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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011 
OR
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      .
Commission File Number 001-32335
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)	 	88-0488686
(I.R.S. Employer
Identification No.)	
 	 	 	
11388 Sorrento Valley Road, San Diego, CA
(Address of principal executive offices)	 	92121
(Zip Code)	
(858) 794-8889
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company ” in Rule 12b-2 of the Exchange Act. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer o	 	Accelerated filer x	 	Non-accelerated filer o	 	Smaller reporting company o	
 	 		 	(Do not check if a smaller
reporting company)	 	 	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 102,805,047 as of May 2, 2011.

 

HALOZYME THERAPEUTICS, INC.
INDEX
 	 	 	 	 	 	 	
 	 	 	 	Page	
PART I — FINANCIAL INFORMATION	
Item 1.	 	Financial Statements	 	 	 	 	
 	 	Condensed Consolidated Balance Sheets — March 31, 2011 (Unaudited) and December 31, 2010	 	 	3	 	
 	 	Condensed Consolidated Statements of Operations (Unaudited) — Three Months Ended March 31, 2011 and 2010	 	 	4	 	
 	 	Condensed Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 2011 and 2010	 	 	5	 	
 	 	Notes to Condensed Consolidated Financial Statements (Unaudited)	 	 	6	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	15	 	
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	 	 	41	 	
Item 4.	 	Controls and Procedures	 	 	41	 	
PART II — OTHER INFORMATION	
Item 1.	 	Legal Proceedings	 	 	41	 	
Item 1A.	 	Risk Factors	 	 	42	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	 	42	 	
Item 3.	 	Defaults Upon Senior Securities	 	 	42	 	
Item 4.	 	(Removed and Reserved)	 	 	42	 	
Item 5.	 	Other Information	 	 	42	 	
Item 6.	 	Exhibits	 	 	42	 	
 	 	SIGNATURES	 	 	43	 	
  EX-31.1	
  EX-31.2	
  EX-32	
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2011	 	2010	
 	 	(Unaudited)	 	 	(Note)	 	
Assets	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	  $ 	73,829,299	 	 	  $ 	83,255,848	 	
Accounts receivable	 	 	1,731,325	 	 	 	2,328,268	 	
Inventory	 	 	248,474	 	 	 	193,422	 	
Prepaid expenses and other assets	 	 	3,382,993	 	 	 	3,720,896	 	
 	 	 	 	 	
Total current assets	 	 	79,192,091	 	 	 	89,498,434	 	
Property and equipment, net	 	 	1,741,192	 	 	 	1,846,899	 	
 	 	 	 	 	
Total Assets	 	  $ 	80,933,283	 	 	  $ 	91,345,333	 	

Liabilities and Stockholders’ Equity	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	  $ 	1,450,993	 	 	  $ 	3,820,368	 	
Accrued expenses	 	 	8,238,267	 	 	 	8,605,569	 	
Deferred revenue	 	 	2,914,479	 	 	 	2,917,129	 	
 	 	 	 	 	
Total current liabilities	 	 	12,603,739	 	 	 	15,343,066	 	
Deferred revenue, net of current portion	 	 	54,447,803	 	 	 	55,176,422	 	
Deferred rent, net of current portion	 	 	366,392	 	 	 	474,389	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies (Note 13)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	 	 	 	 	
Preferred stock — $0.001 par value; 20,000,000 shares authorized; no shares issued and outstanding	 	 	-    	 	 	 	-    	 	
Common stock — $0.001 par value; 150,000,000 shares authorized; 102,033,491 and 100,580,849 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively	 	 	102,033	 	 	 	100,581	 	
Additional paid-in capital	 	 	248,300,828	 	 	 	245,502,670	 	
Accumulated deficit	 	 	(234,887,512	)	 	 	(225,251,795	)	
 	 	 	 	 	
Total stockholders’ equity	 	 	13,515,349	 	 	 	20,351,456	 	
 	 	 	 	 	
Total Liabilities and Stockholders’ Equity	 	  $ 	80,933,283	 	 	  $ 	91,345,333	 	

			
Note:	 	The condensed balance sheet at December 31, 2010 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.	
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	
 	2011	 	2010	 	
Revenues:	 	 	 	 	 	 	 	 	
Product sales	 	  $ 	165,449	 	 	  $ 	397,810	 	
Revenues under collaborative agreements	 	 	7,378,445	 	 	 	3,043,921	 	
 	 	 	 	 	 	 	
Total revenues	 	 	7,543,894	 	 	 	3,441,731	 	

Operating expenses:	 	 	 	 	 	 	 	 	
Cost of product sales	 	 	11,717	 	 	 	5,660	 	
Research and development	 	 	13,785,797	 	 	 	11,467,204	 	
Selling, general and administrative	 	 	3,405,966	 	 	 	3,757,013	 	
 	 	 	 	 	 	 	
Total operating expenses	 	 	17,203,480	 	 	 	15,229,877	 	

Operating loss	 	 	(9,659,586	)	 	 	(11,788,146	)	
 	 	 	 	 	 	 	 	 	
Interest and other income, net	 	 	23,869	 	 	 	669	 	

Net loss	 	  $ 	(9,635,717	)	 	  $ 	(11,787,477	)	

Basic and diluted net loss per share	 	  $ 	(0.10	)	 	  $ 	(0.13	)	

Shares used in computing basic and diluted net loss per share	 	 	100,927,402	 	 	 	91,610,830	 	
 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	
 	 	2011	 	2010	
Operating activities:	 	 	 	 	 	 	 	 	
Net loss	 	  $ 	(9,635,717	)	 	  $ 	(11,787,477	)	
Adjustments to reconcile net loss to net cash used in operating activities:	 	 	 	 	 	 	 	 	
Share-based compensation	 	 	931,070	 	 	 	1,228,786	 	
Depreciation and amortization	 	 	326,181	 	 	 	410,257	 	
(Gain) loss on disposal of equipment	 	 	(656	)	 	 	5,101	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	
Accounts receivable	 	 	596,943	 	 	 	2,223,163	 	
Inventory	 	 	(55,052	)	 	 	-    	 	
Prepaid expenses and other assets	 	 	337,903	 	 	 	(2,746,930	)	
Accounts payable and accrued expenses	 	 	(2,771,781	)	 	 	(637,995	)	
Deferred rent	 	 	(89,688	)	 	 	(72,504	)	
Deferred revenue	 	 	(731,269	)	 	 	(1,225,054	)	
 	 	 	 	 	
Net cash used in operating activities	 	 	(11,092,066	)	 	 	(12,602,653	)	

Investing activities:	 	 	 	 	 	 	 	 	
Purchases of property and equipment	 	 	(203,023	)	 	 	(149,040	)	
 	 	 	 	 	
Net cash used in investing activities	 	 	(203,023	)	 	 	(149,040	)	

Financing activities:	 	 	 	 	 	 	 	 	
Proceeds from exercise of stock options, net	 	 	1,868,540	 	 	 	463,503	 	
 	 	 	 	 	
Net cash provided by financing activities	 	 	1,868,540	 	 	 	463,503	 	

Net decrease in cash and cash equivalents	 	 	(9,426,549	)	 	 	(12,288,190	)	
Cash and cash equivalents at beginning of period	 	 	83,255,848	 	 	 	67,464,506	 	
 	 	 	 	 	
Cash and cash equivalents at end of period	 	  $ 	73,829,299	 	 	  $ 	55,176,316	 	

Supplemental disclosure of non-cash investing and financing activities:	 	 	 	 	 	 	 	 	
Accounts payable for purchases of property and equipment	 	  $ 	16,795	 	 	  $ 	44,429	 	
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.       Organization and Business
          Halozyme Therapeutics, Inc. (“Halozyme” or the “Company”) is a biopharmaceutical company dedicated to the development and commercialization of recombinant human enzymes that either transiently modify tissue under the skin to facilitate injection of other therapies or correct diseased tissue structures for clinical benefit. The Company’s existing products and its products under development are based primarily on intellectual property covering the family of human enzymes known as hyaluronidases.
          The Company’s operations to date have involved: (i) organizing and staffing its operating subsidiary, Halozyme, Inc.; (ii) acquiring, developing and securing its technology; (iii) undertaking product development for its existing products and a limited number of product candidates; and (iv) supporting the development of partnered product candidates. The Company currently has multiple proprietary programs in various stages of research and development. In addition, the Company has a key partnership with F. Hoffmann-La Roche, Ltd and Hoffmann-La Roche, Inc. (“Roche”) to apply the Company’s Enhanze Ô Technology to Roche’s biological therapeutic compounds for up to eight targets (the “Roche Partnership”). The Company also has a key partnership with Baxter Healthcare Corporation (“Baxter”) to apply Enhanze Technology to Baxter’s biological therapeutic compound, GAMMAGARD LIQUID Ô (the “Gammagard Partnership”). The Company also had a partnership with Baxter, under which Baxter had worldwide marketing rights for HYLENEX ® , a registered trademark of Baxter International, Inc. (the “HYLENEX Partnership”). In January 2011, the Company and Baxter mutually agreed to terminate the HYLENEX Partnership. There are two marketed products that utilize the Company’s technology: HYLENEX, a hyaluronidase human injection used as an adjuvant to enhance the dispersion and absorption of other injected drugs and fluids, and Cumulase ® , a product used for in vitro fertilization (“IVF”). Currently, the Company has received only limited revenue from the sales of active pharmaceutical ingredients (“API”) to the third party that produces Cumulase, in addition to other revenues from its partnerships with Baxter and Roche.
2.       Basis of Presentation
          The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Operating results for interim periods are not necessarily indicative of the operating results for an entire fiscal year.
          The consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and its wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been eliminated.
          The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from management’s estimates.
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3.       Adoption of Recent Accounting Pronouncements
          Effective January 1, 2011, the Company adopted on a prospective basis Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition (Topic 605): Milestone Method of Revenue Recognition (“Milestone Method”). ASU No. 2010-17 states that the Milestone Method is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The Milestone Method is not required and is not the only acceptable method of revenue recognition for milestone payments. The adoption of ASU No. 2010-17 did not have a material impact on the Company’s consolidated financial position or results of operations.
          Effective January 1, 2011, the Company adopted on a prospective basis FASB’s ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements . ASU No. 2009-13 requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. ASU No. 2009-13 eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to Accounting Standards Code 605-25. The adoption of ASU No. 2009-13 did not have a material impact on the Company’s consolidated financial position or results of operations.
4.       Summary of Significant Accounting Policies
Fair Value Measurements
          The Company follows the authoritative guidance for fair value measurements and disclosures, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
          The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value as follows:
 	 	 	
Level 1	 	Quoted prices (unadjusted) in active markets for identical assets or liabilities;	
 	 	 	
Level 2	 	Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and	
 	 	 	
Level 3	 	Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.	
          Cash equivalents of approximately $72.0 million and $79.8 million at March 31, 2011 and December 31, 2010, respectively, are carried at fair value and are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices for identical securities. The Company has no instruments that are classified within Level 2 or Level 3.
Revenue Recognition
          The Company generates revenues from product sales and collaborative agreements. Payments received under collaborative agreements may include nonrefundable fees at the inception of the agreements, license fees, milestone payments for specific achievements designated in the collaborative agreements, reimbursements of research and development services and/or royalties on sales of products resulting from collaborative agreements.
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          The Company recognizes revenues in accordance with the authoritative guidance for revenue recognition. The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
           Product Sales — Revenue from the sales of API for Cumulase is recognized when the transfer of ownership occurs, which is upon shipment to the Company’s distributor. The Company is obligated to accept returns for product that does not meet product specifications. Historically, the Company has not had any product returns as a result of not meeting product specifications.
          In accordance with the HYLENEX Partnership with Baxter, the Company supplied Baxter with API for HYLENEX at its fully burdened cost plus a margin. Baxter filled and finished HYLENEX and held it for subsequent distribution, at which time the Company ensured it met product specifications and released it as available for sale. Because of the Company’s continued involvement in the development and production process of HYLENEX, the earnings process was not considered to be complete. Accordingly, the Company deferred the revenue and related product costs on the API for HYLENEX until the product was filled, finished, packaged and released. Baxter might only return the API for HYLENEX to the Company if it did not conform to the specified criteria set forth in the HYLENEX Partnership or upon termination of such agreement. In addition, the Company received product-based payments upon the sale of HYLENEX by Baxter, in accordance with the terms of the HYLENEX Partnership. Product sales revenues were recognized as the Company earned such revenues based on Baxter’s shipments of HYLENEX to its distributors when such amounts could be reasonably estimated. Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. See Note 8, “ Deferred Revenue ,” for further discussion.
           Collaborative Agreements — The Company analyzes each element of its collaborative agreements to determine the appropriate revenue recognition. The Company recognizes revenue on nonrefundable upfront payments and license fees from the collaborative agreements entered into prior to January 1, 2011, in which it has an ongoing involvement or performance obligation, over the period of significant involvement under the related agreements. If and when the Company enters into a new collaborative agreement or materially modifies an existing collaborative agreement, the Company will be required to apply the new revenue recognition guidance for multiple-deliverable arrangements.
          Prior to the Company’s adoption of the Milestone Method, the Company recognized milestone payments upon the achievement of specified milestones if: (1) the milestone was substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement, (2) the fees were nonrefundable and (3) the Company’s performance obligations after the milestone achievement would continue to be funded by the Company’s collaborator at a level comparable to the level before the milestone achievement.
          Effective January 1, 2011, the Company adopted on a prospective basis the Milestone Method. Under the Milestone Method, the Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

 	1.	 	The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone,	
 		
 	2.	 	The consideration relates solely to past performance, and	
 		
 	3.	 	The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.	
          A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.
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          Reimbursements of research and development services are recognized as revenue during the period in which the services are performed. Royalties to be received based on sales of licensed products by the Company’s collaborators incorporating the Company’s products will be recognized as earned. See Note 5, “ Collaborative Agreements, ” and Note 9, “Deferred Revenue, ” for further discussion.
Cost of Sales
          Cost of product sales consists primarily of raw materials, third-party manufacturing costs, fill and finish costs and freight costs associated with the sales of API for Cumulase and API for HYLENEX. Cost of sales also consists of the write-down of obsolete inventory.
Research and Development Expenses
          Research and development expenses include salaries and benefits, facilities and other overhead expenses, external clinical trials, research-related manufacturing services, contract services and other outside expenses. Research and development expenses are charged to operations as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts will be recognized as an expense as the related goods are delivered or the related services are performed or such time when the Company does not expect the goods to be delivered or services to be performed.
          Milestone payments that the Company makes in connection with in-licensed technology or product candidates are expensed as incurred when there is uncertainty in receiving future economic benefits from the licensed technology or product candidates. The Company considers the future economic benefits from the licensed technology or product candidates to be uncertain until such licensed technology or product candidates are approved for marketing by the U.S. Food and Drug Administration or comparable regulatory agencies in foreign countries or when other significant risk factors are abated. Management has viewed future economic benefits for all of the Company’s licensed technology or product candidates to be uncertain and has expensed these amounts for accounting purposes.
Clinical Trial Expenses
          Expenses related to clinical trials are accrued based on the Company’s estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and clinical trials progress. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the contracted amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the Company modifies its accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. Historically, the Company has had no material changes in its clinical trial expense accruals that would have had a material impact on its consolidated results of operations or financial position.
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Share-Based Compensation
          Share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense, net of estimated forfeitures, over the employee’s requisite service period. Total share-based compensation expense related to all of the Company’s share-based awards was allocated as follows:
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	
 	 	March 31,	
 	 	2011	 	2010	
Research and development	 	  $ 	400,685	 	 	  $ 	686,202	 	
Selling, general and administrative	 	 	530,385	 	 	 	542,584	 	
 	 	 	 	 	
Share-based compensation expense	 	  $ 	931,070	 	 	  $ 	1,228,786	 	

Net share-based compensation expense per basic and diluted share	 	  $ 	0.01	 	 	  $ 	0.01	 	

Share-based compensation expense from:	 	 	 	 	 	 	 	 	
Stock options	 	  $ 	706,611	 	 	  $ 	1,058,767	 	
Restricted stock awards	 	 	224,459	 	 	 	170,019	 	
 	 	 	 	 	
 	 	  $ 	931,070	 	 	  $ 	1,228,786	 	
 	 	 	 	 	
          Since the Company has a net operating loss carryforward as of March 31, 2011, no excess tax benefits for the tax deductions related to share-based awards were recognized in the interim unaudited condensed consolidated statement of operations. For the three months ended March 31, 2011 and 2010, employees exercised stock options to purchase 1,452,642 and 199,814 shares of common stock, respectively, for aggregate proceeds of approximately $1.9 million and $464,000, respectively.
          As of March 31, 2011, total unrecognized estimated compensation cost related to non-vested stock options and non-vested restricted stock awards granted prior to that date was approximately $7.7 million and $100,000, respectively, which is expected to be recognized over a weighted-average period of approximately 2.7 years and less than two months, respectively.
Comprehensive Income (Loss)
          Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss was the same as the Company’s net loss.
5.       Collaborative Agreements
Roche Partnership
          In December 2006, the Company and Roche entered into the Roche Partnership, under which Roche obtained a worldwide, exclusive license to develop and commercialize product combinations of the Company’s proprietary recombinant human hyaluronidase (“rHuPH20”) and up to thirteen Roche target compounds resulting from the partnership. Under the terms of the Roche Partnership, Roche paid $20.0 million as an initial upfront license fee for the application of rHuPH20 to three pre-defined Roche biologic targets. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and annual license maintenance fees were deferred and are being recognized over the term of the Roche Partnership. Roche will pay the Company further payments which could potentially reach a value of up to $111.0 million for the initial three exclusive targets upon achievement of the following milestones:

 	•	 	Clinical — Enrollment of the first subject in a clinical trial for a licensed product candidate by Roche.	
 		
 	•	 	Regulatory — Regulatory approval of a licensed product.	
 		
 	•	 	Sales-Based — Achievement of specified sales volumes of commercialized products by Roche.	
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          Under the terms of the Roche Partnership, Roche will also pay the Company royalties on product sales for these first three targets. Through March 31, 2011, Roche has elected two additional exclusive targets. In 2010, Roche did not pay the annual license maintenance fee on five target slots. As a result, Roche has an option to select only three additional targets under the Roche partnership agreement, provided that Roche continues to pay annual exclusivity maintenance fees to the Company. For each of the additional five targets, Roche may pay the Company further upfront and milestone payments of up to $47.0 million per target, as well as royalties on product sales for each of these additional five targets. Additionally, Roche will obtain access to the Company’s expertise in developing and applying rHuPH20 to Roche targets. Under the terms of the Roche Partnership, the Company was obligated to scale up the production of rHuPH20 and to identify a second source manufacturer that would help meet anticipated production obligations arising from the partnership.
          The Company has determined that the clinical and regulatory milestones are substantive; therefore, the Company expects to recognize such clinical and regulatory milestone payments as revenue upon achievement. Given the challenges inherent in developing and obtaining approval for pharmaceutical and biologic products, there was substantive uncertainty whether any of the clinical and regulatory milestones would be achieved at the time the Roche Partnership was entered into. In addition, the Company evaluated whether the clinical and regulatory milestones met the remaining criteria to be considered substantive. The Company has determined that the sales-based milestone payments are similar to royalty payments; therefore, the Company will recognize such sales-based milestone payments as revenue upon achievement of the milestone. In the quarter ended March 31, 2011, the Company recognized a $5.0 million payment as revenue in accordance with the Milestone Method of revenue recognition related to the achievement of certain clinical milestones pursuant to the terms of the Roche Partnership.
Gammagard Partnership
          In September 2007, the Company entered into the Gammagard Partnership with Baxter, under which Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20, with a current Baxter product, GAMMAGARD LIQUID. Under the terms of the Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over the term of the Gammagard Partnership. Baxter may make further milestone payments totaling $37.0 million to the Company upon the achievement of regulatory approval for the licensed product candidate and specified sales volumes of commercialized product by Baxter. In addition, Baxter will pay royalties on the sales, if any, of the product that result from the collaboration. The Gammagard Partnership is applicable to both kit and formulation combinations. Baxter assumes all development, manufacturing, clinical, regulatory, sales and marketing costs under the Gammagard Partnership, while the Company is responsible for the supply of the rHuPH20 enzyme. The Company performs research and development activities at the request of Baxter, which are reimbursed by Baxter under the terms of the Gammagard Partnership. In addition, Baxter has certain product development and commercialization obligations in major markets identified in the Gammagard Partnership.
          The Company has determined that the regulatory milestones are substantive; therefore, the Company expects to recognize such regulatory milestone payments as revenue upon achievement. Given the challenges inherent in developing and obtaining approval for pharmaceutical and biologic products, there was substantive uncertainty whether any of the regulatory events would be achieved at the time the Gammagard Partnership was entered into. In addition, the Company evaluated whether the regulatory milestones met the remaining criteria to be considered substantive. The Company has determined that sales-based milestone payments are similar to royalty payments and, therefore, will be recognized as revenue upon achievement of the milestone.
6.       Inventory
          Inventory at March 31, 2011 and December 31, 2010 consists of raw materials used in the manufacture of the Company’s HYLENEX and Cumulase products. In connection with the termination of the HYLENEX Partnership in January 2011, the Company has established a reserve for inventory obsolescence of approximately $875,000 for HYLENEX API in the three months ended December 31, 2010. As of March 31, 2011 and December 31, 2010, the reserve for HYLENEX API inventory obsolescence was approximately $875,000.
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7.       Property and Equipment
          Property and equipment, net consists of the following:
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	December 31,	
 	 	2011	 	2010	
Research equipment	 	  $ 	4,497,974	 	 	  $ 	4,308,654	 	
Computer and office equipment	 	 	1,225,535	 	 	 	1,215,894	 	
Leasehold improvements	 	 	1,002,912	 	 	 	998,368	 	
 	 	 	 	 	
 	 	 	6,726,421	 	 	 	6,522,916	 	
Accumulated depreciation and amortization	 	 	(4,985,229	)	 	 	(4,676,017	)	
 	 	 	 	 	
 	 	  $ 	1,741,192	 	 	  $ 	1,846,899	 	
 	 	 	 	 	
          Depreciation and amortization expense totaled approximately $326,000 and $410,000 for the three months ended March 31, 2011 and 2010, respectively.
8.       Accrued Expenses
          Accrued expenses consist of the following:
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	December 31,	
 	 	2011	 	2010	
Accrued outsourced research and development expenses	 	  $ 	4,918,533	 	 	  $ 	3,647,762	 	
Accrued compensation and payroll taxes	 	 	1,617,153	 	 	 	3,045,950	 	
Accrued expenses	 	 	1,702,581	 	 	 	1,911,857	 	
 	 	 	 	 	
 	 	  $ 	8,238,267	 	 	  $ 	8,605,569	 	
 	 	 	 	 	
9.       Deferred Revenue
          Deferred revenue consists of the following:
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	December 31,	
 	 	2011	 	2010	
Collaborative agreements	 	  $ 	48,030,092	 	 	  $ 	48,761,361	 	
Product sales	 	 	9,332,190	 	 	 	9,332,190	 	
 	 	 	 	 	
Total deferred revenue	 	 	57,362,282	 	 	 	58,093,551	 	
Less current portion	 	 	2,914,479	 	 	 	2,917,129	 	
 	 	 	 	 	
Deferred revenue, net of current portion	 	  $ 	54,447,803	 	 	  $ 	55,176,422	 	
 	 	 	 	 	
           Roche Partnership - In December 2006, the Company and Roche entered into the Roche Partnership under which Roche obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20and up to thirteen Roche target compounds. Under the terms of the Roche Partnership, Roche paid $20.0 million to the Company in December 2006 as an initial upfront payment for the application of rHuPH20 to three pre-defined Roche biologic targets. Through March 31, 2011, Roche has paid an aggregate of $19.25 million in connection with Roche’s election of two additional exclusive targets and annual license maintenance fees for the right to designate the remaining targets as exclusive targets. In 2010, Roche did not pay the annual license maintenance fees on five of the remaining eight target slots. As a result, Roche currently retains the option to exclusively develop and commercialize rHuPH20 with three additional targets through the payment of annual license maintenance fees.
          Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and annual license maintenance fees were deferred and are being recognized over the term of the Roche Partnership. The Company recognized revenue from the upfront payment, exclusive designation fees and annual license maintenance fees under the Roche Partnership in the amounts of approximately $491,000 and $530,000 for the three months ended March 31, 2011 and 2010, respectively. Deferred revenue relating to the upfront payment, exclusive designation fees and annual license maintenance fees under the Roche Partnership was $32.4 million and $32.9 million as of March 31, 2011 and December 31, 2010, respectively.
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           Baxter Partnerships - In September 2007, the Company and Baxter entered into the Gammagard Partnership, under which Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID. Under the terms of the Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPh20 enzyme), the $10.0 million upfront payment was deferred and is being recognized over the term of the Gammagard Partnership. The Company recognized revenue from the upfront payment under the Gammagard Partnership in the amounts of approximately $121,000 and $140,000 for the three months ended March 31, 2011 and 2010, respectively. Deferred revenue relating to the upfront payment under the Gammagard Partnership was $8.0 million and $8.1 million as of March 31, 2011 and December 31, 2010, respectively.
          In February 2007, the Company and Baxter amended certain existing agreements for HYLENEX and entered into the HYLENEX Partnership for kits and formulations with rHuPH20. Under the terms of the HYLENEX Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0 million. In addition, Baxter would make payments to the Company based on sales of the products covered under the HYLENEX Partnership. Baxter had prepaid nonrefundable product-based payments totaling $10.0 million in connection with the execution of the HYLENEX Partnership. Due to the Company’s continuing involvement obligations (for example, support activities associated with rHuPh20 enzyme), the $10.0 million upfront payment was initially deferred and was being recognized over the term of the HYLENEX Partnership. The prepaid product-based payments were also deferred and were being recognized as product sales revenues as the Company earned such revenues from the sales of HYLENEX by Baxter.
          Effective January 7, 2011, the Company and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. The parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period including Baxter’s manufacture of an interim supply of Standalone Product (as defined in the HYLENEX Development and Supply Agreement), all on mutually acceptable terms and conditions. The termination of these agreements does not affect the other relationships between the parties, including the application of Halozyme’s Enhanze Technology to Baxter’s GAMMAGARD LIQUID. As a result, in the fourth quarter ended December 31, 2010 the Company recharacterized deferred revenue of approximately $991,000 as a reserve for product returns for HYLENEX API previously delivered to Baxter that could be returned. As of March 31, 2011 and December 31, 2010, the reserve for HYLENEX API returns was approximately $991,000 and was included in current accrued expenses of the Company’s condensed consolidated balance sheets. In addition, the Company will reassess the periods over which the unamortized deferred revenue relating to the prepaid product-based payments totaling approximately $9.3 million and the unamortized deferred revenue relating to the upfront payment totaling approximately $7.7 million at March 31, 2011 will be recognized. The periods over which these amounts will be amortized will be based on the final outcome of the definitive agreements. For the three months ended March 31, 2011 and 2010, the Company recognized revenues under the HYLENEX Partnership from the upfront payment in the amounts of approximately $117,000 and $135,000, respectively, and from the product-based payments in the amounts of approximately $0 and $332,000, respectively.
10.      Net Loss Per Share
          Basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Stock options, unvested stock awards and warrants are considered to be common equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive. Because of the Company’s net loss, all outstanding stock options, unvested stock awards and warrants were excluded from the calculation. The Company has excluded 6.8 million and 8.8 million shares of stock options and unvested stock awards from the calculation of diluted net loss per common share for the three months ended March 31, 2011 and 2010, respectively, because their effect is anti-dilutive.
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11.      Stockholders’ Equity
          During the three months ended March 31, 2011 and 2010, the Company issued an aggregate of 1,452,642 and 199,814 shares of common stock, respectively, in connection with the exercises of stock options at a weighted average exercise price of $1.61 and $2.32 per share, respectively, for net proceeds of approximately $1.9 million and $464,000, respectively. Options to purchase approximately 6.6 million and 8.0 million shares of the Company’s common stock were outstanding as of March 31, 2011 and December 31, 2010, respectively.
12.      Restructuring Liability
          In October 2010, the Company completed a corporate reorganization to focus its resources on advancing its core proprietary programs and supporting strategic alliances with Roche and Baxter. This reorganization resulted in a reduction in the workforce of approximately 25 percent primarily in the discovery research and preclinical areas. The following table sets forth activities in the restructuring liability:
 	 	 	 	 	
 	 	Employee severance	
 	 	and benefits	
Balance, December 31, 2010	 	  $ 	116,677	 	
Accruals during the year	 	 	-   	 	
Cash payments	 	 	(63,346	)	
 	 	 	
Balance, March 31, 2011	 	  $ 	53,331	 	
 	 	 	
13.       Commitments and Contingencies
          From time to time the Company is involved in legal actions arising in the normal course of its business. The Company is not presently subject to any material litigation nor, to management’s knowledge, is any litigation threatened against the Company that collectively is expected to have a material adverse effect on the Company’s consolidated cash flows, financial condition or results of operations.
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
           As used in this report, unless the context suggests otherwise, the terms “we,” “our,” “ours,” and “us” refer to Halozyme Therapeutics, Inc., and its wholly owned subsidiary, Halozyme, Inc., which are sometimes collectively referred to herein as “the Company.”
           The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. Past financial or operating performance is not necessarily a reliable indicator of future performance, and our historical performance should not be used to anticipate results or future period trends.
           Except for the historical information contained herein, this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management’s current forecast of certain aspects of our future. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “think,” “may,” “could,” “will,” “would,” “should,” “continue,” “potential,” “likely,” “opportunity” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of indentifying forward-looking statements in this report. Additionally, statements concerning future matters such as the development or regulatory approval of new products, enhancements of existing products or technologies, third party performance under key collaboration agreements, revenue and expense levels and other statements regarding matters that are not historical are forward-looking statements. Such statements are based on currently available operating, financial and competitive information and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in our forward-looking statements due to a number of factors including, but not limited to, those set forth below under the section entitled “Risks Factors” and elsewhere in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K.
Overview
          We are a biopharmaceutical company dedicated to the development and commercialization of recombinant human enzymes that either transiently modify tissue under the skin to facilitate injection of other therapies or correct diseased tissue structures for clinical benefit. Our existing products and our products under development are based primarily on intellectual property covering the family of human enzymes known as hyaluronidases. Hyaluronidases are enzymes (proteins) that break down hyaluronan, or HA, which is a naturally occurring space-filling, gel-like substance that is a major component of both normal tissues throughout the body, such as skin and cartilage, and abnormal tissues such as tumors. Our primary technology is based on our proprietary recombinant human PH20 enzyme, or rHuPH20, a human synthetic version of hyaluronidase. The PH20 enzyme is a naturally occurring enzyme that temporarily degrades HA, thereby facilitating the penetration and diffusion of other drugs and fluids that are injected under the skin or in the muscle. Our proprietary rHuPH20 technology is applicable to multiple therapeutic areas and may be used to both expand existing markets and create new ones through the development of our own proprietary products. The rHuPH20 technology may also be applied to existing and developmental products of third parties through partnerships or other collaborations.
          Our operations to date have involved: (i) organizing and staffing our operating subsidiary, Halozyme, Inc.; (ii) acquiring, developing and securing our technology; (iii) undertaking product development for our existing products and a limited number of product candidates; and (iv) supporting the development of partnered product candidates. We continue to increase our focus on our proprietary product pipeline and have expanded investments in our proprietary product candidates. We currently have multiple proprietary programs in various stages of research and development. In addition, we have entered into a key partnership with F. Hoffmann-La Roche, Ltd and Hoffmann-La Roche, Inc., or Roche, to apply Enhanze Ô Technology to Roche’s biological therapeutic compounds for up to eight targets, or Roche Partnership. We also have a key partnership with Baxter Healthcare Corporation, or Baxter, to apply Enhanze Technology to Baxter’s biological therapeutic compound, GAMMAGARD LIQUID Ô , or Gammargard Partnership. In January 2011, we and Baxter mutually agreed to terminate a partnership between Baxter and us, under which Baxter had worldwide marketing rights for HYLENEX ® , a registered trademark of Baxter International, Inc., or HYLENEX Partnership. There are two marketed products that utilize our technology: HYLENEX, a hyaluronidase human injection used as an adjuvant to enhance the dispersion and absorption of other injected drugs and fluids, and Cumulase ® , a product used for in vitro fertilization, or IVF. Currently, we have received only limited revenue from the sales of active pharmaceutical ingredients, or API, to the third party that produces Cumulase, in addition to other revenues from our partnerships with Baxter and Roche.
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          In February 2007, we and Baxter amended certain existing agreements relating to HYLENEX and entered into the HYLENEX Partnership for kits and formulations with rHuPH20. In October 2009, Baxter commenced the commercial launch of HYLENEX recombinant (hyaluronidase human injection). Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. In May 2010, we delivered a notice of breach to Baxter due to Baxter’s failure to manufacture HYLENEX in accordance with the terms of existing development and supply contracts. In August 2010, we announced the withdrawal, without prejudice, of the notice of breach to Baxter. We have been in communication with the U.S. Food and Drug Administration, or FDA, and have provided them materials relating to the root cause and remediation plans. We are also generating data requested by the FDA and currently expect, pending regulatory review and approval, that we could reintroduce the product in the second half of 2011.
          Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. In addition, the parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period including Baxter’s manufacture of an interim supply of Standalone Product (as defined in the HYLENEX Development and Supply Agreement), all on mutually acceptable terms and conditions. The termination of these agreements does not affect the other relationships between the parties, including the application of Halozyme’s Enhanze Technology to Baxter’s GAMMAGARD LIQUID.
          We and our partners have product candidates in the research, preclinical and clinical stages, but future revenues from the sales and/or royalties of these product candidates will depend on our partners’ abilities and ours to develop, manufacture, obtain regulatory approvals for and successfully commercialize product candidates. It may be years, if ever, before we and our partners are able to obtain regulatory approvals for these product candidates. We have incurred net operating losses each year since inception, with an accumulated deficit of approximately $234.9 million as of March 31, 2011.
          We currently have a shelf registration statement on Form S-3 (Registration No. 333-164215) which allows us, from time to time, to offer and sell up to approximately $39.8 million of equity or debt securities. We may utilize this universal shelf in the future to raise capital to fund the continued development of our product candidates, the commercialization of our products or for other general corporate purposes.
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Products and Product Candidates
          We have two marketed products and multiple product candidates targeting several indications in various stages of development. The following table summarizes our proprietary products and product candidates as well as our partnered product candidates:

Ultrafast Insulin Program
          Our lead proprietary program focuses on the formulation of rHuPH20 with prandial (mealtime) insulins for the treatment of diabetes mellitus. Diabetes mellitus is an increasingly prevalent, costly condition associated with substantial morbidity and mortality. Attaining and maintaining normal blood sugar levels to minimize the long-term clinical risks is a key treatment goal for diabetic patients. Combining rHuPH20 with a rapid acting analog insulin, i.e., insulin lispro (Humalog ® ), insulin aspart (Novolog ® ) and insulin glulisine (Apidra ® ), facilitates faster insulin dispersion in, and absorption from, the subcutaneous space into the vascular compartment leading to faster insulin response. By making mealtime insulin onset faster, i.e., providing earlier insulin to the blood and thus earlier glucose lowering activity, a combination of insulin with rHuPH20 may yield a better profile of insulin effect, more like that found in healthy, non-diabetic people.
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          The primary goal of our ultrafast insulin program is to develop a best-in-class insulin product, with demonstrated clinical benefits for type 1 and 2 diabetes mellitus patients, in comparison to the current standard of care analog products. With a more rapidly absorbed, faster acting insulin product, we seek to demonstrate one or more significant improvements relative to existing treatment, such as improved glycemic control, less hypoglycemia, and less weight gain. A number of Phase 1 and Phase 2 clinical pharmacology trials and registration trial-enabling treatment studies in connection with our ultrafast insulin program have been completed and are ongoing or planned, that will investigate the various attributes of our insulin product candidates. The status of some of these trials is summarized below:

 	•	 	In January 2011, we initiated an insulin pump study that utilizes rHuPH20 combined with two commercially available mealtime insulin analogs: insulin aspart and insulin glulisine. Patients with type 1 diabetes enrolled in these pump studies receive the insulin analog alone and, separately, insulin analog with rHuPH20. These study drugs are continuously infused via commercially available insulin infusion pump systems for three days. Data for pharmacokinetic and glucodynamic measures as well as safety and tolerability are being collected and compared for each treatment. The double-blind crossover pump study enrolls up to 54 type 1 diabetes patients who already receive their insulin therapy with a pump. Patients receive subcutaneous continuous infusions of either insulin aspart alone and insulin aspart with rHuPH20 or insulin glulisine alone and insulin glulisine with rHuPH20 for up to 72 to 80 hours each. The primary endpoint of the study is a comparison of the early insulin exposure as measured by the area under the curve during the first 60 minutes following a bolus infusion of insulin delivered by a pump. In addition, various pharmacokinetic and glucodynamic measures including C max , T max , glucose infusion rates, glycemic response to standard meal challenges, and area under the curve at specified time intervals are being measured. An evaluation of the safety and local tolerability of the analogs with and without rHuPH20 is also being performed. The preliminary results from this study were presented at the American Association of Clinical Endocrinologists ( AACE ) meeting in San Diego, California in April 2011, demonstrating that rHuPH20 confers an ultrafast insulin profile to rapid acting analog insulin when delivered by subcutaneous infusion. We currently expect that final results from this study will be available for presentation at a scientific forum by June 2012.	
 		
