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

Overview

We are a biopharmaceutical company that develops novel drugs. Our lead drug candidate is called REMOXY. REMOXY is a strong painkiller with a unique formulation designed to reduce potential risks of unintended use. REMOXY and three other abuse-resistant painkillers are being developed pursuant to a strategic alliance we have with Pfizer under the Pfizer Agreements.

Pfizer acquired King in early 2011, and references in this section to Pfizer include a reference to King. We expect REMOXY will be commercialized within Pfizer's primary care unit. We believe Pfizer's acquisition of King may facilitate REMOXY's commercial success, if approved by the FDA.

We and King jointly managed a Phase III clinical program and NDA submission for REMOXY. In mid-2008, the FDA accepted our NDA for REMOXY with Priority Review. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated additional non-clinical data was required to support the approval of REMOXY. Also, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In 2009, King assumed sole responsibility for the regulatory approval of REMOXY. This shift of responsibility did not change any economic term of the King Agreements. In December 2010, King resubmitted the REMOXY NDA. In January 2011, we announced that the FDA had accepted the resubmission of the REMOXY NDA. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King's resubmission of the REMOXY NDA. The FDA's Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Sufficient information does not yet exist to accurately assess the time required to resolve the concerns raised in the FDA's Complete Response Letter.

Pfizer recently announced that it plans to meet with the FDA in March 2013 to discuss REMOXY.

We have received the following program fee and milestone payments under the Pfizer Agreements:

                                                                                 Amount
                                                                  Year          Received
Description                                                     Received          (mm)
Upfront program fee payment                                          2005       $     150
Program fee payment related to an amendment to the
strategic alliance                                                   2010       $       5
Milestone payments related to:
acceptance by the FDA of the NDA for REMOXY                          2008       $      15
acceptance by the FDA of the IND for abuse-resistant
oxymorphone                                                          2011       $       5
acceptance by the FDA of the IND for abuse-resistant
hydrocodone                                                          2008       $       5
acceptance by the FDA of the IND for abuse-resistant
hydromorphone                                                        2006       $       5

We will receive a $15.0 million cash milestone payment from Pfizer upon regulatory approval of REMOXY in the United States. We could also receive from Pfizer up to $105.0 million in additional milestone payments in the course of clinical development of the other abuse-resistant opioid painkillers under the strategic alliance. In addition, subject to certain limitations, Pfizer is obligated to fund development expenses incurred by us pursuant to the collaboration agreement.

Pfizer is obligated to fund the commercialization expenses of, and has the exclusive right to market and sell, drugs developed pursuant to the strategic alliance. The royalty rate for net sales of REMOXY and other products

covered by the strategic alliance in the United States is 20%, except as to the first $1.0 billion in cumulative net sales in the United States, for which the royalty is 15%. The royalty rate for net sales of products covered by the strategic alliance outside the United States is 10%. Pfizer is also obligated to reimburse us for our payment of third-party royalty obligations related to this strategic alliance.

Although we were profitable in 2006, 2007 and 2008 based on payments received pursuant to the Pfizer Agreements and interest income, we have yet to generate any revenues from product sales. We have recorded an accumulated deficit of $135.7 million at December 31, 2012. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.

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

• conduct preclinical and clinical trials for our drug candidates;

• seek regulatory approvals for our drug candidates;

• develop, formulate, manufacture and commercialize our drug candidates;

• implement additional internal systems and develop new infrastructure;

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

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

• hire additional personnel.

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

We focus substantially all our research and development efforts on research and development in the areas of neurology, oncology and hematology. The following table summarizes expenses by category for research and development efforts (in thousands):

                                                Years Ended December 31,
                                              2012        2011         2010
             Compensation                   $  5,756     $ 5,785     $ 14,203
             Contractor fees and supplies      1,099       1,176          287
             Other common costs                  750       1,339        1,256

                                            $  7,605     $ 8,300     $ 15,746

Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs includes the allocation of common costs such as facilities.

Our technology has been applied across certain of our portfolio of drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. For example, we expect that results of non-clinical studies, such as pharmacokinetics, toxicology and other studies, regarding certain components of our drug candidate REMOXY to be applicable to the other potential drug candidates that may arise out of our strategic alliance with Pfizer since all such potential drug candidates are expected to utilize such components. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.

Our contractor fees and supplies expenses in 2012 related to programs outside of the strategic alliance with Pfizer were approximately $0.3 million.

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

In December 2012, we paid our stockholders a special non-dividend distribution of $0.75 per share, totaling $34.0 million.

On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY's development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified.

Critical Accounting Policies

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

• Stock-based compensation. We recognize expense in the statement of operations for the fair value of all share-based payments to employees and directors, including grants of employee stock options and other share based awards. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-line attribution method. Using this approach, the compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years.

We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance conditions. We estimate an implicit service period for achieving these performance conditions. Performance Awards vest and common stock

is issued on achieving performance conditions. We recognize stock-based compensation expense for Performance Awards when we conclude that achieving a performance condition is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance conditions.

• Revenue recognition and deferred program fee revenue. We recognize program fee revenue, collaboration revenue and milestone revenue in connection with our strategic alliance with Pfizer. Program fee revenue is derived from upfront payments under the Pfizer Agreements, including the $150.0 million paid to us at the beginning of the strategic alliance and the $5.0 million we received in July 2010 in connection with an amendment the Pfizer Agreements. These payments are recognized from receipt ratably over our estimate of the development period for the fourth of four drug candidates expected to be developed under the strategic alliance with Pfizer. We currently estimate the development period for all four expected drug candidates to end in the quarter ended March, 2018. We review the estimated development period on a quarterly basis and change it if appropriate based upon our latest expectations. In the fourth quarter of 2012 we determined that our estimate of the development period should be extended from the third quarter of 2016 to the first quarter of 2018. Deferred program fee revenue represents the amount of the upfront payment that has not yet been recognized as program fee revenue. As a result of the change in estimate in the fourth quarter of 2012, program fee revenue was $0.3 million lower in 2012. Collaboration revenues from reimbursement of development expenses pursuant to our collaboration agreement with Pfizer are generally recognized when Pfizer has completed its review of the expenses invoiced to them. Pfizer is obligated to pay us milestone payments contingent upon the achievement of certain substantive events in the development of REMOXY and the other opioid painkillers under the strategic alliance. We recognize milestone payments from Pfizer as revenue when we achieve the underlying developmental milestone as the milestone payments are not dependent upon any other future activities or achievement of any other future milestones and the achievement of each of the developmental milestones were substantively at risk and contingent at the effective date of the collaboration. Substantial effort is involved in achieving each of the developmental milestones. These milestones represent the culmination of discrete earnings processes and the amount of each milestone payment is reasonable in relation with the level of effort associated with the achievement of the milestone. Each milestone payment is non-refundable and non-creditable when made. The ongoing research and development services being provided to Pfizer under the collaboration are priced at fair value based upon the reimbursement of expenses incurred pursuant to the collaboration with Pfizer.

• Taxes. We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance. We may in the future determine that more of our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.

Results of Operations

Years Ended December 31, 2012 and 2011

Revenue-Program fee revenue

We received a $150.0 million upfront fee in 2005 in connection with the closing of the Pfizer Agreements and $5.0 million in July 2010 in connection with an amendment to the Pfizer Agreements. Revenues recognized

from amortization of upfront fees were $10.6 million in 2012 and $10.9 million in 2011. We expect to recognize the rest of the program fee ratably over our estimate of the remainder of the development period under the strategic alliance with Pfizer. We currently estimate the development period for all four expected drug candidates to extend through March 2018.

Revenue-Collaboration revenue

Collaboration revenues were $0.2 million in 2012 and $0.6 million in 2011. These revenues related to reimbursement of our development expenses incurred pursuant to the Pfizer Agreements. Collaboration revenues were lower in 2012 as compared to 2011 primarily because the reimbursement of expenses we incurred pursuant to the Pfizer Agreements was lower in 2012 as compared to 2011.

We expect the amount and timing of collaboration revenue to fluctuate in relation to the amount and timing of the underlying research and development expenses, as well as the timing of completion of Pfizer's review of submitted expenses. We incurred $0.4 million of expenses in 2012 that continue to be subject to Pfizer's review as of December 31, 2012. We expect Pfizer will reimburse us for these expenses in 2013.

Research and Development Expense

Research and development expense consists primarily of costs of development work associated with our drug candidates. Research and development expenses decreased to $7.6 million in 2012 from $8.3 million in 2011, primarily due to lower headcount and facilities-related costs. Research and development expenses included $3.2 million in non-cash stock related compensation expense in 2012 (including $0.8 million related to the nondividend distribution in December 2012) and $2.7 million in 2011. We expect non-cash stock-related compensation expense to decrease in 2013.

We expect research and development expenses to fluctuate over the next several years as we continue our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies.

General and Administrative Expense

General and administrative expenses consist primarily of compensation and other general corporate expenses. General and administrative expenses increased to $7.2 million in 2012 from $6.7 million in 2011, primarily due to higher non-cash stock related compensation expense, offset in part by lower headcount and facilities-related costs. General and administrative expenses included $3.4 million in non-cash stock related compensation expense in 2012 (including $1.0 million related to the nondividend distribution in December 2012) and $2.8 million in 2011. We expect non-cash stock-related compensation costs to decrease in 2013.

We expect other general and administrative expenses to increase over the next several years in connection with support of precommercialization and commercialization activities for our drug candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies.

Interest and Other Income, Net

Interest and other income, net, decreased to $0.5 million in 2012 from $0.9 million in 2011. We expect our interest income to decrease in the future as we use cash to fund our operations.

Provision for Income Taxes

We did not provide for federal income taxes in 2012 or 2011 because we had a tax loss for both 2012 and 2011.

Years Ended December 31, 2011 and 2010

Revenue-Program fee revenue

We received a $150.0 million upfront fee in 2005 in connection with the closing of the Pfizer Agreements and $5.0 million in July 2010 in connection with an amendment to the Pfizer Agreements. Revenues recognized from amortization of upfront fees were $10.9 million in 2011 and $10.5 million in 2010.

Revenue-Collaboration revenue

Collaboration revenues were $0.6 million in 2011 and $1.3 million in 2010. These revenues related to reimbursement of our development expenses incurred pursuant to the Pfizer Agreements. Collaboration revenues were lower in 2011 as compared to 2010 primarily because the reimbursable expenses we incurred pursuant to the Pfizer Agreements were lower in 2011 as compared to 2010.

Revenue-Milestone revenue

Milestone revenue of $5.0 million in 2010 was related to acceptance by the FDA of the IND for abuse-resistant oxymorphone under the Pfizer Agreements.

Research and Development Expense

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

• preclinical testing,

• clinical trials,

• clinical supplies and related formulation and design costs, and

• salaries and other personnel-related expenses.

In October 2010, we were awarded $2.1 million in research grants by the U.S. government under the Qualifying Therapeutic Discovery Project Program. The research grants were awarded following a competitive review of thousands of applications. According to guidance released by the U.S. Department of the Treasury, the U.S. Department of Health and Human Services evaluated each project for its potential to produce new therapies, reduce long-term health care costs or cure cancer. We recognized these grants as a reduction in research and development expenses for the fourth quarter 2010.

Research and development expense decreased to $8.3 million in 2011 from $15.7 million in 2010. The decrease was primarily due to decreases in non-cash stock related compensation costs as well as the timing of development activities for our product candidates, offset in part by the reduction in research and development costs in 2010 for grants awarded to us by the U.S. government.

Research and development expenses included non-cash stock related compensation costs of $2.7 million in 2011 and $10.3 million in 2010. These costs in 2010 included $7.4 million for modifications made to outstanding stock options to prevent diminution of the benefit of these options from the special nondividend distribution to stockholders in the fourth quarter of 2010.

General and Administrative Expense

General and administrative expenses consist primarily of compensation and other general corporate expenses. General and administrative expenses decreased to $6.7 million in 2011 from $14.8 million in 2010. The decrease was primarily due to decreased non-cash stock-related compensation costs in 2011 as compared to 2010.

General and administrative expenses included non-cash stock related compensation costs of $2.8 million in 2011 and $9.9 million in 2010. These costs in 2010 included $7.4 million for modifications made to outstanding stock options to prevent diminution of the benefit of these options from the special nondividend distribution to stockholders in the fourth quarter of 2010.

Interest and Other Income, Net

Interest and other income, net, decreased to $0.9 million in 2011 from $1.7 million in 2010. This decrease was primarily due to decreased average balances of marketable securities.

Provision for Income Taxes

We did not provide for federal income taxes in 2011 or 2010 because we had a tax loss for both 2011 and 2010.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through public and private stock offerings, payments received under the Pfizer Agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of December 31, 2012, cash, cash equivalents and marketable securities were $56.3 million.

Net cash used in operating activities was $7.2 million for 2012 and $0.3 million for 2011. In 2011, we collected $7.1 million from receivables at December 31, 2010.

Net cash provided by investing activities was $17.6 million for 2012 compared to $59.9 million for 2011. Investing activities for both years consisted primarily of the purchase, sale and maturities of marketable securities. We did not use any cash to purchase property, equipment and leasehold improvements in 2012 and 2011.

Net cash used by financing activities was $34.2 million for 2012 and cash provided by financing activities was $8.7 million for 2011. In December 2012, we paid our stockholders $34.0 million in a special non-dividend distribution of $0.75 per share. Other cash used in financing activities in 2012 consisted of $0.5 million in cash used to pay statutory taxes on Performance Awards that were exercised net of taxes, offset in part by $0.2 million received from stock option exercises. Other cash provided by financing activities in 2011 consisted primarily of cash from stock option exercises. We expect cash used to pay for statutory taxes on stock options and Performance Awards may increase in the future.

Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.

We currently lease approximately 6,000 square feet of office space pursuant to a non-cancelable operating lease in Austin, TX that expires in 2014. Future minimum lease payments by year are as follows (in thousands):

2013 2014 Total Future minimum lease payments $ 115 $ 81 $ 196

We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our

licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of December 31, 2012. Our formulation agreement with Durect Corporation obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones. Pfizer is obligated to reimburse us for any of our milestone payments and royalty payments to Durect Corporation.

We have an accumulated deficit of $135.7 million at December 31, 2012. We expect . . .