. revenues and a decline in Testim coupon usage, offset in part by an increase in Testim rebates due principally to contract changes.

Cost of goods sold. Cost of goods sold were $49.7 million and $37.0 million for the years ended December 31, 2010 and 2009, respectively. The increase in cost of goods sold in 2010 over 2009 was directly attributable to the increase in products sold and a provision of $3.9 million for XIAFLEX inventory that may expire prior to its expected sale. The gross margin rate on our net revenues was 76% for 2010 compared to 77% for 2009. The reduction in the gross margin rate was due to the $3.9 million XIAFLEX inventory provision and the lower International contract revenues in 2010, partially offset by the contribution of high margin XIAFLEX product sales and the impact of year-over-year price increases on U.S. Testim revenues.

Research and development expenses. Research and development expenses were $48.0 million and $51.4 million for the years ended December 31, 2010 and 2009, respectively. The reduction in spending was the result of the shift of XIAFLEX production activity from manufacturing development to commercial inventory production that commenced in the fourth quarter of 2009, partially offset by commencement of start-up activities related to the Phase III XIAFLEX clinical trials for Peyronie’s and costs related to development of a larger scale production process.

Selling, general and administrative expenses. Selling, general and administrative expenses were $164.7 million and $129.2 million for the years ended December 31, 2010 and 2009, respectively. The increase in 2010 over 2009 was due primarily to selling and marketing expenses increasing by $33.5 million as a result of the addition of the sales and reimbursement field force and infrastructure and promotional and training activity in support of the launch of XIAFLEX for Dupuytren’s in the U.S., and promotional spending for Testim. General and administrative expenses increased by $2.0 million as a result of increased stock-compensation expense offset in part by lower legal expenses.

Interest income. Interest income was $0.2 million and $0.5 million for the years ended 2010 and 2009, respectively, and related primarily to interest earned on investment of available cash.

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

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Sources and Uses of Cash

Cash provided by (used in) operations was $30.7 million, $(48.9) million, and $(41.4) million for 2011, 2010 and 2009, respectively. Cash provided by operations for 2011 resulted primarily from the $15.0 million up-front payment received from Asahi Kasei and the $41.1 million of net milestone payments received from Pfizer, offset by BioSpecifics’ share of these up-front and milestone payments which totaled $4.6 million, and operating losses (net of stock compensation expenses and other non-cash charges). Cash used in operations for 2010 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges. This cash usage reflects the build of inventory supporting the launch of XIAFLEX and an offsetting net cash receipt of approximately $13.7 million under our XIAFLEX license agreements, representing the $15 million European MAA milestone payment received from Pfizer and the associated payment of approximately $1.3 million to BioSpecifics for their share of this milestone. Cash used in operations for 2009 resulted primarily from operating losses, net of stock compensation expenses and other non-cash charges. Cash used in operations for 2009 included the payment of $9.4 million of costs accrued in 2008 in connection with the Pfizer Agreement and a $9.8 million increase in inventory which was primarily due to our build-up of XIAFLEX inventory for future commercial use in preparation for the launch of XIAFLEX.

Cash used in investing activities was $125.1 million, $10.5 million, and $10.6 million for 2011, 2010 and 2009, respectively. The cash impact of investing activities in 2011 relates primarily to net purchases of short-term investments in marketable debt securities, investments in property and equipment, and the investment of $1.9 million to secure a letter of credit relating to the Horsham manufacturing facility. Investing activities in 2010 and 2009 represent our investments in property and equipment, net of redemptions of investments. Our investments in property and equipment relate primarily to improvements made to our Horsham biological manufacturing facility and our information technology infrastructure.

Cash provided by financing activities was $3.8 million, $5.7 million, and $120.0 million in 2011, 2010 and 2009, respectively. Cash provided by financing activities for 2011 and 2010 resulted primarily from cash receipts from stock option exercises, net of treasury shares acquired in satisfaction of tax withholding requirements on stock awards to certain officers, and from Employee Stock Purchase Plan purchases. Cash provided by financing activity in 2009 results primarily from the $115.8 million in net proceeds we received in our September 2009 common stock offering and $5.1 million in net cash receipts from stock option exercises and employee stock purchases.

Liquidity and Capital Resources

Since inception through December 31, 2011, we have financed our product development, operations and capital expenditures primarily from private and public sales of equity securities. Since inception through December 31, 2011, we received net proceeds of approximately $412.8 million from our initial public offering, registered direct offering, private and public sales of securities and the exercise of stock options and warrants. We had approximately $154.3 million and $128.2 million in cash, cash equivalents and short-term investments as of December 31, 2011 and December 31, 2010, respectively.

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

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See “Risk Factors” for further discussion of the factors and risks that may adversely affect our financial resources and sources of liquidity.

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

Contractual Commitments

We are involved with in-licensing of products which are generally associated with payments to the partner from whom we have licensed the product. Such payments frequently take the form of: