Raptor Pharmaceutical Corp.

(Exact name of registrant as specified in its charter)

Delaware		86-0883978
(State or other jurisdiction of incorporation or organization)		(I.R.S.  Employer Identification No.)

5 Hamilton Landing, Suite 160, Novato, CA  94949

(Address of principal executive offices) (Zip Code)

(415) 408-6200

(Registrant's telephone number, including area code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value		The NASDAQ Global Market
Preferred Share Purchase Rights

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PART I
ITEM 1: BUSINESS	4
ITEM 1A: RISK FACTORS	19
ITEM 1B: UNRESOLVED STAFF COMMENTS	39
ITEM 2: PROPERTIES	39
ITEM 3: LEGAL PROCEEDINGS	39
ITEM 4: MINE SAFETY DISCLOSURES	39
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	40
ITEM 6: SELECTED FINANCIAL DATA	42
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	57
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	58
ITEM 9A: CONTROLS AND PROCEDURES	58
ITEM 9B: OTHER INFORMATION	59
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	60
ITEM 11: EXECUTIVE COMPENSATION	64
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS	82
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE	83
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES	84
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES	85
SIGNATURES	89

·	completion of process validation, quality product release and stability;

·	submission to the FDA of a new drug application, or NDA, for the drug candidate for marketing approval;

·	potential review of the product application by an FDA advisory committee, where appropriate and if applicable;

·	satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities where the proposed product is produced to assess compliance with the FDA's current Good Manufacturing Practice, or cGMP, requirements; and

·	review and approval of the NDA by the FDA before the product may be sold commercially.

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Preclinical testing includes laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Preclinical testing results are submitted to the FDA as a part of an IND which must become effective prior to commencement of clinical trials. Clinical trials are typically conducted in three sequential phases following submission of an IND. Phase 1 represents the initial administration of the drug to a small group of humans, either patients or healthy volunteers, typically to test for safety (adverse effects), dosage tolerance, absorption, distribution, metabolism, excretion and clinical pharmacology, and, if possible, to gain early evidence of effectiveness. Phase 2 involves studies in a small sample of the actual intended patient population to assess the efficacy of the drug for a specific indication, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase 3 studies are initiated to further establish clinical safety and efficacy of the therapy in a broader sample of the general patient population, in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for any physician labeling. During all clinical studies, we must adhere to GCP or good clinical practices, standards. The results of the research and product development, manufacturing, preclinical studies, clinical studies and related information are submitted in an NDA to the FDA.

The FDA, the IRB or the clinical study sponsor may suspend or terminate a clinical study at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Additionally, some clinical studies are overseen by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study. We may also suspend or terminate a clinical study based on evolving business objectives and/or competitive climate.  The process of completing clinical testing and obtaining FDA approval for a new drug is likely to take a number of years and require the expenditure of substantial resources. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA.

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational new drug product information is submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. Under federal law, the submission of most NDAs is subject to a substantial application user fee. Applications for orphan drug products are exempted from the NDA user fees, unless the application includes an indication for other than a rare disease or condition.

An NDA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product's chemistry, manufacturing, controls and proposed labeling, among other things.  Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators.  To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational new drug product to the satisfaction of the FDA.

Once an NDA has been submitted, the FDA's goal is to review the application within 10 months after it accepts the application for filing, or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months after the FDA accepts the application for filing. The review process is often significantly extended by FDA requests for additional information or clarification.  In addition, an application may be referred to an advisory committee, which is a panel of independent experts, to review, evaluate and provide a recommendation to the FDA as to whether the application should be approved and under what conditions.  The FDA is not bound by the recommendations of an advisory committee, but it typically follows such recommendations and considers them carefully when making approval decisions.

Before obtaining FDA approval for each product, the FDA typically will inspect the facility or facilities where the product is manufactured and will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.  Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP requirements.  Following approval, each product manufacturing establishment must be registered with the FDA and its quality control and manufacturing procedures must continue to conform and adhere at all times to the FDA's cGMP regulations. The FDA and other government agencies regularly inspect manufacturing facilities for compliance with these requirements. If, as a result of these inspections, the FDA determines that any equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of the manufacturing operations.  Manufacturers must expend substantial time, money and effort in the area of production and quality control to ensure full technical compliance with these standards.

Even after initial FDA approval has been obtained, further studies, including a commitment to conduct post-market studies, would be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested and approved.  Also, the FDA will require post-market reporting. Results of post-marketing programs, including Phase 4 clinical studies or post-market surveillance, might limit or expand the further marketing of the products.  Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling or a change in manufacturing facility, submission and approval of an NDA supplement might be required.

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Failure to comply with applicable FDA requirements may result in a number of consequences that could materially and adversely affect us.  Failure to adhere to approved trial standards and GCPs in conducting clinical trials could cause the FDA to place a clinical hold on one or more studies which would delay research and data collection necessary for product approval.  Noncompliance with GCPs could also have a negative impact on the FDA's evaluation of an NDA. Failure to adhere to GCPs, cGMPs and other applicable requirements could result in FDA enforcement action and in civil and criminal sanctions, including but not limited to fines, seizure of product, refusal of the FDA to approve product approval applications, withdrawal of approved applications, and prosecution.  Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a Risk Evaluation and Mitigation Strategies, or REMS, program.  The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

 Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval might be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for some European countries, in general, each country at this time has its own procedures and requirements. There can be no assurance that any foreign approvals would be obtained.

In addition to the regulatory framework for product approvals, we and our collaborative partners must comply with federal, state and local laws and regulations regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and other local, state, federal and foreign regulations. All facilities and manufacturing processes used by third parties to produce our drug candidates for clinical use in the U.S. must conform with cGMPs. These facilities and practices are subject to periodic regulatory inspections to ensure compliance with cGMP requirements. Their failure to comply with applicable regulations could extend, delay, or cause the termination of clinical trials conducted for our drug candidates or of manufacturing and sale of any of our products approved for sale. We cannot accurately predict the extent of government regulation that might result from future legislation or administrative action.

Expedited Review and Accelerated Approval Programs

A sponsor may seek approval of its product candidate under programs designed to accelerate FDA's review and approval of NDAs. For example, Fast Track Designation may be granted to a drug intended for treatment of a serious or life-threatening disease or condition that has potential to address unmet medical needs for the disease or condition.  The key benefits of fast track designation are the eligibility for priority review, rolling review (submission of portions of an application before the complete marketing application is submitted), and accelerated approval, if relevant criteria are met.  Based on results of clinical studies submitted in an NDA, upon the request of an applicant, the FDA may grant the NDA priority review designation, which sets the target date for FDA action on the application at six months after the FDA accepts the application for filing.  Priority review is granted where there is evidence that the proposed product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious condition.  If criteria are not met for priority review, the application is subject to the standard FDA review period of 10 months after FDA accepts the application for filing.  Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

Under the accelerated approval program, the FDA may approve an NDA on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Post-marketing studies or completion of ongoing studies after marketing approval are generally required to verify the drug's clinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit.  In addition, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was enacted and signed into law in 2012, established the new Breakthrough Therapy designation.  A sponsor may seek FDA designation of its product candidate as a Breakthrough Therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.

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European Union Drug Review and Approval

In the EEA (which is comprised of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA.  There are two types of MA:

The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the CHMP of the EMA, is valid throughout the entire territory of the EEA.  The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes and auto-immune and viral diseases.  The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the European Union.

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure.  Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in other Member States through the Mutual Recognition Procedure.  If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

Orphan Designation and Exclusivity

The Orphan Drug Act provides incentives for the development of products intended to treat rare diseases or conditions. Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making a drug product available in the U.S. for this type of disease or condition will be recovered from sales of the product. If a sponsor demonstrates that a drug is intended to treat rare diseases or conditions, the FDA will grant orphan designation for that product for the orphan disease indication. Orphan designation must be requested before submitting an NDA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA.

Orphan drug designation provides manufacturers with research grants, tax credits and eligibility for orphan drug exclusivity. If a product that has orphan drug designation subsequently receives the first FDA approval of the active moiety for that disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which for seven years prohibits the FDA from approving another product with the same active ingredient for the same indication, except in limited circumstances. If a drug designated as an orphan product receives marketing approval for an indication broader than the orphan indication for which it received the designation, it will not be entitled to orphan drug exclusivity. Orphan exclusivity will not bar approval of another product under certain circumstances, including if a subsequent product with the same active ingredient for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand. Further, the FDA may approve more than one product for the same orphan indication or disease as long as the products contain different active ingredients. Moreover, competitors may receive approval of for the same product but for a different indication for which the orphan product has exclusivity. As a result, even if we obtain orphan exclusivity, we may still be subject to competition.

In the EU, the EMA's Committee for Orphan Medicinal Products, or COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the European Union Community and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected).  Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the EU would be sufficient to justify the necessary investment in developing the medicinal product.  In the EU, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

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Pediatric Studies and Exclusivity

NDAs must contain data (or a proposal for post-marketing activity) to assess the safety and effectiveness of an investigational new drug product for the claimed indications in all relevant pediatric populations in order to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults or full or partial waivers if certain criteria are met. The requirements for pediatric data do not apply to any drug for an indication for which orphan designation has been granted.

Pediatric exclusivity is another type of non-patent exclusivity in the U.S. and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the five-year and three-year non-patent and orphan exclusivity.  This six-month exclusivity may be granted if an NDA or Biologic License Application sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical study is deemed to fairly respond to the FDA's request, the additional protection is granted. If reports of FDA-requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application relying on the NDA sponsor's data.

Hatch-Waxman Amendments and Exclusivity

As an alternative path to FDA approval for modifications to formulations or uses of products previously approved by the FDA, an applicant may submit an NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant. If the 505(b)(2) applicant can establish that reliance on FDA's previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements, including clinical trials, to support the change from the approved branded reference drug. The FDA may then approve the new product candidate for all, or some, of the label indications for which the branded reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.

In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant's product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the Orange Book. Any applicant who files an abbreviated new drug application, or ANDA, seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA that (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. This last certification is known as a paragraph IV certification. A notice of the paragraph IV certification must be provided to each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the ANDA or 505(b)(2) application refers.  The applicant may also elect to submit a ''section viii'' statement certifying that its proposed label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent.

If the reference NDA holder and patent owners assert a patent challenge directed to one of the Orange Book listed patents within 45 days of the receipt of the paragraph IV certification notice, the FDA is prohibited from approving the application until the earlier of 30 months from the receipt of the paragraph IV certification expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the applicant.  The ANDA or 505(b)(2) application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the branded reference drug has expired.  Specifically, the holder of the NDA for the listed drug may be entitled to a period of non-patent exclusivity, during which the FDA cannot approve an ANDA or 505(b)(2) application that relies on the listed drug. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity, or NCE, which is a drug that contains an active moiety that has not been approved by FDA in any other NDA. An ''active moiety'' is defined as the molecule or ion responsible for the drug substance's physiological or pharmacologic action. During the five-year exclusivity period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA for the same active moiety and that relies on the FDA's findings regarding that drug, except that FDA may accept an application for filing after four years if the follow-on applicant makes a paragraph IV certification.

A drug, including one approved under Section 505(b)(2), may obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant. Should this occur, the FDA would be precluded from approving any ANDA or 505(b)(2) application for the protected modification until after that three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an application and begin the review process during the exclusivity period.

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Coverage and Reimbursement

Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health care programs, commercial insurance and managed healthcare organizations.  These third-party payors are increasingly limiting coverage and reducing reimbursements for medical products and services.  In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on coverage and reimbursement and requirements for substitution of generic products.  Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results.  Decreases in third-party reimbursement for PROCYSBI and our drug candidates or a decision by a third-party payor to not cover PROCYSBI and our drug candidates could reduce physician utilization of our products and have a material adverse effect on our sales, results of operations and financial condition.

Other Healthcare Laws

We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business.  These laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physician sunshine laws and regulations.

The federal Anti-Kickback Statute prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs.  The Anti-Kickback Statute is subject to evolving interpretations. In the past, the government has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies based on sham consulting and other financial arrangements with physicians. Further, the recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Health Care Reform Law, among other things, amends the intent requirement of the federal Anti-Kickback Statute and the criminal statute governing healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them. In addition, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute. The majority of states also have anti-kickback laws which establish similar prohibitions and in some cases may apply to items or services reimbursed by any third-party payor, including commercial insurers.

Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices.  The government has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers' and manufacturers' compliance with applicable fraud and abuse laws.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The Health Care Reform Law, among other things, imposes new reporting requirements on drug manufacturers for payments made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.  Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for "knowing failures"), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission.  Drug manufacturers were required to begin collecting data on August 1, 2013 and submit reports to the government by March 31, 2014 and the 90^th day of each subsequent calendar year.  Certain states also mandate implementation of commercial compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.

The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or more of the requirements.  If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

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Legal Proceedings

We know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholders are an adverse party or have a material interest adverse to us.

Research and Development

We have an active research and development effort.  Our plan is to focus our research and development efforts in the discovery, research, preclinical and clinical development of our clinical drug candidates in order to provide therapies that we believe will be safer, less intrusive and more effective than current approaches in treating a wide variety of disorders.  During the year ended December 31, 2013, the four-month transition period ended December 31, 2012 and the fiscal years ended August 31, 2012 and 2011, we incurred approximately $29.2 million, $8.9 million, $21.4 million and $14.8 million, respectively, in research and development expenses.

Operating Segment and Geographic Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by a company in deciding how to allocate its resources and to assess its performance.  We have reviewed how we allocate our resources and analyze performance worldwide and have determined that, because employees work on integrated programs in the U.S. and in Europe, encompassing all stages of product development and commercialization, we operate in one segment.

Compliance with Environmental Laws

 We estimate the annual cost of compliance with environmental laws, comprised primarily of hazardous waste removal, will be nominal.

Employees

 As of December 31, 2013, we had 70 full time employees (65 and 5 in the U.S. and EU, respectively) and 2 U.S. part-time employees.  Of the 70 employees, 40 are sales and marketing and general and administrative personnel and 30 are in manufacturing, quality control and assurance and research and development.  Based on our current plan, over the next 12-month period we intend to expand our U.S. and EU employee base across all functions in the Company.

Facilities

Our primary offices are located at 5 Hamilton Landing, Suite 160, Novato, CA 94949.  Our main phone number is (415) 408-6200 and our facsimile number is (415) 382-8002.

Website

Our corporate website is located at www.raptorpharma.com.  Any information contained in, or that can be accessed through, our website is not incorporated by reference into, nor is it in any way a part of, this Annual Report on Form 10-K.

Available Information

We are subject to the reporting requirements under the Exchange Act. Consequently, we are required to file reports and information with the SEC, including reports on the following forms: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.  These reports and other information concerning us may be accessed through the SEC's website at www.sec.gov and on our website at www.raptorpharma.com.  Such filings are placed on our website as soon as reasonably practicable after they are filed with the SEC.

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ITEM 1A:  RISK FACTORS

Investing in our common stock involves a high degree of risk.  Before deciding whether to invest in our common stock, you should consider carefully the risk factors described below, together with the other information contained in this Annual Report on Form 10-K.  If any of these risks actually occur, it may materially harm our business, financial condition, operating results or cash flow.  As a result, the market price of our common stock could decline, and you could lose all or part of your investment.  Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, operating results and financial condition and could result in a complete loss of your investment.

Risks Associated with Commercialization and Product Development

We currently depend entirely on the commercial success of our lead drug, PROCYSBI, for the management of nephropathic cystinosis.

PROCYSBI is our only product currently approved for marketing and, as a result, our operating results are substantially dependent on the commercial success of PROCYSBI, for which we commenced marketing in the U.S. in June 2013.  In the U.S., we are permitted to market PROCYSBI only for the management of nephropathic cystinosis in adults and children six years and older.  In September  2013, we received marketing authorization from the European Commission, which allows us to commercialize PROCYSBI in the 28 Member States of the EU plus Norway, Liechtenstein and Iceland (which are not EU Member States but are part of the European Free Trade Association, or EFTA) for the treatment of proven nephropathic cystinosis; however, we have not yet commercially launched PROCYSBI in the EU.  We believe that the trading price of our common stock will be substantially affected by our results of operations and, in particular, net product sales of PROCYSBI.  We do not have prior experience in commercializing therapeutics.  If PROCYSBI sales do not meet expectations, our stock price may not increase or could significantly decrease.  The successful commercialization of PROCYSBI will depend on several factors, including:

·	growing sales of PROCYSBI in the U.S.;

·	the negotiation and agreement on an acceptable prices in EU countries and other select territories, and reimbursement at the country-specific price;

·	the successful commercial launch of PROCYSBI in the EU and other select territories;

·	acceptance of PROCYSBI by physicians, parents, patients and cystinosis research/advocacy organizations including the conversion from the existing standard of care to PROCYSBI;

·	coverage and reimbursement for PROCYSBI from commercial health plans and government health programs, which we refer to collectively as third-party payors;

·	compliance with regulatory requirements including fulfilling any FDA and EC required post-approval commitments;

·	provision of affordable out-of-pocket cost to patients and/or other programs to ensure patient access to PROCYSBI in the U.S.;

·	approval by other country regulatory agencies of appropriate product labeling for PROCYSBI;

·	agreements with wholesalers, distributors and pharmacies on commercially reasonable terms;

·	manufacture and supply of adequate quantities of PROCYSBI to meet commercial demand; and

·	development and maintenance of intellectual property protection for PROCYSBI.

If we fail to grow sales of PROCYSBI in the U.S. or successfully commercialize PROCYSBI in the EU within a reasonable time period, we may never become profitable and may be unable to sustain our business, and our business, financial condition and results of operations will be adversely affected.

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Our ability to generate significant product sales from PROCYSBI is dependent upon market acceptance among physicians, patients, patient families, third-party payors and the healthcare community.

PROCYSBI may not attain or maintain market acceptance among physicians, patients, patient families, third-party payors or the healthcare community compared to the current standard of care.  We believe that the degree of market acceptance and our ability to generate significant product sales of PROCYSBI will depend on a number of factors, including:

·	availability and relative efficacy, safety and ease of administration of alternative treatments;

·	the price of our product, both in absolute terms and relative to alternative treatments;

·	timing of market introduction of our product as well as competitive drugs;

·	efficacy, safety and prevalence and severity of any side effects of PROCYSBI;

·	identification of currently diagnosed and undiagnosed patients and continued growth of the cystinosis market;

·	acceptance by patients, patient families and primary care and other specialists including conversion from the existing standard of care;

·	continued patient adherence to therapy;

·	the effect of current and future healthcare laws;

·	availability of coverage and adequate reimbursement and pricing from third-party payors; and

·	breadth of product labeling or product insert requirements of the FDA, EC or other regulatory authorities.

If PROCYSBI does not achieve and maintain significant market acceptance among physicians, patients, patient families, third-party payors or the healthcare community, our ability to generate revenues from PROCYSBI will be materially and adversely affected.

The amount of our product sales of PROCYSBI in the EU is dependent upon the pricing and reimbursement guidelines adopted in each of the various countries in the EU, which levels may be below our current expectations.

We have not yet priced PROCYSBI in any countries in the EU. While we are developing estimates of anticipated pricing, one or more EU countries may not support our anticipated pricing and reimbursement for PROCYSBI, particularly in light of the budget crises faced by a number of countries in the EU, which would negatively affect anticipated revenue from PROCYSBI.  The pricing and reimbursement process in the EU can be lengthy and involved, and we do not have significant experience with this process.  Failure to timely complete the pricing and reimbursement process in the EU will delay our ability to market PROCYSBI in the EU and derive product sales in that region.

If we are unable to expand the use of RP103 and receive regulatory approval for any other indication, we may delay or cease some of our product development activities, which would adversely affect the long term value of RP103 and our growth prospects.

We must obtain and maintain appropriate pre-market approvals from regulatory agencies in each of the markets in which we intend to market our products.  Once approved, we may only market our products for the specific uses that are reflected in the product's approved labeling.  In the U.S., we are permitted to market RP103 only for the management of nephropathic cystinosis in adults and children six years and older under the brand name PROCYSBI.  We are permitted to market PROCYSBI in the EU as an orphan medicinal product for the treatment of proven nephropathic cystinosis.  We do not have approval of RP103 in any other market nor for any other disease indication.  A new drug application, or NDA, submitted to the FDA or marketing authorization application, or MAA, submitted to the EMA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, to demonstrate the safety and efficacy of the applicable product candidate for the management of each individual indication to the satisfaction of the applicable regulatory authority.

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Obtaining approval of an NDA, MAA or any other filing for marketing authorization in a foreign country is an extensive, expensive and uncertain process. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities.  The FDA, EC or other regulatory authorities may delay, limit or deny approval of RP103 or our future drug product candidates for many reasons, including:

·	the results of clinical trials may not meet the level of statistical or clinical significance required by regulatory authorities for approval;

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regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical trials; may not find the data from preclinical studies and clinical trials sufficient to demonstrate that a product candidate has adequate clinical and other benefits or an adequate safety profile; or may disagree with our interpretation of data from preclinical studies or clinical trials and require that we conduct additional trials;

·	regulatory authorities may not accept data generated at our clinical trial sites;

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regulatory authorities may have difficulties scheduling an advisory committee meeting (or equivalent, if required) in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the regulatory agency require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

·	regulatory authorities may require additional preclinical or clinical studies or other data prior to granting approval, and we may not be able to generate the required data on a timely basis, if at all;

·	regulatory authorities may impose limitations on approved labeling, thus introducing reimbursement complications which may limit access for intended uses or limit the commercial profile of the drug;

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regulatory authorities may identify deficiencies in the manufacturing processes or in the facilities of our third-party suppliers and/or contract manufacturers, or may require us to manufacture additional validation batches or change our process, specifications or third-party suppliers or contract manufacturers;

·	we may not be able to validate our manufacturing process to the satisfaction of the regulatory authorities, or they may not agree with our plan for potential retrospective validation; or

·	regulatory authorities may change approval policies or adopt new regulations.

If we fail to gain regulatory approval for RP103 for other indications, we will have to delay or terminate some or all of our research product development programs and our business, financial condition and results of operations will be adversely affected.

We do not have internal manufacturing capabilities.  During 2014 and throughout most of 2015, we expect to continue to rely on a single supplier for the active pharmaceutical ingredient and a single third-party manufacturer for the conversion to finished drug product.  If we are unable to obtain an adequate supply of our drugs, our reputation will be harmed, our revenues will be delayed or diminished and our financial results will be adversely affected.

Using external CMOs under contract, we currently manufacture commercial and clinical quantities of PROCYSBI and RP103 for the indications under development.  We rely on single manufacturing sources for our cysteamine active pharmaceutical ingredient, or API, and finished products.  Our ability to obtain sufficient quantities of PROCYSBI and RP103 is constrained by limited supplies of raw materials and capacity and output of these manufacturers, which may have a material adverse impact on sales of PROCYSBI and the availability of product for our clinical trials.  While we have entered into an agreement with a second tablet manufacturer, we expect that this second manufacturer will not be able to produce finished products for commercial sale until the latter part of 2015.  Furthermore, any reduction or interruption in our supply of API from the single source supplier and of finished goods from our contract manufacturer, and efforts to identify and qualify alternative sources of API supply, could result in significant additional operating costs, interruptions in product supply and delays in sales of PROCYSBI and in developing RP103 for HD, NAFLD and Leigh's syndrome.  In addition, supply arrangements from alternative sources may not be available on acceptable economic terms, if at all.

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The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls.  Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production to commercial requirements.  Difficulties may arise related to production costs and yields, quality control, including stability of the product or product candidates and quality control testing, sourcing scarcities, resource constraints, equipment problems, shortages of qualified personnel, labor disputes, severe weather events, unstable political environments or financial difficulties at foreign facilities, as well as compliance with strictly enforced federal, state and foreign regulations.  In addition, due to our small patient population, the manufacture of our drug may be given lower prioritization on the production line if manufacturing is decided by scale.

We depend on our third-party supplier and manufacturers for compliance with the FDA's cGMP requirements and other FDA requirements, Drug Enforcement Administration's regulations and other rules and regulations prescribed by applicable non-U.S. regulatory authorities.  We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with good manufacturing practices, or cGMP, requirements.  If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel.  If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to market PROCYSBI and to develop, obtain regulatory approval for or market our product candidates, if approved.   If we or our third-party suppliers and manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may issue warning letters or untitled letters; seek an injunction or impose civil or criminal penalties or monetary fines; suspend or withdraw regulatory approval; suspend any ongoing clinical trials; refuse to approve pending applications or supplements to applications; suspend or impose restrictions on operations, including costly new manufacturing requirements; seize or detain products; or request that we initiate a product recall.

If any of these events were to occur, our reputation would be harmed, revenues from sales of our products would be delayed or diminished and our business, financial condition and results of operations would be adversely affected.

PROCYSBI is, and any other future product candidates, if approved, will be, subject to extensive and ongoing regulatory requirements and continued regulatory review, which will result in significant expense.  Additionally, PROCYSBI and our future product candidates, if approved, may be subject to labeling and other restrictions or potential market withdrawal, and we may be subject to penalties and litigation if we fail to comply with regulatory requirements or experience problems with our products.

Our manufacturing processes, labeling, packaging, distribution, storage, adverse event reporting, dispensation, distribution, advertising, promotion and recordkeeping are subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, ongoing maintenance of product registration, as well as continued compliance with cGMPs, GCPs, good distribution practices, or GDPs, and good laboratory practices, or GLPs.  If we do not comply with applicable regulations and requirements, the range of possible sanctions includes adverse publicity, product recalls or seizures, fines, total or partial suspensions of production and/or distribution, suspension of marketing applications, withdrawal of a product's approval and enforcement actions, including injunctions and civil or criminal prosecution. In addition, if we or a regulatory agency discover previously unknown problems with PROCYSBI, such as adverse events of unanticipated severity or frequency, or identify data that suggest that PROCYSBI may present a risk to safety, the regulatory authorities could withdraw our product approval, suspend production or place other marketing restrictions on our products.  If regulatory sanctions are applied or if regulatory approval is withdrawn, our growth prospects and our operating results will be adversely affected.

Moreover, any regulatory approvals that we obtain will be subject to limitations on the approved indicated uses for which the product may be marketed or the conditions of approval, or contain requirements for potentially costly post-market testing and surveillance to monitor the safety and efficacy of the product.  The FDA and EC strictly regulate the promotional claims that may be made about prescription products and our product labeling, advertising and promotion is subject to continuing regulatory review. Physicians nevertheless may prescribe our product to their patients in a manner that is inconsistent with the approved label, or that is off-label.  The FDA, the Competent Authorities of the Member States of the Economic European Area, or EEA, and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and if we are found to have improperly promoted off-label uses we may be subject to significant sanctions, civil and criminal fines and injunctions prohibiting us from engaging in specified promotional conduct.

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In addition, engaging in improper promotion of our products for off-label uses in the U.S. can subject us to false claims litigation under federal and state statutes, which can lead to consent decrees, civil money penalties, restitution, criminal fines and imprisonment, and exclusion from participating in Medicare, Medicaid and other federal and state health care programs.  These false claims statutes in the U.S. include the federal False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid.  If the government prevails in the lawsuit, the individual will share in any fines or settlement funds.  Growth in false claims litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs.

In the EEA, the advertising and promotion of pharmaceuticals is strictly regulated, and the direct-to-consumer promotion of prescription pharmaceuticals is not permitted. The Member States of the EEA have also adopted laws against misleading and unfair advertising. In addition, some Member States require the notification and/or prior authorization of promotional or advertising materials directed at health care professionals.  Failure to comply with these regulations can lead to the imposition of administrative fines and criminal penalties, civil litigation leading to injunctive relief to stop the advertising, corrective statements, or damages.

If serious adverse side effects become associated with PROCYSBI, our business will be harmed.

The prescribing information for PROCYSBI includes several warnings relating to observed adverse reactions of cysteamine bitartrate usage.  These adverse reactions were not observed in our clinical trials supporting PROCYSBI's NDA and MAA, but were required on our label due to our submission of a 505(b)(2) application in the U.S. and a hybrid application in the EU.  The FDA may require products approved under Section 505(b)(2) of the FDCA to bear the same or similar warning statements as the reference product.  We expect to update adverse reactions listed in the prescribing information based on continued commercial use and additional clinical trials.  If additional adverse reactions emerge, or if there is a pattern of severe or persistent previously observed side effects in the relevant patient populations, the FDA, the EMA or other regulatory agencies could modify or revoke our marketing approval, require us to modify our label, or require us to suspend production, or we may choose to withdraw PROCYSBI from the market.  If this were to occur, we may be unable to obtain marketing approval in other indications.  In addition, patients or their representatives may bring claims against us alleging serious adverse side effects or harm suffered as a result of use of PROCYSBI.  Any such side effects or related claims could have a material adverse effect on our business, financial condition and results of operations.

See also the risk factor titled "We may be subject to product liability claims."

Pressure on drug product third-party payor coverage, reimbursement and pricing may impair our ability to be reimbursed for PROCYSBI and our other future product candidates at prices or on terms sufficient to provide a viable financial outcome.

Market acceptance and sales of PROCYSBI and any product candidates that we may develop will depend in large part on third-party payor coverage and reimbursement policies and may be affected by future healthcare reform measures in the U.S. as well as the EU and other key international markets.  The continuing efforts of governmental and third-party payors to contain, reduce or shift the costs of healthcare through various means, including an increased emphasis on managed care and attempts to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, may result in downward pressure on product pricing, reimbursement and utilization, which may adversely affect our product sales and results of operations.  These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, drug coverage and reimbursement policies and pricing in general.  Moreover, private health insurers and other third-party payors in the U.S. often follow the coverage and reimbursement policies of government payors, including the Medicare or Medicaid programs.  In the U.S., third-party payors are shifting their cost containment measures to specialty products and high-cost drugs and PROCYSBI may be a target of such measures.

Beginning April 1, 2013, Medicare payments for all items and services under Part A and B, including drugs and biologicals, and most payments to plans under Medicare Part D were reduced by 2% under the automatic spending reductions, or sequestration, required by the Budget Control Act of 2011, or BCA, as amended by the American Taxpayer Relief Act, or ATRA.  The BCA required sequestration for most federal programs, excluding Medicaid, Social Security and certain other programs, because Congress failed to enact legislation by January 15, 2012 to reduce federal deficits by $1.2 trillion over 10 years.  As long as BCA cuts remain in effect, they could adversely impact payment for PROCYSBI.  In addition, other recent legislative changes that increase manufacturer liability for rebates and other payments under the 340B drug pricing program, the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit also could impact our revenues.   See the risk factor titled "Enacted and future legislation may increase the difficulty and cost for us to commercialize PROCYSBI or any other product candidate that we develop and affect the prices we may obtain."

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Further, payors also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price, or ASP, average manufacturer price, or AMP, or actual acquisition cost, or AAC.  Although the intent of the changes to reimbursement methodologies generally is to limit payment increases, it is difficult to project the impact of these and other alternative reimbursement methodologies on the willingness of payors to reimburse PROCYSBI and any product candidates that we may develop.  Although to date PROCYSBI has been reimbursed, we do not know whether third-party payors will continue to reimburse PROCYSBI in the U.S. and whether third-party payors will reimburse RP103 and our future products for future commercial indications until we enter into payor negotiations.  If coverage and reimbursement are not available or available only to limited levels, we may not be able to generate sufficient revenue to meet our operating costs or to achieve our revenue, cash flow breakeven or profitability goals in the timeframe that we expect, or at all.

Enacted and future legislation may increase the difficulty and cost for us to commercialize PROCYSBI or any other product candidate that we develop and affect the prices we may obtain.

In the U.S., there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that restrict or regulate post-approval activities, which may affect our ability to profitably sell PROCYSBI or any other product candidate for which we obtain marketing approval.

The Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products.  The legislation expanded Medicare coverage for outpatient drug purchases by those covered by Medicare under a new Part D and introduced a new reimbursement methodology based on average sales prices for Medicare Part B physician-administered drugs.  In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies whereby they can limit the number of drugs that will be covered in any therapeutic class.  As a result of this legislation and the expansion of federal coverage of drug products, there is additional pressure to contain and reduce costs.  While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.  These cost reduction initiatives and other provisions of the MMA could decrease the coverage and reimbursement that we receive for any approved products, and could seriously harm our business.   Manufacturers' contributions to this area, including donut hole coverage (as described below) or potential excise taxes, are increasing and are subject to additional changes in the future.

In 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, the "Health Care Reform Law"), a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.  The Health Care Reform Law, among other things, revised the definition of AMP for reporting purposes, which could increase the amount of Medicaid drug rebates to states and extended the rebate program to beneficiaries enrolled in Medicaid managed care organizations.  The Health Care Reform Law also imposed a significant annual fee on companies that manufacture or import branded prescription drug products and established an annual non-deductible fee on entities that sell branded prescription drugs or biologics to specified government programs in the U.S.  The Health Care Reform Law also expanded the 340B drug discount program (excluding orphan drugs), including the creation of new penalties for non-compliance and included a 50% discount on brand name drugs for Medicare Part D participants in the coverage gap, or "donut hole."  The Health Care Reform Law includes a provision to increase the Medicaid rebate for line extensions or reformulated drugs, which depending on how this provision is implemented could substantially increase our Medicaid rebate rate (in effect limiting reimbursement for these patients).  These and other new provisions are likely to continue the pressure on pharmaceutical pricing, may require us to modify our business practices with healthcare practitioners, and may also increase our regulatory burdens and operating costs.  See the risk factor titled "Failure to comply with healthcare regulations may subject us to substantial penalties."

Legislative and regulatory proposals also have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.  In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may subject us to more stringent product labeling and post-marketing testing and other requirements.  Delays in feedback from the FDA may affect our ability to quickly update or adjust our label in the interest of patient adherence and tolerability. We cannot predict whether other legislative changes will be adopted or how such changes would affect the pharmaceutical industry generally and specifically the commercialization of PROCYSBI.

Failure to comply with healthcare regulations may subject us to substantial penalties.

Although we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse, physician payment transparency and privacy and security laws and regulations apply to us and our arrangements with healthcare providers, customers and other entities, including our marketing practices, educational programs and pricing policies.  The laws that may affect our ability to operate as a commercial organization include:

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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs;

·	federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent;

·	federal criminal laws that prohibit executing a scheme to defraud any federal healthcare benefit program or making false statements relating to healthcare matters;

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the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

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the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other "transfers of value" made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other "transfers of value" to such physician owners and their immediate family members. Manufacturers were required to begin data collection on August 1, 2013 and to report aggregate data to the government by March 31, 2014 with more detailed reports due by August 1, 2014;

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in the EU, in various Member States, including France, the UK, the Netherlands, Italy, or Spain, the legislator or self-regulatory industry bodies have adopted rules requiring the notification and/or publication of certain transfers of value from pharmaceutical companies to health care professionals.  For example, France has recently adopted legislation (Law No. 2011-2012, or the "French Sunshine Act," and Decree no. 2013-414 which implements it) requiring pharmaceutical companies to disclose and publish agreements with or transfers of value to health care professionals; and

·	analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.  In addition, the Health Care Reform Law further strengthened these laws by amending the intent requirement of the federal anti-kickback and criminal health care fraud statutes.  A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it.  In addition, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes.  Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business.

Moreover, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing.  Certain states mandate implementation of compliance programs and/or the tracking and reporting of gifts, compensation, and other remuneration to physicians.  The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increase the possibility that a healthcare company may violate one or more of the requirements.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with physicians and other health care providers, some of whom recommend, purchase and/or prescribe our products, could be subject to challenge under one or more of such laws.  While these activities are structured to comply with all applicable laws, if our operations are found to be in violation of any of the laws described above or any other laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to market PROCYSBI, RP103 and other future drug candidates and adversely impact our financial results.  See also the risk factor titled "If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the U.S., we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and future business prospects."

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If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the U.S., we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and future business prospects.

We participate in the Medicaid Drug Rebate Program and other Federal and state government pricing programs in the U.S., and we may participate in additional government pricing programs in the future.  These programs generally require us to pay rebates or provide discounts to government payors in connection with drugs, including PROCYSBI, that are dispensed to beneficiaries of these programs.  In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing and rebate calculations that we report on a monthly and quarterly basis to the government agencies that administer the programs.  The terms, scope and complexity of these government pricing programs change frequently.  Responding to current and future changes may increase our costs and the complexity of compliance will be time-consuming, and could have a material adverse effect on our results of operations.

Pricing and rebate calculations vary among products and programs.  The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts.

In addition, the Office of Inspector General has recently increased its focus on the methodologies used by manufacturers to calculate AMP and best price, or BP, to assess manufacturer compliance with reporting requirements under the Medicaid Drug Rebate Program. We are liable for errors associated with our submission of pricing data and for overcharging government payors.  For example, failure to submit monthly/quarterly AMP and BP data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date.  Failure to make necessary disclosures and/or to identify overpayments could result in allegations against us under the Federal False Claims Act and other laws and regulations.

Unexpected refunds to the U.S. government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition and results of operations. In the event that CMS were to terminate our rebate agreement, no federal payments would be available under Medicaid or Medicare for our covered outpatient drugs.

Because the target patient populations for PROCYSBI and some of our drug product candidates are small, we must achieve significant market share and obtain relatively high per-patient prices for our products to achieve meaningful gross margins.

PROCYSBI and our clinical development of RP103 target diseases with small patient populations, including cystinosis and HD, respectively.  A key component of the successful commercialization of a drug product for these indications includes identification of patients and a targeted prescriber base for the drug product.  Due to small patient populations, we believe that we would need to have significant market penetration to achieve meaningful revenues and identifying patients and targeting the prescriber base are key to achieving significant market penetration.  In addition, the per-patient prices at which we sell PROCYSBI (currently an average of $250,000 per year prior to rebates, discounts, distribution fees and not adjusted for patient compliance in the U.S.) and RP103 for these indications will need to be relatively high in order for us to generate an appropriate return for the investment in these product development programs and achieve meaningful gross margins.  There can be no assurance that we will be successful in achieving a sufficient degree of market penetration and/or obtaining or maintaining high per-patient prices for PROCYSBI and RP103 for diseases with small patient populations.  Further, even if we obtain significant market share for PROCYSBI and RP103, if approved, because the potential target populations are very small, we may never achieve profitability despite obtaining such significant market share.  Furthermore, because the potential target populations are very small, even if we do obtain significant market share for PROCYSBI and RP103, if approved, we may never achieve profitability.  Additionally, patients who discontinue therapy or do not fill prescriptions are not easily replaced by new patients, given the limited patient population.

If we fail to obtain or maintain orphan drug exclusivity or regulatory exclusivity for PROCYSBI and some of our orphan drug product candidates, our competitors may sell products to treat the same conditions or sell at greatly reduced prices and our revenues will be significantly reduced.

As part of our business strategy, we intend to develop RP103 for additional indications and other drugs that may be eligible for FDA and EMA orphan drug designation.  Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined as a patient population of less than 200,000 in the U.S., or a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the U.S.  In the U.S., orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.  The company that first obtains FDA approval for a designated orphan drug for a given rare disease receives marketing exclusivity for use of that drug for the stated condition for a period of seven years, with an additional six months if for a pediatric indication.  Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective, a subsequent product is deemed clinically superior, or if the manufacturer is unable to deliver sufficient quantity of the drug.

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In the EU, the EMA's Committee for Orphan Medicinal Products, or COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the EU Community and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected). Additionally, designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the EU would be sufficient to justify the necessary investment in developing the medicinal product.  An EU orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following medicinal product approval.  This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.  Orphan drug designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Because the extent and scope of patent protection for some of our drug products may be particularly limited, orphan drug designation is especially important for our products that are eligible for orphan drug designation.  For eligible drugs, we plan to rely on the orphan exclusivity period to maintain a competitive position.  However, if we do not obtain orphan drug exclusivity for RP103 for the potential treatment of HD or other potential indications, or our future relevant drug products do not have strong patent protection, our competitors may then sell the same drug to treat the same condition and our revenues will be reduced.  Also, without strong patent protection, competitors may sell a generic version upon the expiration of orphan exclusivity, if our patent position is not upheld.

Even though we have been granted orphan drug designation in the U.S. prior to the approval of RP103 for the potential treatment of HD, and even if we obtain orphan drug designation for our future drug product candidates, we may not fulfill the criteria for exclusivity or we may not be the first to obtain marketing approval for any orphan indication.  Further, even if we obtain orphan drug exclusivity for a particular product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve a drug for the same condition if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care.  The FDA can discontinue Orphan Drug exclusivity after it has been granted  if the orphan drug cannot be manufactured in sufficient quantities to meet demand.  Positive clinical trial results in any of our RP103 programs increase the risk that Cystagon may be used off-label in those indications in certain geographic areas due to Cystagon's lower cost and our 505(b)(2) filing status.

A breakthrough designation or fast track designation for our drug product candidates, if obtained, may not actually lead to a faster review process.

Under the Prescription Drug User Fee Act, the FDA has a goal of responding to NDAs within 10 months of submission the filing date for standard review, but this timeframe is also often extended.  In the future, we may seek approval of our drug candidates under programs designed to accelerate the FDA's review and approval of NDAs.  For example, a sponsor may seek FDA designation of a drug candidate as a "fast track product."  Fast track products are those products intended for the treatment of a serious or life-threatening disease or condition and which demonstrate the potential to address unmet medical needs for such disease or condition. If fast track designation is obtained, the FDA may initiate review of sections of an NDA before the application is complete.  This "rolling review" is available if the applicant provides and the FDA approves a schedule for the remaining information.  In some cases, a product may be approved on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments.  Approvals of this kind typically include requirements for appropriate post-approval Phase 4 clinical trials to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint.  In addition, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was enacted and signed into law in 2012, established a new category of drugs referred to as "breakthrough therapies," which are defined as drugs intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.  In the future, we may request breakthrough designation or fast track designation from the FDA for our other drug product candidates, but we cannot assure that we will obtain such designations.  Moreover, even if we obtain breakthrough designation or fast track designation from the FDA, the designations do not guarantee FDA approval of our NDA, that the development program or review timeline will ultimately be shorter than if we had not obtained the designations, or that the FDA will not request additional information, including requesting additional clinical studies (although potentially a post-marketing requirement), during its review.  Any request for additional information or clinical data could delay the FDA's timely review of our NDA.

We may not be successful in integrating our European operations with our U.S. operations.

In connection with the anticipated European commercial launch of PROCYSBI, we have expanded our operations in Europe where we expect to continue to add personnel. We may encounter difficulties successfully managing remotely a substantially larger and internationally diverse organization and may encounter delays in commercialization if we are not successful in integrating our international operations.  Challenges related to managing international operations include the following:

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·	the potential strain on our financial and managerial controls and reporting systems and procedures;

·	potential miscommunication between U.S. personnel and European personnel due to cultural and language differences;

·	the small size of our company and our intention to grow at a consistent but measured pace;

·	ability to operate within diverse individual country regulatory and statutory laws; and

·	the costs of maintaining EU presence, in-country legal entities and related tax structures.

If we fail to obtain and maintain approval from regulatory authorities in international markets for PROCYSBI, RP103 and any future product candidates for which we have rights in international markets, our market opportunities will be limited and our business will be adversely impacted.

Sales of our products outside of the U.S. are subject to foreign regulatory requirements governing clinical trials, manufacturing and marketing approvals.  Even if the FDA and EC grant marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of our product candidates in those countries.  Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials or manufacturing and control requirements.  In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country.  In many cases, the price that we propose to charge for our products is also subject to approval by individual countries before we can launch our product candidates in those countries.  Obtaining foreign regulatory approvals, complying with foreign regulatory requirements and gaining approved pricing and reimbursement could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries.  Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome and results of earlier studies and trials may not be predictive of future trial results.  If we fail to demonstrate safety or efficacy in our preclinical studies or clinical trials or keep to the terms of a product development program, our future business prospects for these drug product candidates will be materially adversely affected.

The success of our development and commercialization efforts will be greatly dependent upon our ability to demonstrate safety and efficacy in preclinical studies and clinical trials.  Preclinical studies involve testing in appropriate multiple non-human disease models to demonstrate efficacy and safety.  Regulatory agencies evaluate these data carefully before they will authorize clinical testing in humans.  If certain preclinical data reveal potential safety issues or the results are inconsistent with an expectation of the drug product candidate's efficacy in humans, the regulatory agencies may require additional testing before allowing human clinical trials.  This additional testing will increase program expenses and extend timelines.  We may decide to suspend further testing on our drug product candidates or technologies if, in the judgment of our management and advisors, the preclinical test results do not support further development.  There are many potential preclinical models to test for different disease states, and we could fail to choose the best preclinical model to determine proof of concept, safety and efficacy of our drug product candidates.

Following successful preclinical testing, drug product candidates must be tested in a clinical development program to provide data on safety and efficacy in humans prior to becoming eligible for product approval and licensure by regulatory agencies.  Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful.  Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.  The clinical trial process may fail to demonstrate with statistical significance that our drug product candidates are safe for humans and effective for indicated uses.  This failure would cause us to abandon a drug product candidate and may delay development of other drug product candidates.  Any delay in, or termination of, our preclinical testing or clinical trials will delay the filing of relevant marketing applications with the regulatory agencies and, ultimately, our ability to commercialize our drug product candidates and generate product revenues.

The rate of completion of any clinical trials will be dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the trial, the availability of alternative therapies and drugs, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays.  We do not know whether our IND for future products or the protocols for any future clinical trials will be accepted by the FDA. We do not know if our clinical trials will begin or be completed on schedule or at all. Even if completed, we do not know if these trials will produce clinically meaningful results sufficient to support an application for marketing approval. The commencement of our planned clinical trials could be substantially delayed or prevented by several factors, including:

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The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:

In addition, many of our clinical trials involve small patient populations.  Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians' and patients' perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Moreover, because of the small sample size, the results of these early clinical trials may not be indicative of future results.  Any delay in our preclinical or clinical programs or the failure to demonstrate safety or efficacy in our clinical trials would have a material adverse effect on our future business prospects, financial condition and results of operations.

We may be subject to product liability claims.

The nature of our business exposes us to potential liability risks inherent in the testing (including through human trials), manufacturing and marketing of drugs.  PROCYSBI and our drug product candidates could potentially harm people or allegedly harm people and we may be subject to costly and damaging product liability claims.  Many of the patients who participate in our current clinical trials and U.S. and EU cystinosis patients who may purchase PROCYSBI commercially are already critically ill or suffering from chronic debilitating diseases.  The waivers we obtain from patients participating in clinical trials may not be enforceable and may not protect us from liability or the costs of product liability litigation.

We may not be able to avoid significant liability if any product liability claim is brought against us.  Although we currently carry product liability insurance, it may not be sufficient to cover future claims.  If a successful product liability claim is brought against us and the amount of liability exceeds our insurance coverage, we may incur substantial charges that would adversely affect our business, financial condition and results of operations.

We rely on third parties for the distribution and pharmaceutical services of PROCYSBI in the U.S. and the EU.

 We rely on a third-party logistics provider and specialty pharmacy to distribute PROCYSBI to patients and to collect from insurance companies and government agencies in the U.S. and in the EU.  Our ability to collect from the logistics provider is not only subject to such provider's credit worthiness but is also dependent, in part, on its ability to arrange for full reimbursement from third-party payors.  The outsourcing of our distribution function is complex, and we may experience difficulties that could reduce, delay or stop shipments of PROCYSBI.  If we encounter such distribution problems, and we are unable to quickly enter into a similar agreement with another specialty distributor on substantially similar terms, if at all, the distribution of PROCYSBI could become disrupted, resulting in reduced revenues, healthcare provider dissatisfaction and/or patient dissatisfaction which may harm our reputation and financial condition.

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Our reliance on third parties may result in delays in completing, or a failure to complete, preclinical testing, clinical trials or regulatory marketing submissions.

In the course of product development, we engage and collaborate with a variety of external organizations to perform services essential to drug product development.  The organizations which perform services may include, but are not limited to:

·	governmental agencies and university laboratories;

·	other biotechnology and pharmaceutical companies;

·	contract manufacturing organizations;

·	clinical research organizations;

·	distribution and supply (logistics) service organizations;

·	contract testing organizations;

·	consultants or consulting organizations with specialized knowledge based expertise;

·	intellectual property legal firms; and

·	multiple other service organizations.

As a result of our engagement of these types of organizations to help us with our product development programs, many important aspects of our business are and will be out of our direct control.  Nevertheless, we are responsible for ensuring that each of our product development programs complies with applicable regulatory requirements, and our reliance on these organizations does not relieve us of our regulatory responsibilities. If any such organizations we engage in the future fail to perform their obligations under our agreements with them or fail to perform in a satisfactory manner in compliance with applicable regulatory requirements, we may face delays in completing our development and commercialization processes for any of our drug product candidates and could be required to repeat testing or clinical trials, which would delay the regulatory approval process.  Furthermore, any loss or delay in obtaining contracts with such entities may also delay the completion of our clinical trials, regulatory filings and the potential market approval of our drug product candidates.

Specifically, we have and will continue to rely on third parties, such as contract research organizations and/or co-operative groups, to assist us in overseeing and monitoring clinical trials as well as to process the clinical results.  If third parties fail to perform or to meet the applicable standards, this will result in delays in or failures to complete trials.  A failure by us or such third parties to observe the terms of a product development program for any particular product candidate or to complete the clinical trials for a product candidate in the anticipated time frame could have significant negative repercussions on our business and financial condition.

In addition, our dependence on collaborative arrangements with third parties will subject us to a number of risks that could harm our ability to develop and commercialize products:

·	collaborative arrangements might not be available on terms which are reasonably favorable to us, or at all;

·	disagreements with partners may result in delays in the development and marketing of products, termination of collaboration agreements or time consuming and expensive legal action;

·	agreement terms may be difficult or costly to enforce;

·	partners may not allocate sufficient funds or resources to the development, promotion or marketing of our product candidates, or may not perform their obligations as expected;

·	partners may choose to develop, independently or with other companies, alternative products or treatments, including products or treatments which compete with ours;

·	agreements with partners may expire or be terminated without renewal, or partners may breach agreements with us;

·	business combinations or significant changes in a partner's business strategy or financial resources might adversely affect that partner's willingness or ability to fulfill its obligations to us; and

·	the terms and conditions of the relevant agreements may no longer be suitable.

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We cannot guarantee that we will be able to negotiate acceptable future collaboration agreements or that those currently in existence will make it possible for us to fulfill our objectives.

We depend on the support of key scientific and medical collaborators.

We must establish and maintain relationships with key opinion leaders, leading scientists and research institutions.  We believe that such relationships are pivotal to establishing products using our technologies as a standard of care for their approved indications. Although we have various medical and scientific advisors and research collaborations, there is no assurance that our advisors and our research collaborators will continue to work with us or that we will be able to attract additional research partners.  If we are not able to maintain existing or establish new clinical and scientific relationships to assist in our commercialization and research and development, we may not be able to successfully develop PROCYSBI, RP103 or our other drug product candidates.

We will continue to incur increased costs as a result of corporate governance and financial reporting laws and regulations and our management will continue to be required to devote substantial time to comply with such laws and regulations.

We face burdens relating to increased corporate governance and financial reporting standards.  Legislation or regulations, such as the Physician Payment Sunshine Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as other rules implemented by the FDA, the SEC and NASDAQ, follow stricter corporate governance and financial reporting standards and have led to an increase in the costs of compliance, including substantial increases in consulting, auditing and legal fees.  Our management and other personnel will need to devote a substantial amount of time to these requirements.  New rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors' and officers' 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.  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, on our board committees or as executive officers.  Failure to comply with these new laws and regulations may impact our financial condition and could materially harm our business.

 In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures.  In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.  Our compliance with Section 404 requires that we incur substantial accounting and related expense and expend significant management efforts.  Moreover, if we are not able to comply with the requirements of Section 404, or we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities.

Our success depends on our ability to manage our projected growth.

Continued commercial sales of PROCYSBI in the U.S., the EU commercial launch of PROCYSBI, expansion of our commercial operations into other markets, the continuation of our clinical-stage programs and our current plans to in-license and acquire additional clinical-stage product candidates will require us to retain existing and add required new qualified and experienced personnel in all functional areas over the next several years.  Also, if our preclinical pipeline diversifies through internal discoveries, or the acquisition or in-licensing of new molecules, we will need to hire additional scientists to supplement our existing scientific expertise over the next several years.

Our staff, financial resources, systems, procedures or controls may be inadequate to support our expanding operations and our management may be unable to take advantage of future market opportunities or manage successfully our relationships with third parties if we are unable to adequately manage our anticipated growth and the integration of new personnel.

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Our loan agreement with HealthCare Royalty Partners II, L.P., or HC Royalty, contains a number of restrictive covenants and other provisions, which, if violated, could result in the acceleration of the payment terms of our outstanding indebtedness, which could have an adverse impact on our business and financial condition.

In December 2012, we entered into a loan agreement with HC Royalty as lender, under which we agreed to borrow $50.0 million in two $25.0 million tranches, or the HC Royalty loan agreement.  We drew down the first tranche in the amount of $25.0 million in December 2012 upon signing the HC Royalty loan agreement and we drew down the second tranche of $25.0 million in May 2013 as a result of our achievement of the milestone of U.S. approval of PROCYSBI.  The HC Royalty loan agreement includes a number of affirmative and negative covenants, including the use of commercially reasonable efforts to exploit PROCYSBI and RP103 in specific markets and compliance with laws, as well as restrictions on mergers and sales of assets, incurrence of liens, incurrence of indebtedness and transactions with affiliates and other requirements.  To secure the performance of our obligations under the HC Royalty loan agreement, we granted a security interest to HC Royalty in substantially all of our assets, the assets of our domestic subsidiaries and a pledge of stock of certain of our domestic subsidiaries.  Our failure to comply with the terms of the HC Royalty loan agreement and related documents, the occurrence of a change of control of our Company or the occurrence of an uncured material adverse effect on our Company, or our wholly-owned subsidiary Raptor Pharmaceuticals, or the occurrence of certain other specified events, could result in an event of default under the HC Royalty loan agreement that, if not cured or waived, could result in the acceleration of the payment of all of our indebtedness to HC Royalty and interest thereon.  Under the terms of the security agreement, in an event of default, the lender could potentially take possession of, foreclose on, sell, assign or grant a license to use our pledged collateral and assign and transfer the pledged stock of certain of our subsidiaries.  A default or material adverse effect or change of control would also trigger a prepayment penalty which would require us to pay a substantially higher amount due than the current balance of our loan.

Credit risks from customers outside the U.S. may negatively affect our results of operations.