 	•	 	In January 2011, we completed patient enrollment for two randomized double-blind Phase 2 clinical trials that utilize our rHuPH20 in combination with the two leading commercially available mealtime analogs: insulin aspart and insulin lispro. Diabetes patients enrolled in these cross-over design studies receive an insulin analog alone and with rHuPH20 treatment for 12 weeks each delivered by conventional subcutaneous injection using insulin syringes. Previous studies have demonstrated that the subcutaneous coinjection of rHuPH20 with an insulin analog results in a more physiologic fast-in, fast-out profile that enhances the mealtime glycemic control for each analog. These Phase 2 clinical trials, one in type 1 diabetes patients and the other in type 2 patients, compare two ultrafast insulin analog products formulated with rHuPH20 to an active comparator, Humalog. Each study enrolled approximately 110 patients and began with a 4 to 6 week titration period where patients optimized their basal insulin dosing. Patients were then randomized to receive either the lispro with rHuPH20 or aspart with rHuPH20 investigational study drugs and the active comparator three times daily for 12 weeks each in a random sequence. The primary endpoint of each study is a comparison of improved glycemic control, as assessed by the change in glycemic control from baseline. Data regarding postprandial glucose levels, the proportion of patients that safely achieve glycemic control targets, rates of hypoglycemia, weight change and additional endpoints will be collected. We currently expect that final results from both studies will be available for presentation at a scientific forum by June 2012.	
PEGPH20
          We are investigating a PEGylated version of rHuPH20, or PEGPH20, a new molecular entity, as a candidate for the systemic treatment of tumors rich in HA. PEGylation refers to the attachment of polyethylene glycol to our rHuPH20 enzyme, which extends its half life in the blood from less than one minute to approximately 48 to 72 hours. An estimated 20% to 30% of solid tumors, including prostate, breast, pancreas and colon, accumulate significant amounts of HA that surrounds and covers the surface of the tumor cells. The quantity of HA produced by the tumor correlates with increased tumor growth and metastasis and has been linked with tumor progression in some studies.
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          In preclinical studies, PEGPH20 has been shown to deplete HA in cell culture and in animal models of human cancer. The PEGPH20-mediated depletion of HA in tumor models results in significant inhibition of tumor growth when used as a single agent, and it greatly enhances the impact of chemotherapy. The increased efficacy of chemotherapy results from increased influx of drug into tumor tissue as the HA is removed. This effect is specific for the tumor microenvironment, and is not observed in normal tissues. Repeat dosing with PEGPH20 produced a sustained depletion of HA in the tumor microenvironment. For tumor models that did not produce HA, the presence of PEGPH20 had no therapeutic effect. Administration of the combination of PEGPH20 with docetaxel, liposomal doxorubicin and gemcitabine in HA-producing animal tumor models produced a significant survival advantage for the combination relative to either chemotherapeutic agent alone.
          In the first quarter of 2009, we initiated a Phase 1 clinical trial for our PEGPH20 program. This first in human trial with PEGPH20 is a dose-escalation, multicenter, pharmacokinetic and pharmacodynamic, safety study, in which patients with advanced solid tumors are receiving intravenous administration of PEGPH20 as a single agent. Based on initial data from this trial, and after consultation with the FDA, lower doses of PEGPH20 are now employed at a lower dosing frequency. The study was closed to further enrollment in March 2011. In July 2010, we initiated a second Phase 1 clinical trial with PEGPH20 in the treatment of solid tumors. This trial incorporates the use of oral dexamethasone as a pretreatment for all patients prior to receiving intravenous administration of PEGPH20. The second Phase 1 study is ongoing and actively enrolling.
          A Phase 1b/2 trial in pancreatic cancer patients is planned for initiation in the second half of 2011. This two-phase trial will compare chemotherapy alone versus chemotherapy with PEGPH20 with regard to various clinical endpoints. The objective of the first phase is to identity a safe and well-tolerated dose that will be selected for the second phase. The second phase will be a randomized, double-blind, placebo-controlled study to assess safety, tolerability, and efficacy of chemotherapy either with or without PEGPH20.
Enhanze Technology
          Enhanze Technology, a proprietary drug delivery enhancement platform using rHuPH20, is a broad technology that we have licensed to other pharmaceutical companies. When formulated with other injectable drugs, Enhanze Technology can facilitate the subcutaneous dispersion and absorption of these drugs. Molecules as large as 200 nanometers may pass freely through the extracellular matrix, which recovers its normal density within approximately 24 hours, leading to a drug delivery platform which does not permanently alter the architecture of the skin. The principal focus of our Enhanze Technology platform is the use of rHuPH20 to facilitate subcutaneous route of administration for large molecule biological therapeutics, some of which currently require intravenous administration. Potential benefits of subcutaneous administration of these biologics include life cycle management, patient convenience, reductions in infusion reactions and lower administration costs.
          We currently have Enhanze Technology partnerships with Roche and Baxter and we are currently pursuing additional partnerships with biopharmaceutical companies that market or develop drugs that could benefit from injection via the subcutaneous route of administration.
           Roche Partnership
          In December 2006, we and Roche entered into the Roche Partnership, under which Roche obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with up to thirteen Roche target compounds. Roche initially had the exclusive right to apply rHuPH20 to only three pre-defined Roche biologic targets with the option to exclusively develop and commercialize rHuPH20 with an additional ten targets. Roche elected to add a fourth exclusive target in December 2008 and a fifth exclusive target in June 2009. In 2010, Roche did not pay the annual license maintenance fee on five of the remaining eight additional target slots. As a result, Roche currently retains the option to exclusively develop and commercialize rHuPH20 with an additional three targets through the payment of annual license maintenance fees. Pending the successful completion of various clinical, regulatory and sales events, Roche will be obligated to make milestone payments to us, as well as royalty payments on the sales of products that result from the partnership.
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          Compounds directed at three of the five Roche exclusive targets have previously commenced clinical trials. Two compounds (subcutaneous Herceptin ® and subcutaneous MabThera ® ) are in Phase 3 clinical trials and one compound (subcutaneous Actemra ® ) has completed a Phase 1 clinical trial.
          In December 2010, Roche completed the enrollment for its first Phase 3 clinical trial for a compound directed at an exclusive target. This Phase 3 clinical trial is for a subcutaneously delivered version of Roche’s anticancer biologic, Herceptin (trastuzumab). The study will investigate the pharmacokinetics, efficacy and safety of subcutaneous Herceptin in patients with HER2-positive breast cancer as part of adjuvant treatment. Herceptin is approved to treat HER2-positive breast cancer and currently is given intravenously. Breast cancer is the most common cancer among women worldwide. Each year, more than one million new cases of breast cancer are diagnosed worldwide, and nearly 400,000 people will die of the disease annually. In HER2-positive breast cancer, increased quantities of the HER2 protein are present on the surface of the tumor cells. This is known as ‘HER2 positivity’ and affects approximately 20-25% of women with breast cancer. