Our management's discussion and analysis of financial condition and results of operations contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements that set forth anticipated results based on management's plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, development of products, strategic alliances, intellectual property, competitive position, plans and objectives of management. We often use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions to identify forward-looking statements. In particular, any statements regarding our efforts to reduce our burn rate and conserve cash, potential FDA marketing approval for KRYSTEXXA™ (pegloticase), a meeting with the FDA to discuss the complete response letter, the reversion to and revalidation of the Phase 3 manufacturing process, the terms of a REMS program or other post-marketing commitments, the timing of a resubmission to the FDA in response to the complete response letter and the efficacy and safety of KRYSTEXXA are forward-looking statements. Additionally, forward-looking statements include those relating to future actions, prospective products or product approvals, future performance, financing needs, liquidity or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates and the outcome of contingencies, such as legal proceedings, and financial results.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview

We are a specialty biopharmaceutical company focused on developing and marketing pharmaceutical products that target unmet medical needs in both niche and broader specialty markets.

We are currently developing one product: KRYSTEXXA™ (pegloticase) for the treatment of chronic gout in patients refractory to conventional therapy. Chronic gout is gout refractory to conventional therapy occurring in patients who have failed to normalize serum uric acid and whose signs and symptoms are inadequately controlled with xanthine oxidase inhibitors at the maximum medically appropriate dose or for whom these drugs are contraindicated. KRYSTEXXA is not recommended for the treatment of asymptomatic hyperuricemia. In our replicate randomized, double-blind, placebo- controlled, parallel-group Phase 3 clinical trials, KRYSTEXXA, a biologic PEGylated uricase enzyme, achieved statistical significance for the primary endpoint by demonstrating the normalization of uric acid. Secondary endpoints were also achieved including complete resolution of tophi, improvement in chronic pain, improvement of physical functioning and decreased frequency of gout flares in patients with chronic gout refractory to conventional therapy.

In October 2007, we completed the treatment portion of our two replicate Phase 3 clinical trials of KRYSTEXXA and we are currently conducting an open label extension, or OLE, study in patients who completed the Phase 3 clinical trials and elected to participate in the OLE study. In October 2008, we submitted a Biologic License Application, or BLA, to the U.S. Food and Drug Administration, or FDA, for KRYSTEXXA, and in December 2008, the FDA notified us that the BLA was accepted for priority review with a Prescription Drug User Fee Act action, or PDUFA, date of April 30, 2009. The FDA notified us of the acceptance of the trade name KRYSTEXXA as the proprietary name for pegloticase in January 2009. During the BLA review process, we submitted

In July 2009, we completed the patient dosing phase of the OLE study and the observation period for patients enrolled in this study is currently ongoing.

On July 31, 2009, the FDA issued a complete response letter, or CRL, notifying us that it would not approve the BLA as a treatment for chronic gout in patients refractory to conventional therapy unless and until a resubmission was provided to the FDA which addressed:

• deficiencies with the chemistry, manufacturing and controls, or CMC, section of the BLA,

• remediation of observations arising from the FDA pre-approval inspection of the manufacturing facility of our primary third-party active pharmaceutical ingredient, or API, manufacturer, Bio-Technology General Ltd Israel, or BTG,

• a Risk Evaluation and Mitigation Strategy, or REMS, (consisting of a Medication Guide and a Communication Plan), and

• follow-up safety update of clinical and pre-clinical studies to the FDA.

The CRL also included the latest FDA comments on our draft label language. Our requested Type A meeting with the FDA occurred on September 14, 2009 to discuss the CRL and next steps. This meeting with the FDA provided clarification and alignment on a resubmission plan for us to fully address all deficiencies and issues identified in the CRL. As part of this meeting, we were informed that the review cycle for resubmission of our BLA for KRYSTEXXA would include the review of all data to fully address all issues identified in the CRL, including the final product labeling and the REMS materials. Since the resubmission will include REMS materials, this is subject to a Class 2 review cycle, meaning simultaneous approval of all components of our filing within six months of the date of our resubmission.

Our strategic plan is to advance the development and regulatory review of KRYSTEXXA and continue to seek FDA approval of the BLA filing for this product. To fully optimize shareholder value through the full exploitation of the commercial prospects of KRYSTEXXA in the U.S., Europe and internationally, we continue to believe that a worldwide partnership for the commercialization of KRYSTEXXA or broader strategic transaction is needed. If we are unsuccessful in consummating a worldwide partnership or broader strategic transaction, we intend to independently pursue the commercialization of KRYSTEXXA in the United States.

Currently, we sell and distribute branded and generic versions of oxandrolone, a drug used to promote weight gain following involuntary weight loss. We distribute the branded version of oxandrolone in the U.S. under the name Oxandrin® directly through wholesalers, and our authorized generic version of oxandrolone through an agreement with Watson Pharma, Inc., or Watson. We launched our authorized generic version of oxandrolone in December 2006 in response to the approval and launch of generic competition to Oxandrin and currently have five competitors in the oxandrolone market. Our generic competitors are Sandoz Pharmaceuticals, Upsher-Smith Laboratories, Par Pharmaceuticals, Roxane Laboratories and Kali Laboratories.

The introduction of oxandrolone generics has led to significant decreases in demand for Oxandrin and our authorized generic version of oxandrolone. We believe that revenues from Oxandrin and our authorized generic version of oxandrolone will slightly decline or remain flat in future periods.

We currently operate within one "Specialty Pharmaceutical" segment, which includes sales of Oxandrin and oxandrolone and the research and development activities of KRYSTEXXA.

Results of Operations

Our revenues were derived from Oxandrin and oxandrolone for the nine months ended September 30, 2009 and 2008. Our product revenues and expenses have in the past displayed, and

• the timing and amount of product sales,

• changing demand for our products,

• our inability to provide adequate supply of our products,

• changes in wholesaler buying patterns,

• returns of expired product,

• changes in government or private payor reimbursement policies for our products,

• increased competition from new or existing products,

• the timing of the introduction of new products,

• the timing and amount of expenses relating to our manufacturing activities, and

• the extent and timing of costs of obtaining, enforcing and defending intellectual property rights.

We believe that our product performance will vary from period-to-period based on the purchasing patterns of our customers, particularly related to wholesaler inventory management trends, and our focus on:

• maintaining or increasing business with our existing products,

• Expanding into new markets, and

• commercializing additional products.

During 2009, we continue to expect the expenses associated with our regulatory, clinical, manufacturing and commercial development of KRYSTEXXA to be the most significant factors affecting our results of operations.

The following table summarizes net sales of our commercialized products and their percent of net product sales and revenues for the periods indicated:

                               Three Months Ended September 30,                                      Nine Months Ended September 30,
                            2009                              2008                               2009                               2008
Oxandrin        $   (437 )          -133.2 %       $   (189 )          -37.9 %       $    (563 )          -26.9 %       $    (401 )          -20.5 %
Oxandrolone          765             233.2 %            688            137.9 %           2,655            126.9 %           2,359            120.5 %

                $    328             100.0 %       $    499            100.0 %       $   2,092            100.0 %       $   1,958            100.0 %

Results of Operations for the Three Months Ended September 30, 2009 and September 30, 2008

Revenues

Total revenues decreased $0.2 million, or 39%, to $0.3 million for the three months ended September 30, 2009, from $0.5 million for the three months ended September 30, 2008. Gross sales of Oxandrin decreased by $0.6 million, or 61%, to $0.4 million for the three months ended September 30, 2009, from $1.0 million for the three months ended September 30, 2008. The decrease was due to lower overall demand for the product as a result of increased generic competition. Net sales of Oxandrin decreased by $0.2 million for the three months ended September 30, 2009 due to lower gross sales partially offset by higher prior year historical experience adjustments relating to reserves for government and customer rebates. Additionally, we increased our Oxandrin product return reserve in both the current and prior year to reflect higher actual return experience. We expect that sales of Oxandrin will continue to decline slightly or remain flat in future periods. The rate of decline will depend on various factors, including the pricing of competing generic products, the number of competing products and overall demand in the marketplace. The decrease in Oxandrin sales for the three months ended September 30, 2009 as compared to the three month ended September 30, 2008 was slightly offset by a $0.1 million increase in net sales of our authorized

Cost of goods sold

Cost of goods sold increased $0.1 million, or 23%, to $0.4 million for the three months ended September 30, 2009, from $0.3 million for the three months ended September 30, 2008. The increase was primarily due to higher gross sales of our authorized generic, oxandrolone.

Research and development expenses

Research and development expenses increased by $6.8 million, or 62%, to $17.7 million for the three months ended September 30, 2009, from $10.9 million for the three months ended September 30, 2008. The increase was primarily due to $4.5 million in contingency charges recorded in the third quarter of 2009 relating to amending the fee schedule and total obligation under our services agreement with Diosynth RTP, or Diosynth, our planned secondary source supplier for pegloticase API, in the United States. The additional charges of $4.5 million are incremental to the original agreement and are partially due to a $2.5 million idle and down time fee as a result of us delaying the originally scheduled conformance batch production campaign for pegloticase API, as a result of the FDA stating in its CRL to us in July 2009, that it could not at that time approve our BLA for KRYSTEXXA. We also recorded a $2.0 million charge relating to a non-refundable reservation fee to reserve manufacturing space in Diosynth's facility for API conformance batch production work, to be completed in 2010.

Additionally, we incurred $1.0 million in higher costs resulting from increased outside laboratory testing services supporting our OLE study for KRYSTEXXA and $0.9 million of increased expenses relating to the timing of manufacture of pegloticase API batches at Bio-Technology General Israel Ltd, or BTG, our primary source supplier of pegloticase API.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $0.9 million, or 13%, to $8.5 million for the three months ended September 30, 2009, from $7.6 million for the three months ended September 30, 2008. The increase was primarily due to $0.7 million of severance expense related to our plan of termination that reduced our workforce by 25 employees in September 2009.

Investment income, net

Investment income increased $0.2 million, or 48%, to $0.5 million for the three months ended September 30, 2009, from $0.3 million for the three months ended September 30, 2008. The increase was primarily attributable to realized gains on the sale of short-term investments driven by the full liquidation of our position in the Columbia Strategic Cash Portfolio, or Portfolio, in the third quarter of 2009.

Other income (expense), net

Other income (expense), net increased $11.9 million as a result of the mark-to-market valuation adjustment to our warrant liability during the three months ended September 30, 2009. During the three months ended September 30, 2009, we recorded a gain of $11.8 million as the fair market value of the warrants declined primarily as a result of the FDA's July 31, 2009 CRL regarding our BLA for KRYSTEXXA.

Income tax benefit

Our income tax benefit decreased $0.8 million to $0.1 million for the three months ended September 30, 2009, from $0.9 million for the three months ended September 30, 2008 as we no longer have the ability to carry back losses to previous years to recover taxes paid and it is uncertain that we will be able to utilize these net operating losses against future income. The 2008 income tax benefit reflects the tax effects of the carryback of our 2008 net operating losses to the 2006 tax year to recover 2006 income taxes paid.

Revenues

Total revenues were $2.1 million for the nine months ended September 30, 2009, consistent with $2.1 million for the nine months ended September 30, 2008. Gross sales of Oxandrin decreased by $1.4 million, or 42%, for the nine months ended September 30, 2009, from $3.3 million for the nine months ended September 30, 2008. The decrease is due to lower overall demand for the product as a result of increased generic competition. Net sales of Oxandrin declined by $0.2 million for the nine months ended September 30, 2009 versus the prior year due to lower gross sales partially offset by higher prior year historical experience adjustments relating to reserves for government and customer rebates. Additionally, we increased our Oxandrin product return reserve in both the current and prior year to reflect higher actual return experience. The decrease in Oxandrin sales for the nine months ended September 30, 2009 versus the prior year was slightly offset by a $0.3 million increase in net sales of our authorized generic, oxandrolone, due to increased market share being achieved by Watson.

Cost of goods sold

Cost of goods sold increased $0.3 million, or 45%, to $1.2 million for the nine months ended September 30, 2009, from $0.9 million for the nine months ended September 30, 2008. The increase resulted primarily from higher gross sales of oxandrolone.

Research and development expenses

Research and development expenses increased by $4.3 million, or 11%, to $42.1 million for the nine months ended September 30, 2009, from $37.8 million for the nine months ended September 30, 2008. The increase was primarily due to higher expenses of $3.5 million associated with the production of pegloticase commercial API batches at BTG, severance expense of $2.5 million recorded during the current year related to the terminations and resignations of certain members of senior management and our plan of termination that reduced our workforce by 25 employees in September 2009, and contingency charges of $4.5 million recorded in the third quarter of 2009 for idle and down time related to amending the fee schedule and total obligation under our services agreement for the manufacture of conformance batches at Diosynth. The increases in expense were partially offset by approximately $3.2 million of lower technology transfer costs at Diosynth during the nine months ended September 30, 2009 versus the prior year as the majority of the work was performed in the prior year and has now been substantially completed. Additionally, we incurred lower expenses for reservation fees as the prior year period reflects a $2.2 million payment to BTG to reserve manufacturing space in their facility.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased by $1.9 million, or 7%, to $25.4 million for the nine months ended September 30, 2009, from $27.3 million for the nine months ended September 30, 2008. The decrease was primarily due to $3.2 million in lower legal fees as the prior year results reflect expenses for Oxandrin-related patent infringement litigation and $2.1 million of lower compensation and benefits, including share-based compensation, due primarily to decreased headcount. Partially offsetting the lower costs are higher severance expenses of $1.2 million recorded during the current year as a result of the termination of former members of our senior management team and our plan of termination that reduced our workforce by 25 employees in September 2009. Additionally, our marketing expenses were higher compared to the prior year by $1.1 million as a result of pre-launch market research expenses coupled with increased recruiting costs of $1.0 million, both due to our previously anticipated commercial launch of KRYSTEXXA.

Investment income (expense), net

Investment income decreased $1.4 million, or 84%, to $0.3 million for the nine months ended September 30, 2009, from $1.7 million for the nine months ended September 30, 2008. The decrease was primarily attributable to lower dividend and interest income from lower cash, cash equivalent and investment balances and as a result of lower yields earned on these investments.

Other expense, net increased $23.9 million as a result of the mark-to-market valuation adjustment to our warrant liability in the current year. The increase in expense is primarily due to a $24.1 million loss recorded due to the appreciation in fair market value of our warrants as a result of a higher underlying common stock price since the date of issuance of the warrants.

Income tax benefit

Our income tax benefit decreased $3.6 to $0.1 million for the nine months ended September 30, 2009, from $3.7 million for the nine months ended September 30, 2008, as we no longer have the ability to carry back losses to previous years to recover taxes paid and it is uncertain that we will be able to utilize these net operating losses against future income. The 2008 income tax benefit reflects the tax effects of the carryback of our 2008 net operating losses to the 2006 tax year to recover 2006 income taxes paid.

Liquidity and Capital Resources

At September 30, 2009, we had $67.5 million in cash and short-term investments. We primarily invest our cash equivalents and short-term investments in highly liquid, interest-bearing, U.S. Treasury money market funds in order to preserve principal. In October 2009, we completed an underwritten public offering of 4,945,000 shares of our common stock for net proceeds of $60.9 million. We intend to use the net proceeds to complete our ongoing development effort to seek FDA approval of KRYSTEXXA, to develop a program of regulatory filings and review of KRYSTEXXA in other countries, to engage a secondary source supplier and a secondary fill and finish manufacturer and for working capital and other general corporate purposes. After giving effect to the offering, we would have had approximately $128.4 million in cash and short-term investments as of September 30, 2009 on a pro forma basis.

Although our strategic plan is to advance the development and regulatory review of KRYSTEXXA and to seek FDA approval of the BLA filing for this product, we believe that a worldwide partnership or strategic transaction is needed to fully optimize shareholder value through the full exploitation of the commercial prospects of KRYSTEXXA in the U.S., Europe and internationally. If we are unsuccessful in consummating a worldwide partnership or strategic transaction, we intend to independently pursue the commercialization of KRYSTEXXA in the U.S. and will make significant expenditures related to the launch of the product, which we anticipate will occur in the second half of 2010. Based on our current strategic plan, we believe that our available cash and cash equivalents will be sufficient to fund anticipated levels of operations for at least the next twenty-four months. However, if we independently pursue the commercialization of KRYSTEXXA in the U.S., we believe that our available cash and cash equivalents will be sufficient to fund anticipated levels of operations for at least the next eighteen months. In addition, in light of the FDA's July 31, 2009 CRL to our KRYSTEXXA BLA, we are continuing to engage in an active effort to reassess our expenditures and align our cash outlays more closely with the FDA approval process to conserve cash.

In April 2009, we raised $31.0 million from a registered direct offering, which yielded $29.0 million in cash net of approximately $2.0 million of offering costs, which were charged to additional paid-in-capital. We issued 5,927,343 shares of our common stock to existing and new institutional investors as part of the offering. The investors also received warrants to purchase up to 5,038,237 shares of our common stock at an initial exercise price of $10.46 per share. The warrants are exercisable at any time on or after the date of issuance and expire on the earlier of November 2, 2010, and the date that is nine months after the date on which we publicly announce that we have addressed all items required by the FDA to be addressed before our BLA can be approved. Pursuant to the terms of the warrants, the exercise price per share for the warrants is $10.46, which is equal to the dollar volume weighted- average price of our common stock for the five trading days immediately preceding August 17, 2009. We may, at our or the warrant holder's election, issue net shares in lieu of a cash payment of the exercise price by the warrant holder upon exercise. In the event that we enter into a merger or change of control transaction, the holders of the warrants will

In June 2009, we received a U.S. federal income tax refund of approximately $5.5 million which was reflected in Recoverable Income Taxes on our consolidated balance sheet as of December 31, 2008. The refund is the result of the carry back of our 2008 federal net operating losses against 2006 taxable income.

As a result of the deficiencies in our BLA filed for KRYSTEXXA cited by the FDA and our decision to revert to the Phase 3 manufacturing process, launch quantity finished product batches previously manufactured will not be available for commercial distribution. Therefore, except for portions of these batches being utilized for stability and other analytical testing, the remaining quantities of this finished product will be disposed of. We believe we may incur approximately $5.1 million of cash outlays in the future to replace these launch quantities of finished product. As the original costs for these finished product batches were expensed as incurred as research and development expenses within our consolidated statements of operations when the batches were originally manufactured, the decision to dispose of this inventory has had no impact on our financial position and results of operations for the three and nine months ended September 30, 2009.

Cash Flows

Cash used in operating activities of $48.3 million for the nine months ended September 30, 2009 reflects our net loss for the period of $90.6 million partially offset by $5.5 million in cash received from our U.S. federal income tax refund as a result of the carry back of our 2008 federal net operating losses against 2006 taxable income and a non-cash charge of $24.1 million as a result of the mark-to-market valuation of our warrant liability. We received $4.2 million from investment activities resulting primarily from the full liquidation of our investment in the Portfolio as of September 29, 2009. The proceeds from the redemptions were re-invested in cash and cash equivalents and used to fund operations. We also received $35.4 million in cash from financing activities, $29.0 million resulting from net proceeds from our registered direct offering on April 8, 2009 and $6.5 million in proceeds from the issuance of common stock, primarily due to the exercise of stock options.

For the nine months ended September 30, 2008, we used net cash of $47.2 million in operating activities, mainly to fund the research and development of KRYSTEXXA. We received $11.9 million in cash from investing activities, resulting primarily from redemptions of our investment in the Portfolio. Cash received from financing activities of $2.5 million resulted from proceeds from the exercise of stock options.

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