Any future sales of our products to government supported customers outside of the U.S. are likely to be subject to significant payment delays due to government funding and reimbursement practices, which will result in an increase in the length of time that we may have accounts receivable outstanding.  For example, many governments in Europe are facing significant liquidity crises.  If government reimbursement for future sales of PROCYSBI or our potential products in the EU is delayed or becomes unavailable, we may not be able to collect on amounts payable to us in reasonable time frames from such customers and our capital requirements will increase and our results of operations would be adversely affected.

Our business could be adversely affected by macroeconomic conditions.

Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates, foreign currency exchange rates and overall economic conditions and uncertainties, including those resulting from conditions in the global financial markets and business and economic conditions. For instance, if inflation or other factors were to significantly increase our business costs, it may not be feasible to increase the price of PROCYSBI or other future products due to the process by which healthcare providers are reimbursed.

In the recent past, the U.S. credit and capital markets experienced historic dislocations and a massive liquidity crisis which caused financing to be unavailable in many cases, or caused the cost of financing to significantly increase.  Any similar disruption in the financial markets may increase uncertainty in the debt and equity markets, which may negatively impact our ability to access financing on favorable terms in the future.  In addition, our suppliers, manufacturers and other third parties important to our business also may be negatively affected by such potential market dislocations and disruptions, and their businesses may be disrupted which could adversely affect our business and results of operations.

Any product sales could be reduced by imports from countries where our product candidates are available at lower prices.

Even though we have FDA approval of PROCYSBI, our recognized product sales in the U.S. may be reduced if PROCYSBI is imported into the U.S. from lower priced markets, whether legally or illegally.  In the U.S., prices for pharmaceuticals are generally higher than in the bordering nations of Canada and Mexico.  There have been proposals to legalize the import of pharmaceuticals from outside the U.S.  If such legislation were enacted, our potential future revenues could be reduced.

Our future international sales and operating expenses will be subject to fluctuations in currency exchange rates.

If and when we launch PROCYSBI in the EU and in other countries outside the U.S., a portion of our business will be conducted in currencies other than our reporting currency, the U.S. dollar.  We will recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses.  As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business will likely cause foreign currency translation gains and losses in the future.  Because of the number of currencies that may be involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency translation and transaction losses in the future due to the effect of exchange rate fluctuations.

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Our future success depends, in part, on the continued services of our management team.

Our success is dependent in part upon the availability of our senior executive officers, including Christopher M. Starr, Ph.D., Chief Executive Officer; Julie Anne Smith, Chief Operating Officer; Georgia Erbez, Chief Financial Officer and Ted Daley, Chief Business Officer.  The loss or unavailability to us of any of these individuals or key research and development personnel, and particularly if lost to competitors, could have a material adverse effect on our business, prospects, financial condition and results of operations.  We do not have key-man insurance on any of our employees.

There is no assurance that we will be able to retain key employees or consultants.  There is intense competition for qualified scientists and managerial personnel from numerous pharmaceutical and biotechnology companies, as well as from academic and government organizations, research institutions and other entities.  If key employees terminate their employment, or if insufficient numbers of qualified employees are retained, or are not available via recruitment, to maintain effective operations, our development activities might be adversely affected, management's attention might be diverted from managing our operations to hiring suitable replacements and our business might suffer.  In addition, we might not be able to locate suitable replacements for any key employees that terminate their employment with us and we may not be able to offer employment to potential replacements on reasonable terms, which could negatively impact our product candidate development timelines and may adversely affect our future revenues and financial condition.

In addition to our employees, we rely and will continue to rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development strategy.  All of our consultants and advisors will be employed by other employers or be self-employed, and will have commitments to or consulting or advisory contracts with other entities that may limit their availability to us.

If we do not achieve our projected development and commercialization goals in the time frames we expect and announce, the price of our common stock may decline.

For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory, market launch and commercialization goals, which we sometimes refer to as milestones.  These milestones include the completion of reimbursement and pricing negotiations and a commercial launch in the EU and other territories, commencement or completion of scientific studies and clinical trials, and the submission of regulatory filings.

From time to time, we may publicly announce the estimated timing of some of these milestones.  All of these milestones will be based on a variety of assumptions.  The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control.  For example, clinical trials may be delayed due to factors such as institutional review board, or IRB, approvals, qualification of clinical sites, scheduling conflicts with participating clinicians and clinical institutions and the rate of patient enrollment.  In most circumstances, we rely on academic institutions, major medical institutions, governmental research organizations (U.S. or internationally based), clinical research organizations or contract manufacturing organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates.  We will have limited control over the timing and other aspects of these clinical trials.  Furthermore, our ability to launch commercial sales of PROCYSBI in the EU is subject to the timely completion of reimbursement and pricing negotiations with various governmental entities in the EU, which process can be lengthy and uncertain.  See also the risk factors titled "The amount of our product sales of PROCYSBI in the EU is dependent upon the pricing and reimbursement guidelines adopted in each of the various countries in the EU, which levels may be below our current expectations" and "Our reliance on third parties may result in delays in completing, or a failure to complete, preclinical testing, clinical trials or regulatory marketing submissions."

If we do not meet the milestones as publicly announced, or as projected by various security analysts who follow our Company, our stockholders or potential stockholders may lose confidence in our ability to meet overall product development and commercialization goals and, as a result, the price of our common stock may decline.

Our executive offices and laboratory facility are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facility and equipment, or that of our third-party manufacturers or single-source suppliers, which could materially impair our ability to continue our product development programs.

Our executive offices and laboratory facility are located in the San Francisco Bay Area near known earthquake fault zones and are vulnerable to significant damage from earthquakes.  We and the contract manufacturers and our single-source suppliers of raw materials and critical services are also vulnerable to damage from other types of disasters, including fires, storms, floods, power losses and similar events.  If such a disaster were to occur, our ability to continue our product development programs or product commercialization activities could be seriously, or potentially completely, impaired.  The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

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Risks Related to Intellectual Property and Competition

If we are unable to protect our proprietary technology, we may not be able to compete as effectively and our business and financial prospects may be harmed.

Where possible, we seek patent protection for certain aspects of our technology.  Patent protection may not be available for some of the drug product candidates we are developing.  If we must spend extraordinary time and money protecting our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed.

The patent positions of biopharmaceutical products are complex and uncertain.

We own or license issued U.S. and foreign patents and pending U.S. and foreign patent applications related to certain of our drug product candidates.  However, these patents and patent applications do not ensure the protection of our intellectual property for a number of reasons, including the following:

•	We do not know whether our patent applications will result in issued patents.  For example, we may not have developed a method for treating a disease before others developed similar methods;

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Competitors may interfere with our patent process in a variety of ways.  Competitors may claim that they invented the claimed invention prior to us, or file patent applications before we do.  Competitors may also claim that we are infringing on their patents and therefore cannot practice our technology as claimed under our patents, if issued.  Competitors may also contest our patents, if issued, by showing the patent examiner that the invention was not original, was not novel or was obvious.  In litigation, a competitor could claim that our patents, if issued, are not valid for a number of reasons.  If a court agrees, we would lose that patent.  As a Company, we have no meaningful experience with competitors interfering with our patents or patent applications;

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Enforcing patents is expensive and may absorb significant management time.  Management would spend less time and resources on developing drug product candidates.  The processes of defending patents and related intellectual property could increase our operating expenses and delay product programs; and

•	Receipt of a patent may not provide practical protection.  If we receive a patent with a narrow scope, then it will be easier for competitors to design products that do not infringe on our patent.

In addition, competitors also seek patent protection for their technology.  Due to the number of patents in our field of technology, we cannot be certain that we do not infringe on those patents or that we will not infringe on patents granted in the future.  If a patent holder believes our drug product candidate infringes on its patent, the patent holder may sue us even if we have received patent protection for our technology.  If someone else claims we infringe on their technology, we would face a number of issues, including the following:

•	Defending a lawsuit takes significant time is typically very expensive;

•	If a court decides that our drug product candidate infringes on the competitor's patent, we may have to pay substantial damages for past infringement;

•	A court may prohibit us from selling or licensing the drug product candidate unless the patent holder licenses the patent to us. The patent holder is not required to grant us a license.  If a license is available, we may have to pay substantial royalties or grant cross licenses to our patents; and

•	Redesigning our drug product candidates so we do not infringe may not be possible or practical and could require substantial funds and time.

Our trade secrets may not be adequately protected.  While we use reasonable efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our information to competitors.  Enforcing a claim that someone else illegally obtained and is using our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable.  In addition, courts outside the U.S. are sometimes less willing to protect trade secrets.  Our competitors may independently develop equivalent knowledge, methods and know-how.  We may also support and collaborate in research conducted by government organizations, hospitals, universities or other educational institutions.  These research partners may be unwilling to grant us any exclusive rights to technology or products derived from these collaborations prior to entering into the relationship.  If we do not obtain required licenses or rights, we could encounter delays in our product development efforts while we attempt to design around other patents or even be prohibited from developing, manufacturing or selling drug product candidates requiring these licenses.  There is also a risk that disputes may arise as to the rights to technology or drug product candidates developed in collaboration with other parties.

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If we are limited in our ability to utilize acquired or licensed technologies, we may be unable to develop, out-license, market and sell our product candidates, which could prevent new product introductions and/or cause delayed new product introductions.

We have acquired and licensed certain proprietary technologies and plan to further license and acquire various patents and proprietary technologies owned by other parties.  The agreements in place are critical to our product development programs.  These agreements may be terminated, and all rights to the technologies and product candidates will be lost, if we fail to perform our obligations under these agreements and licenses in accordance with their terms including, but not limited to, our ability to fund all payments due under such agreements.  Our inability to continue to maintain these technologies could adversely affect our business, financial condition and results of operations.  In addition, our business strategy depends on the successful development of licensed and acquired technologies into commercial products, and, therefore, any limitations on our ability to utilize these technologies may impair our ability to develop, out-license or market and sell our product candidates, delay new product introductions, and/or adversely affect our reputation, any of which could have a material adverse effect on our business, financial condition and results of operations.

If our licensing agreements are terminated, we will lose the right to use or exploit our owned and licensed technologies.

Most of our patent portfolio pertaining to PROCYSBI and RP103 for cystinosis and other therapeutic indications has been licensed from academic institutions.  Our license agreements with these institutions include termination clauses which permit the licensor to terminate our license under certain circumstances, including if we materially breach our obligations and fail to remedy the breach within permitted cure periods.  If one or more of our licenses is terminated, we would have no further right to use or exploit the patents, know-how and other intellectual property rights relating to those respective technologies and it could impact our ability to market PROCYSBI or continue our development programs of RP103 in other clinical indications. If this happens our financial condition and results of operations will be adversely affected, and we may have to cease our operations.

If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our drug product candidates, then our technologies and future drug product candidates may be rendered less competitive.

We face significant competition from industry participants that are pursuing similar technologies that we are pursuing and are developing pharmaceutical products that are competitive with PROCYSBI or our drug product candidates.  Many of our pharmaceutical competitors who are in areas competitive with us have greater capital resources, larger overall research and development staff and facilities, and a longer history in drug discovery, development, regulatory approval, manufacturing and marketing than we do.  With these additional resources and experience, our competitors may be able to respond to rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can.

We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies.  Rapid technological development, as well as new scientific developments, may result in our compounds, drug products, drug product candidates or processes becoming obsolete before we can recover any or all of the expenses incurred to develop them.  For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy like we are developing may limit the drug's market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.

If our agreements with employees, consultants, advisors, suppliers and corporate partners fail to protect our intellectual property, proprietary information or trade secrets, it could have a significant adverse effect on us.

We have taken steps to protect our intellectual property and proprietary technology, by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, advisors and corporate and educational institution partners.  Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure.  Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.  Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S.

Risks Related to Our Financial Position and Capital Requirements

Our commercialization efforts and clinical development programs will require substantial future funding which will impact our operational and financial condition.

Excluding PROCYSBI for cystinosis, it will take a substantial period of time before we are able to develop our other drug product candidates into marketable drug products, if at all.  The marketing and sales efforts for PROCYSBI and any future approved products, obtaining adequate reimbursement for products and our product development programs will require substantial additional capital, arising from costs to:

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•	conduct research, preclinical testing and human studies and clinical trials;

•	establish or contract for pilot scale and commercial scale manufacturing processes and facilities;

•	market and distribute PROCYSBI and any future approved products; and

•	establish and develop quality control, manufacturing, regulatory, medical, distribution, marketing, sales, finance and administrative capabilities to support these programs.

Our future operating and capital needs will depend on many factors, including:

•	the effectiveness of our commercialization activities;

•	the scope and results of preclinical testing and human clinical trials;

•	the pace of scientific progress in our research and development programs and the magnitude of these programs;

•	our ability to obtain, and the time and costs involved in obtaining, regulatory approvals;

•	the cost of manufacturing scale-up for new product candidates;

•	our ability to prosecute, maintain and enforce, and the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing, patent claims;

•	competing technological and market developments;

•	our ability to establish additional collaborations; and

•	changes in our existing collaborations.

We base our outlook regarding the need for funds on many uncertain variables.  Such uncertainties include the success of our commercial sales of PROCYSBI in the U.S. and EU, our efforts to commercialize any future approved products, the success of our research initiatives, regulatory approvals, the timing of events outside our direct control, such as negotiations with healthcare payors and potential strategic partners and other factors.  In addition, certain product programs may require collaborative agreements with corporate partners with greater financial and organizational resources than we have.  Such agreements may require substantial time to complete and may not be available in the time frame desired or with acceptable financial terms, if at all.  Any of these factors may significantly change the timing and amount of our cash requirements as they determine such one-time events as the receipt or payment of milestone-based and other payments.

Significant additional funds from outside financing sources will be required to support our operations.  If we are unable to obtain them on acceptable terms, we may be required to cease or reduce further development of PROCYSBI and our other drug product programs, to sell some or all of our technology or assets, to merge with another entity or to cease operations.

If we fail to obtain the capital necessary to fund our operations, our operational and financial results will be adversely affected.

As of December 31, 2013, we had an accumulated deficit of approximately $205.4 million.  We may need to raise additional capital and/or generate significant revenue at profitable levels to fund our development and commercialization programs in accordance with our plans.

If we fail to raise additional financing when needed, we may have to delay or terminate some or all of our research and development programs, scale back our operations and/or reduce our commercial expenses for PROCYSBI, which would have a material adverse effect on our financial condition and operating results.

While we believe that based upon our projected PROCYSBI sales and planned operations, our cash and cash equivalents as of December 31, 2013 of approximately $83.1 million will be sufficient to meet our projected operational requirements and obligations through at least through the first half of 2015, in the future, we may need to sell equity or debt securities to raise additional funds to support, among other things, our development and commercialization programs. The sale of additional equity securities or convertible debt securities will result in additional dilution to our stockholders. Additional financing may not be available on a timely basis, in amounts or on terms satisfactory to us, or at all.  We may be unable to raise additional capital due to a variety of factors, including our financial condition, the status of our research and development programs, the status of regulatory reviews for marketing approvals, the status of our commercialization activities, sales of PROCYSBI in the U.S., the execution of our launch of PROCYSBI in Europe and the general condition of the financial markets.  If we fail to raise additional financing when needed, we may have to delay or terminate some or all of our research and development programs, scale back our operations and/or reduce our commercial expenses for PROCYSBI. If such actions are required, our financial condition and operating results will be adversely affected and our future value may be significantly reduced.

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Our cash flows and capital resources may be insufficient to make required payments on our indebtedness.

The required payments of principal and interest on our indebtedness under the HC Royalty loan agreement may require a substantial portion, or all, of our available cash to be dedicated to the service of these debt obligations.  The loan bears interest at an annual fixed rate of 10.75% and a synthetic royalty based on the amount of PROCYSBI and other future approved product net revenues in a calendar year, and such royalty is payable quarterly.  Principal payments under the HC Royalty loan agreement will become due beginning in June 2015.

There is no assurance that our business will generate sufficient cash flow or that we will have capital resources in an amount sufficient to enable us to pay our indebtedness to HC Royalty.  If our cash flows and capital resources are insufficient to fund these debt service obligations, we may be forced to reduce or delay product development, sales and marketing, and capital and other expenditures, and we may be forced to restructure our indebtedness or raise additional capital through the issuance of equity or debt instruments.  We cannot ensure that we will be able to refinance any of our indebtedness or raise additional capital on a timely basis, in sufficient amounts, on satisfactory terms or at all.  In addition, the terms of the HC Royalty loan agreement may limit our ability to pursue any of these financing alternatives and these alternatives may not enable us to meet our scheduled debt service obligations.  Failure to meet our debt service obligations may result in an event of default under the HC Royalty loan agreement, which would permit the lender to accelerate the payment of all of our indebtedness to HC Royalty and interest thereon, take possession of, foreclose on, sell, assign or grant a license to use, our pledged collateral and assign and transfer the pledged stock of our subsidiaries.  A default or material adverse effect or change of control would also trigger a prepayment penalty which would require us to pay a substantially higher amount due than the current balance of our loan.  This could have a material adverse impact on our financial condition and results of operations.

Risks Related to Our Common Stock

We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.

There are a number of reasons why we might fail to meet financial guidance or other expectations about our business, including, but not limited to, the following:

•	unexpected difficulties in the commercialization  of PROCYSBI in the U.S. or in the EU;

•	the effectiveness of our sales, marketing and distribution efforts and overall success of our commercialization efforts in the U.S. and in the EU;

•	lower than expected pricing and reimbursement levels, or no reimbursement at all, for PROCYSBI;

•	current and future competitive products that have or obtain greater acceptance in the market than PROCYSBI;

•	negative publicity about the results of our clinical trials, or those of others with similar or related products;

•	if only a subset of or no affected patients respond to therapy with PROCYSBI or future products, if any;

•	the inability to sell a product at the price we expect; or

•	the inability to supply enough product to meet demand.

If we fail to meet our revenue and/or expense projections and/or other financial guidance for any reason, our stock price could decline.

Our stock price is volatile, which could result in substantial losses over short periods of time for our stockholders.  The trading volume in our common stock may be relatively small.

Our common stock is quoted on the NASDAQ Global Market.  The trading price of our common stock has been and may continue to be volatile.  Our operating performance, both financial and in the development of approved products, affects and will continue to significantly affect the market price of our common stock.  We face a number of risks including those described in this Risk Factors section, which may negatively impact the price of our common stock.

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The market price of our common stock also may be adversely impacted by broad market and industry fluctuations including general economic and technology trends, regardless of our operating performance.  The NASDAQ Global Market has, from time to time, experienced extreme price and trading volume fluctuations, and the market prices of securities of pharmaceutical, biotechnology and other life sciences companies in a comparable stage to us have historically been particularly volatile and trading volume in such securities has often been relatively small.  Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies.  The stock market also has periods during which industry segments, such as biotechnology, are in volatile swings of greater or lesser favor as investments.  These swings may affect in particular the stock prices of companies such as ours that do not have conventional measures of financial and business health such as sales, earnings, profitability and related measures.

These broad market fluctuations, during which our stage of company and our industry may experience a stronger degree of market sensitivity, will adversely affect the trading price of our common stock.  In the past, following periods of volatility in the market resulting in substantial price declines of a company's securities, stockholders have often instituted class action securities litigation against those companies.  Such litigation can result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

A substantial number of shares of our common stock are eligible for future sale in the public market, and the issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the trading price of our common stock.

Any issuance of equity, convertible or exchangeable securities, including for the purposes of raising capital to fund our operations, financing acquisitions and the expansion of our business, will have a dilutive effect on our existing stockholders.  In addition, the perceived market risk associated with the possible issuance of a large number of shares of our common stock, including pursuant to the exercise of our currently outstanding warrants and stock options, or issuances of securities convertible or exchangeable into a large number of shares of our common stock could cause some of our stockholders to sell their common stock, thus causing the trading price of our common stock to decline.  Subsequent sales of our common stock in the open market, exercises of our currently outstanding warrants and stock options and the subsequent sale of the shares acquired thereunder or the sale by us of shares of our common stock or securities convertible or exchangeable into our common stock for capital raising purposes could also have an adverse effect on the trading price of our common stock.  If our common stock price declines, it will be more difficult for us to raise additional capital or we may be unable to raise additional capital at all.

We have entered into an Amended and Restated Sales Agreement with Cowen and Company, which, if utilized further, will create substantial dilution for our existing stockholders.  The original Sales Agreement provided for at-the-market sales of our common stock with aggregate gross proceeds of up to $40.0 million.  On July 3, 2013, we entered into an Amended and Restated Sales Agreement to increase the aggregate gross sales proceeds that may be raised pursuant to the agreement to $100.0 million.  Sales in the at-the-market offering were made pursuant to our prospectus supplement dated April 30, 2012, as amended by Amendment No. 2 dated July 3, 2013, which supplements our prospectus dated February 3, 2012, filed as part of the shelf registration statement that was declared effective by the SEC on February 3, 2012.  As of December 31, 2013, an aggregate of approximately $46.2 million remained available for future sales of our common stock under the Amended and Restated Sales Agreement.

In connection with other collaborations, joint ventures, license agreements or future financings that we may enter into in the future, we may issue additional shares of common stock or other equity securities, and the value of the securities issued may be substantial and create additional dilution to our existing and future common stockholders.

Because we do not intend to pay any cash dividends on our common stock, investors will benefit from an investment in our common stock only if it appreciates in value.  Investors seeking dividend income should not purchase shares of our common stock.

We have not declared or paid any cash dividends on our common stock since our inception.  We anticipate that we will retain our earnings to support our operations and to finance the growth and development of our business and do not expect to pay cash dividends in the foreseeable future.  As a result, the success of an investment in our common stock will depend upon any future appreciation in the value of our common stock.  There is no guarantee that our common stock will appreciate in value or even maintain its current price.  Investors seeking dividend income should not invest in our common stock.

We can issue shares of preferred stock that may adversely affect the rights of a stockholder of our common stock.

Our certificate of incorporation authorizes us to issue up to 15.0 million shares of preferred stock with designations, rights and preferences determined from time-to-time by our board of directors.  Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of stockholders of our common stock.

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Anti-takeover provisions under Delaware law, in our stockholder rights plan and in our certificate of incorporation and bylaws may prevent or complicate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of us difficult.

We are incorporated in Delaware.  Certain anti-takeover provisions of Delaware law as currently in effect may make a change in control of our Company more difficult, even if a change in control may be beneficial to the stockholders.  Our board of directors has the authority to issue up to 15.0 million shares of preferred stock, none of which are issued or outstanding.  The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued.  The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock.  Our certificate of incorporation contains provisions that may enable our management to resist an unwelcome takeover attempt by a third party, including: a prohibition on actions by written consent of our stockholders; the fact that stockholder meetings must be called by our board of directors; and provisions requiring stockholders to provide advance notice of proposals.  Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction.  Our board of directors may use these provisions to prevent changes in the management and control of our Company.  Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

We are a party to a stockholder rights plan, also referred to as a poison pill, which is intended to deter a hostile takeover of us by making such proposed acquisition more expensive and less desirable to the potential acquirer.  The stockholder rights plan and our certificate of incorporation and bylaws, as amended, contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.  These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

None.

We lease 21,330 square feet of office and laboratory space as our headquarters in Novato, California.  We plan to move to an adjacent facility of 30,989 square feet when it becomes available approximately May 2014.

In addition, we lease small office spaces in Paris, France for our French general manager and future French personnel; in Frankfurt, Germany for our German general manager and his field-based staff; and plan to lease office space in the Netherlands for our European sales, marketing and administrative headquarters within the next several months.  

We know of no material, active or pending legal proceedings against us, or any of our property, and we are not involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholders are an adverse party or have a material interest adverse to us.

Not applicable.

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PART II

 

Market Information

In connection with the closing of the 2009 Merger, our common stock commenced trading on the NASDAQ Capital Market on September 30, 2009, under the ticker symbol "RPTPD" with 18,822,162 shares outstanding. Effective October 27, 2009, our ticker symbol changed to "RPTP."  Effective February 29, 2012, our common stock commenced trading on the NASDAQ Global Market. As of February 28, 2014, there were 62,479,286  shares of our common stock outstanding.  There is no public trading market for our warrants.  The closing price for our common stock on February 28, 2014 was $15.83 per share.

The following table sets forth the range of high and low sales prices of our common stock for the quarterly periods indicated, as reported by NASDAQ. Such quotations represent inter-dealer prices without retail mark up, mark down or commission and may not necessarily represent actual transactions.

Holders of Record

 

As of February 28, 2014, there were approximately 139 holders of record of our common stock.  Additionally, on such date, options held by 128 persons to acquire up to, in the aggregate, 9,532,948 shares and warrants held by 7 persons to acquire up to, in the aggregate, 334,764 shares of our common stock, were outstanding.

 

Dividends

 

We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends on our shares of common stock in the foreseeable future. We expect to retain earnings for use in our development activities and the operation of our business.  The payment of any future cash dividends will be subject to the discretion of our board of directors and will depend upon, among other things,  our results of operations, financial condition, cash requirements, prospects and other factors that our board of directors may deem relevant.  Additionally, our ability to pay future cash dividends may be restricted by the terms of any future financing.

Recent Sales of Unregistered Securities

We did not issue any unregistered equity securities during the year ended December 31, 2013.

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Purchase of Equity Securities and Affiliated Purchasers

 

We have not repurchased any shares of our common stock since inception. 

Performance Graph

The following is not deemed "filed" with the Securities and Exchange Commission and is not to be incorporated by reference into any filing we make under the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation by reference language in such filing.

The following graph shows the value of an investment of $100 on September 30, 2009 (date we effected our 2009 Merger) in our common stock, the NASDAQ Composite Index (U.S.), NASDAQ Benchmark TR Index (U.S.) and the NASDAQ Biotechnology Index.  All values assume reinvestment of the pretax value of dividends paid by companies included in these indices and are calculated as of August 31, 2010, 2011, 2012, for the 4 months ended December 31, 2012 and as of our year ended December 31, 2013.  Our common stock is traded under the ticker symbol RPTP on the NASDAQ Global Market. The comparisons shown in the graph are based upon historical data and we caution that the stock price performance shown in the graph is not indicative of, nor intended to forecast, the potential future performance of our stock.

 

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The following table shows selected historical consolidated financial and operating information for, and as of the end of, each of the periods indicated and should be read in conjunction with the information in the sections titled, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Business" and our consolidated financial statements and the corresponding notes to those consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  The following tables set forth our consolidated balance sheet data as of December 31, 2013 and 2012 and as of August 31, 2012, 2011, 2010 and 2009 and its consolidated statements of operations and comprehensive loss data for the year ended December 31, 2013, the four months ended December 31, 2012 and the fiscal years ended August 31, 2012, 2011, 2010 and 2009.

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Overview

You should read the following discussion in conjunction with our consolidated financial statements as of December 31, 2013, and the notes to such consolidated financial statements included elsewhere in this Annual Report on Form 10-K.  The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains forward-looking statements.  Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.  Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors."

Change in Fiscal Year End

On December 4, 2012, our board of directors approved a change in our fiscal year end from August 31 to December 31.  The change became effective at the end of the four months ended December 31, 2012.  All references to "fiscal years" or "years" prior to this change refer to the twelve-month fiscal period covering September 1 through August 31, and each year after December 31, 2012, the fiscal year covers January 1 through December 31.

Plan of Operation and Overview

We are a biopharmaceutical company focused on developing and commercializing life-altering therapeutics that treat debilitating and often fatal diseases.  On April 30, 2013, our first product, PROCYSBI^® (cysteamine bitartrate) delayed-release capsules, or PROCYSBI, received marketing approval from the U.S. Food and Drug Administration, or FDA, for the management of nephropathic cystinosis in adults and children six years and older.  On September 6, 2013, our European equivalent, PROCYSBI gastro-resistant hard capsules of cysteamine (as mercaptamine bitartrate), received a Community or EU marketing authorization from the European Commission, or EC, as an orphan medicinal product for the management of proven nephropathic cystinosis.  The EU marketing authorization allows us to commercialize PROCYSBI in the 28 Member States of the EU plus Norway, Liechtenstein, and Iceland (which are not EU Member States but are part of the EEA).  PROCYSBI received 7 years and 10 years of market exclusivity as an orphan drug in the U.S. and the EU, respectively.  We commenced commercial sales of PROCYSBI in the U.S. in mid-June 2013 and plan to launch PROCYSBI in the EU in the first half of 2014.  With FDA approval of PROCYSBI and the commencement of commercial sales, we are no longer considered to be in the development stage.

Clinical Development Programs

Our three active clinical development programs utilize the same active pharmaceutical ingredient, cysteamine bitartrate, or RP103, our proprietary extended and delayed-release formulation capsule containing enteric coated micro-beads of cysteamine bitartrate.  Cysteamine bitartrate was approved in the U.S. in 1994 and the EU in 1997 as an orally available immediate-release powder in a capsule for the management of, and is the current standard of care for, cystinosis.  We have an exclusive worldwide license to delayed-release cysteamine bitartrate from UCSD which is the basis for our proprietary formulation of cysteamine.  Our proprietary extended and delayed-release formulation, RP103, is a capsule containing enteric-coated microbeads of cysteamine bitartrate.  We currently have product candidates in clinical development designed to potentially treat Huntington's disease, or HD, non-alcoholic fatty liver disease, or NAFLD, Leigh syndrome and other mitochondrial disorders.

Our other clinical-stage product candidate is Convivia™, our proprietary oral formulation of 4-methylpyrazole, for the potential management of acetaldehyde toxicity due to alcohol consumption by individuals with aldehyde dehydrogenase, or ALDH2, deficiency, an inherited metabolic disorder.

Preclinical Product Candidates

Our preclinical programs, for which we are seeking development partners include our cysteamine dioxygenase, or ADO, program and our HepTide™ program, for the potential treatment of hepatocellular carcinoma and other cancers susceptible to induced lysosomal storage.

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Future Activities

Over the next fiscal year, our efforts will be focused on increasing sales of PROCYSBI in the U.S. and successfully launching PROCYSBI in the EU in the first half of 2014; filing a New Drug Submission, or NDS, for PROCYSBI with Health Canada in the second half of 2014; conducting a clinical trial to evaluate PROCYSBI in cystinosis patients that are cysteamine-naïve, as well as other supporting trials in underdeveloped markets; developing select global markets with significant numbers of known cystinosis patients; screening for undiagnosed and unidentified late-onset nephropathic cystinosis patients; initiating and supporting our clinical trials of RP103 for the potential treatment of Leigh syndrome and mitochondrial disorders; supporting our novel preclinical programs; identifying promising in-licensing candidates; and continuing the development of our RP103 clinical pipeline in new indications including Rett Syndrome,.

We plan to seek additional business development partners in Asia for our Convivia™ product candidate.  We may also develop new preclinical, clinical and or commercial opportunities, including proprietary molecules discovered in-house and in-licensed and acquired technologies.

Application of Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the U.S. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our consolidated financial position and results of operations.

Many of the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements. 

Revenue Recognition and Accounts Receivable

We recognize revenue in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller's price to the buyer is fixed or determinable and collectability is reasonably assured.  We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements.  Pursuant to the contract terms, we determine when title to products and associated risk of loss has passed onto the customer.  We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.  We assess collectability based primarily on the customer's payment history and creditworthiness.

PROCYSBI is currently only available for distribution from our U.S. specialty pharmacy partner, the Accredo Health Group, Inc., or Accredo, which is currently our only customer and ships directly to patients.  Our distributor in the EU will be the Almac Group, Ltd. for the commercial launch in the EU anticipated to occur in the first half of 2014.  PROCYSBI is not available in retail pharmacies.  Prior authorization of coverage level by patients' private insurance plans, our patient assistance program, or PAP, or government payors is a prerequisite to the shipment of PROCYSBI to patients.  Revenue is recognized once the product has been shipped by the specialty pharmacy to patients because at this time, we are unable to reasonably estimate rebate percentages based upon our lack of sufficient historical data.  Billings to our distributor in advance of product shipment and delivery by the specialty pharmacy to patients are recorded as deferred revenue by us until such shipments to patients occur.

We record revenue net of expected discounts, distributor fees, returns and rebates, including those paid to Medicare and Medicaid in the U.S.  Allowances are recorded as a reduction of revenue at the time product sales are recognized.  Allowances for government rebates and discounts are established based on the actual payor information, which is known at the time of shipment to patients, and the government-mandated discount rates applicable to government-funded programs.  The allowances are adjusted to reflect known changes in the factors that may impact such allowances in the quarter the changes are known.

Trade accounts receivable are recorded net of product sales allowances for prompt-payment discounts and chargebacks.  Estimates for chargebacks and prompt-payment discounts are based on contractual terms and our expectations regarding the utilization rates.

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Inventories and Cost of Sales

Inventories are stated at the lower of cost or market price, with cost determined on a first-in, first-out basis.  Inventories are reviewed periodically to identify slow-moving inventory based on sales activity, both projected and historical, as well as product shelf-life.  Prior to the approval of PROCYSBI by the FDA on April 30 2013 and in Europe, prior to EMA approval on September 6, 2013, we recorded the purchase of raw materials and the manufacturing costs relating to PROCYSBI as research and development expense.  Subsequent to approval, we began capitalizing these costs as commercial inventory.  Cost of sales includes the cost of inventory sold or reserved, manufacturing and supply chain costs, product shipping and handling costs, amortization of licensing approval milestone payments and licensing royalties payable to the University of California, San Diego, or UCSD.

Note Payable

Note payable consists of our loan agreement with HealthCare Royalty Partners II, L.P., or HC Royalty, as lender, under which we borrowed $50.0 million in two $25.0 million tranches received in December 2012 and May 2013.  The loan bears interest at an annual fixed rate of 10.75% of outstanding principal and includes a synthetic royalty component based on net product sales, including PROCYSBI, in a calendar year.  With respect to the first $25.0 million tranche, for each calendar year, the loan bears a royalty rate of 6.25% of the first $25.0 million of  product net revenues, 3.0% of product net revenues for such calendar year in excess of $25.0 million and below $50.0 million, and 1.0% of product net revenues for such calendar year in excess of $50.0 million, payable quarterly.  With respect to the second $25.0 million tranche, for each calendar year, the loan bears a royalty rate of 6.0% of the first $25.0 million of net revenues for such calendar year, 3.0% of product net revenues for such calendar year in excess of $25.0 million and below $50.0 million, and 1.0% of product net revenues for such calendar year in excess of $50.0 million, payable quarterly.  The fixed and royalty interest are recognized as interest expense as incurred.  The revenue royalty related interest may lead to significant fluctuations in interest expense from period to period.

Impairment of Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired.  Goodwill is not amortized, but is evaluated for impairment on an annual basis or more often when impairment indicators are present.  We have one reporting unit.  Therefore, our consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit.  If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any.  If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required.  We performed our goodwill impairment test as of December 31, 2013 and noted no impairment.

We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist.  Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.  Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset.

Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.

Common Stock Warrant Liabilities

The common stock warrants we issued in connection with certain fiscal year 2010 equity financings contain conditional obligations that may require us to transfer cash to settle the warrants upon the occurrence of certain fundamental transactions.  Therefore, we have classified the warrants as liabilities.  We re-measure the liability at the end of every reporting period with the change in value reported in our consolidated statements of operations and comprehensive loss.  At the exercise date, the fair values of these warrants are re-measured and reclassified to equity.

We use the Black-Scholes option pricing model as our method of valuation for warrants that are subject to warrant liability accounting.  The determination of the fair value as of the reporting date is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.  These variables include, but are not limited to, expected stock price volatility over the term of the security and risk-free interest rate.  In addition, the Black-Scholes option pricing model requires the input of an expected life for the securities for which we have estimated based upon the stage of our development.  The fair value of the warrant liability is revalued each balance sheet date utilizing Black-Scholes valuation model computations with the decrease or increase in fair value being reported in the statement of operations and comprehensive loss as other income or expense, respectively.  The primary factors affecting the fair value of the warrant liability are our stock price and volatility.  In addition, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

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We reported a net loss of $69.4 million for the year ended December 31, 2013.  If our December 31, 2013 closing stock price had been 10% lower, our net loss would have been approximately $0.9 million lower.  If our December 31, 2013 closing stock price had been 10% higher, our net loss would have been approximately $0.9 million higher

If our December 31, 2013 volatility assumption had been 10% lower, our net loss would have been approximately $0.1 million lower.  If our December 31, 2012 volatility assumption had been 10% higher, our net loss would have been approximately $0.1 million higher.

We reported a net loss of $19.3 million for the four months ended December 31, 2012.  If our December 31, 2012 closing stock price had been 10% lower, our net loss would have been approximately $2.0 million lower.  If our August 31, 2012 closing stock price had been 10% higher, our net loss would have been approximately $2.0 million higher.

If our December 31, 2012 volatility assumption had been 10% lower, our net loss would have been approximately $0.7 million lower. If our December 31, 2012 volatility assumption had been 10% higher, our net loss would have been approximately $0.7 million higher. 

Income Taxes

Income taxes are recorded under the liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Based on the weight of available evidence, including cumulative losses since inception and expected future losses, we have determined that it is more likely than not that the deferred tax asset amount will not be realized and therefore a full valuation allowance has been provided on our net deferred tax assets.  We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowance would be based on our estimate of future profitability.

We identify uncertain tax positions and record or disclose any resulting potential tax liability based upon whether the position is more likely than not sustainable upon examination.  We consider proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law and negotiations between tax authorities of different countries concerning our transfer prices or intellectual property transfers.  As of December 31, 2013, we have identified no uncertain tax positions.

We file U.S. Federal, California, various other state income and other tax returns and various foreign country income tax returns.  We are currently not subject to any income tax examinations.  Due to our net operating losses, all tax years generally remain open in each jurisdiction.

Stock-Based Compensation

Determining the fair value of share-based awards at the grant date requires judgment, including estimating future stock price volatility and employee stock option exercise behavior.

We based our Black-Scholes inputs on the following factors: the risk-free interest rate was based upon our review of current constant maturity treasury bill rates for five years; the expected life of five years was based upon our assessment of the ten-year term of the stock options issued along with the fact that we are a development-stage company and our anticipation that option holders will exercise stock options when we are at a more mature stage of development; the volatility was based on a combination of the actual annualized volatility of our common stock price as quoted on NASDAQ since the closing of our 2009 Merger on September 30, 2009 and of annualized volatility of peer companies; the turnover rate was based on our assessment of our historical employee turnover; and the dividend rate was based on our current decision to not pay dividends on our stock at our current corporate stage of development.  If actual results differ significantly from these estimates, stock-based compensation expense and results of operations could be materially impacted.  See Note 8 of our consolidated financial statements for a further discussion of our accounting for stock-based compensation.

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Results of Operations

For the year ended December 31, 2013

Revenue

We recognized $10.2 million in PROCYSBI net product sales for the fourth quarter of 2013.  Net product sales for the year 2013 totaled $16.9 million.  There were no product sales for the comparable prior periods as PROCYSBI became commercially available in the U.S. in June 2013.

Cost of Sales

Prior to the approval of PROCYSBI by the FDA on April 30, 2013 and in Europe, prior to EMA approval on September 6, 2013, we recorded manufacturing costs relating to PROCYSBI as research and development expense.  Subsequent to approval, we began capitalizing these costs as commercial inventory.   PROCYSBI became commercially available in mid-June 2013, and we began recognizing manufacturing costs as capitalized inventory.  Costs capitalized as inventory are expensed as cost of sales as product is sold.  During the year ended December 31, 2013, we recorded a $0.4 million reserve as cost of sales representing commercial inventory that was capitalized subsequent to FDA approval but written off due to an unanticipated minor change in the finished product presentation.  Cost of sales includes the cost of inventory sold, inventory and reserve costs, manufacturing and supply chain costs, product shipping and handling costs, amortization of licensing approval milestone payments and licensing royalties payable to UCSD.

Research and Development

For the year ended December 31, 2013, our research and development expenses consisted primarily of costs associated with the manufacturing and testing of clinical and commercial materials in anticipation for our potential launch of RP103 for cystinosis, clinical trial research expenses and employee compensation.  The increase in research and development expenses relates primarily to increased clinical product manufacture of RP103 for the potential treatment of cystinosis (prior to the capitalization of such amounts upon FDA and EMA approval); HD, NASH, cystinosis extension, and other supporting study expenses and related employee compensation, offset by a reduction in Phase 3 cystinosis clinical trial expenses.

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Major Program expenses recorded as research and development:

 

Selling, General and Administrative Expenses

For the year ended December 31, 2013, our selling, general and administrative expenses consisted primarily of employee compensation, marketing and reimbursement studies, consulting, accounting, legal and patent fees.  The increase in selling, general and administrative expenses relates primarily to increased expenses for pre-commercial operations requirements for RP103 for the potential treatment of cystinosis, employee compensation, stock-compensation for employees and directors, legal fees and investor relations costs.

Major Program expenses recorded as selling, general and administrative expenses:

For the year ended December 31, 2013, our program expenses in selling, general and administrative expenses consisted primarily of pre-commercial and commercial launch expenses for PROCYSBI.

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Current Status of Major Programs

Please refer to the Item 1 of this Annual Report on Form 10-K for a detailed discussion of each of our major programs.  We currently have product candidates in clinical development as potential treatments for HD, NAFLD, Leigh syndrome and other mitochondrial disorders and ALDH2.  Our preclinical programs are based upon bioengineered novel drug candidates that are designed to target cancer and other diseases.  We continue efforts to out-license Convivia and our preclinical programs.

Any of our major programs could be partnered for further development and/or could be accelerated, slowed or ceased due to scientific results or challenges in obtaining funding.  We anticipate that we will need additional funding in order to pursue our plans beyond the next 18 months.  In addition, the timing and costs of development of our programs beyond the next 18 months is highly uncertain and difficult to estimate.  See Part I, Item 1A of this Annual Report on Form 10-K titled "Risk Factors" for further discussion about the risks and uncertainties pertaining to drug development.

Interest Expense

Interest expense for the year ended December 31, 2013 was approximately $6.8 million, which primarily represented interest on our $50 million note payable to HC Royalty including the "synthetic" royalty interest on sales of PROCYSBI.

Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a loss of approximately $10.7 million for the year ended December 31, 2013.

For the four months ended December 31, 2012 and 2011

Research and Development

For the four months ended December 31, 2012, our research and development expenses consisted primarily of costs associated with the manufacturing and testing of clinical and commercial materials in anticipation for our approval and commercial launch of RP103 for cystinosis, clinical trial research expenses and employee compensation.  The increase in research and development expenses for the four months ended December 31, 2012 compared to the four months ended December 31, 2011 relates primarily to increased product manufacture of RP103 for the potential treatment of cystinosis, HD and NASH, additional cystinosis extension and other supporting study expenses, employee compensation, offset by a reduction in Phase 3 cystinosis clinical trial expenses.

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Major Program expenses recorded as research and development:

General and Administrative Expenses

For the four months ended December 31, 2012, our general and administrative expenses consisted primarily of employee compensation, marketing and reimbursement studies, consulting fees and legal and patent fees.  The increase in general and administrative expenses for the four months ended December 31, 2012 compared to the four months ended December 31, 2011 relates primarily to increased expenses for pre-commercial operations requirements for RP103 for the potential treatment of cystinosis, employee compensation, stock-compensation for employees and directors, legal fees and investor relations costs.

Major Program expenses recorded as general and administrative expenses:

For the four months ended December 31, 2012, our program expenses in general and administrative expenses consisted primarily of pre-commercial launch expenses for RP103, such as market research and market access studies.

Additional major program expenses include patent fees and patent expenses which were recorded as general and administrative expenses as these fees are to support patent applications (not issued patents) and expenses related to the pre-commercial launch of RP103 for the potential treatment of cystinosis.

Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a loss of approximately $1.5 million for the four months ended December 31, 2012 compared to a loss of approximately $5.0 million for the four months ended December 31, 2011 (unaudited), a decrease in loss of approximately $3.5 million resulting primarily from a smaller increase in stock price, shorter remaining term and the lower number of remaining warrants outstanding due to warrant exercises as of December 31, 2012.

 

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Years ended August 31, 2012 and 2011

Research and Development

Research and development expenses include medical, clinical, regulatory and scientists' compensation and benefits, lab collaborations, preclinical studies, clinical trials, amortization of intangible assets and allocated human resources and facilities expenses.  Research and development expenses for the year ended August 31, 2012 increased by approximately $6.7 million over the prior fiscal year primarily due to:

Research and development expenses include the following:

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General and Administrative Expenses

General and administrative expenses include finance, executive and sales and marketing compensation and benefits, pre-commercial expenses, such as reimbursement and marketing studies, corporate costs, such as legal and auditing fees, business development expenses, travel, board of director fees and expenses, investor relations expenses, intellectual property costs associated with filed (but not issued) patents, administrative consulting and allocated human resources and facilities costs.  General and administrative expenses for the year ended August 31, 2012 increased by approximately $8.6 million compared to the prior fiscal year.  The increase was primarily due to:

Major Program expenses recorded as general and administrative expenses:

 

Adjustment to the Fair Value of Common Stock Warrants

Adjustment to the fair value of common stock warrants was a loss of approximately $3.2 million for the year ended August 31, 2012 compared to a loss of approximately $16.3 million for the year ended August 31, 2011, a decrease in loss of approximately $13.1 million which resulted primarily from the lower number of remaining warrants outstanding due to warrant exercises.

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Liquidity and Capital Resources

Capital Resources

As of December 31, 2013, we had $83.1 million in cash and cash equivalents, of which $4.2 million is held by our foreign subsidiaries, $30.1 million in current liabilities (of which $7.1 million represented the common stock warrant liability, and is expected to be settled in shares) and $66.2 million of net working capital.  During the year ended December 31, 2013, we raised $23.7 million of net proceeds from the second tranche of financing under our loan agreement with HC Royalty Partners, $38.8 million in proceeds after commissions under our at-the-market (ATM) common stock sales agreement, $10.3 million net proceeds from warrant exercises and $2.5 million net proceeds from stock option exercises.  We believe that our cash balance will be sufficient to meet our projected operational requirements and obligations at least through the first half of 2015.

Under the terms of the HC Royalty loan agreement executed on December 20, 2012, we received $23.4 million in net proceeds from the first tranche of the loan at closing in December 2012.  We received an additional $23.7 million in net proceeds in May 2013 from the second tranche upon FDA approval of RP103 for the management of cystinosis.  The loan matures on March 31, 2020, bears interest at an annual fixed rate of 10.75% and has a synthetic royalty, tiered down, based on a percentage of net product sales.  The loan is interest-only until May 2015.  The proceeds from the loans are being used primarily to fund the commercialization of PROCYSBI for the management of cystinosis, advance our development programs and for general corporate purposes.

On April 30, 2012, we entered into a Sales Agreement with Cowen and Company, or Cowen, to sell shares of our common stock, with aggregate gross sales proceeds of up to $40 million, from time to time through an "at the market" equity offering program under which Cowen acts as sales agent.  We pay a 3% commission to Cowen on any sales pursuant to this Sales Agreement.  

On July 3, 2013, we amended and restated the Sales Agreement to increase the aggregate gross sales proceeds that may be raised to $100 million.  Cumulatively through December 31, 2013, we sold 7,599,474 shares under the ATM offerings at a weighted-average selling price of $7.08 per share for net proceeds of approximately $52.1 million.

As of February 28, 2014, 334,764 shares (including the placement agent warrant described below) of our common stock warrants were outstanding, all of which warrants were issued pursuant to private placement purchase agreements, dated as of August 9, 2010.

Future Funding Requirements

We will need to raise additional capital either through the sale of equity or debt securities (including convertible debt securities) to fund our operations and to, among other activities, develop and commercialize RP103 for the management of cystinosis and other indications. Our future capital requirements may be substantial, and will depend on many factors, including:

 

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There can be no assurance that we will be successful in raising sufficient funds when needed. Additional financing may not be available in amounts or on terms satisfactory to us or at all.

 

Research and Development Activities

We plan to conduct further research and development, to support several clinical trials for RP103, improve upon our internal discovery molecules and in-licensed technology and continue business development efforts for our preclinical and other clinical-stage product candidates in the next 12 months.  We plan to conduct research and development activities by our own laboratory staff and also by engaging contract research organizations, clinical research organizations and contract manufacturing organizations.  We also plan to incur costs for the production of our clinical study drug candidate RP103 for the potential treatment of HD and NASH; for production of RP103 for additional clinical trials in cystinosis; clinical and medical advisors; and consulting and collaboration fees.  We anticipate that our research and development costs will increase during the next 12 months primarily due to the addition of new studies in support of cystinosis, HD, NAFLD, Leigh syndrome and other indications.

Selling, General and Administrative Activities

Selling, general and administrative costs in the next 12 months will consist primarily of sales activities surrounding the sale of PROCYSBI in the U.S. and the commercial launch of PROCYSBI in the EU, of legal, tax and accounting fees, patent legal fees, investor relations expenses, board fees and expenses, insurance, rent and facility support expenses.  We anticipate that selling, general and administrative expenses will continue to increase in support of PROCYSBI sales growth, as well as an increase in facilities and administrative expenses to support our rapid growth.

Capital Expenditures

In the next 12 months, we expect to increase our capital expenditures on leasehold improvements on new facilities, laboratory and office equipment and computer software and hardware as we continue to increase our staff in calendar 2014.

Contractual Obligations

Contractual Obligations With UCSD Relating To The Acquisition Of The DR Cysteamine (RP103) License

We are obligated to pay an annual maintenance fee to UCSD for the exclusive license to develop RP103 for certain indications until we begin commercial sales of any products developed pursuant to the License Agreement.  In addition to the maintenance fee, we are obligated to pay milestone payments (ranging in size for orphan and non-orphan indications) upon the occurrence of certain events during the life of the License Agreement. These include a royalty on commercial net sales from products developed pursuant to the License Agreement - a percentage of sublicense fees - a percentage of sublicense royalties - and a minimum annual royalty commencing the year we begin commercially selling any products pursuant to the License Agreement. Under the License Agreement, we are obligated to fulfill predetermined milestones within a specified number of years from the effective date of the License Agreement, depending on the indication.  Cumulatively, we have expensed approximately $0.9 million in milestone payments to UCSD based upon the initiation of clinical trials in cystinosis, Huntington's disease and NASH and on regulatory filings in cystinosis.  In March 2012, we filed an MAA with the EMA, as well as an NDA with the FDA for RP103 for the potential treatment of cystinosis.  In conjunction with the achievement of MAA/NDA filing milestone, we paid additional milestone payments to UCSD pursuant to this license.  Based on approval of RP103 by the FDA on April 30, 2013 we paid a milestone license of $0.75 million which was capitalized as commercial IP and is being amortized as expense in cost of sales over the life of the patent.  Based on approval by the EMA of RP103 on September 6, 2013, we paid a milestone license of $0.5 million which was capitalized as commercial IP and is being amortized as expense in cost of sales over the life of the patent.  In 2013, we began paying UCSD royalties based upon our net sales of PROCYSBI.  Other future milestones will be payable based on other approvals of cystinosis throughout the rest of the world.

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Other Contractual Obligations

We have contractual obligations under our capital and operating leases and other obligations related to research and development activities, purchase commitments and licenses.  Information about these obligations as of December 31, 2013 is presented in the table below:

We maintain several contracts with contract manufacturers, clinical organizations and clinical sites, drug labelers and distributors and research organizations, primarily to assist with clinical research and clinical manufacturing for our cystinosis and HD programs and our NAFLD clinical collaboration.  The future commitments pursuant to these agreements, some of which include estimates of amounts or timing of payments, are included in the table above as research and development and purchase commitments.

We are also subject to contingent payments related to various development activities totaling approximately $14.9 million, which are primarily due upon the achievement of certain development and commercial milestones if such milestones occur before certain dates in the future.  These contingent payments are not included in the table above as we cannot reliably predict their timing or occurrence.

In conjunction with our loan agreement, we have contractual interest payments that began in December 2012 at a fixed rate of 10.75% plus a percentage of product revenue.  The fixed interest amount that remains committed through the term of loan is approximately $22.1 million.

Off-Balance Sheet Arrangements

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.  We do not engage in trading activities involving non-exchange traded contracts.

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Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices.  We are exposed to various market risks that may arise from adverse changes in market rates and prices, such as foreign exchange rate and interest rate fluctuations.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Foreign Exchange Risk

A majority of our assets and liabilities are maintained in the U.S. in U.S. dollars and a majority of our expenditures are transacted in U.S. dollars.  We are subject to foreign exchange risk for the operations of BV, SAS, GmbH and CV, which use the Euro as their functional currency.  We do not believe that a hypothetical one percentage point fluctuation in the U.S. dollar exchange rate would materially affect our consolidated financial position, results from operations or cash flows as of December 31, 2013.  We do not currently hedge our foreign currency transactions.

Interest Rate Risk

As of December 31, 2013, we had approximately $70.6 million in cash equivalent money market accounts, yielding approximately 0.05% per year.  A hypothetical one percentage point decline in interest rates would not have materially affected our consolidated financial position, results of operations or cash flows as of December 31, 2013.

The information required to be filed in this item appears on pages 91 to 120 of this Annual Report on Form 10-K.

Documents filed as part of this Annual Report on Form 10-K:

Financial Statements

 

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PART II – FINANCIAL INFORMATION

 

ITEM 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A:

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2013, we performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our disclosure controls and procedures were designed to provide reasonable assurance of achieving our control objectives.  Based on our evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective at a reasonable assurance level as of December 31, 2013.

Management's Report on Internal Control Over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is defined as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.

Limitations on the Effectiveness of Controls

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

Attestation Report of Grant Thornton LLP

Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting as of December 31, 2013.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2013, there have not been any material changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B:

OTHER INFORMATION

On February 7, 2014, the Board of Directors approved increasing the 2014 base salaries for Dr. Christopher Starr, our Chief Executive Officer, and Julie Anne Smith, our Chief Operations Officer, Executive Vice President, Strategy, by 15% to $471,500 and $402,500, respectively.

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ITEM 10:

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Name		Age			Position(s) Held with the Company
Raymond W. Anderson (2)(3)			72		Director
Suzanne L. Bruhn, Ph.D. (1)(3)			50		Director
Richard L. Franklin, M.D., Ph.D. (1)(2)			68		Director
Llew Keltner, M.D., Ph.D. (1)			64		Chairman of the Board of Directors
Erich Sager (2)			56		Director
Vijay B. Samant (1)(3)			61		Director
Christopher M. Starr, Ph.D.			61		Chief Executive Officer and Director
Timothy P. Walbert (2)(3)			46		Director

(1)	Member of the Corporate Governance and Nominating Committee.
(2)	Member of the Audit Committee.
(3)	Member of the Compensation Committee.

Name		Age		Position(s) Held with the Company
Christopher M. Starr, Ph.D.		61		Chief Executive Officer and Director
Julie Anne Smith		43		Chief Operations Officer, Executive Vice President, Strategy
Georgia Erbez		47		Chief Financial Officer, Treasurer and Secretary
Thomas (Ted) E. Daley		51		Chief Business Officer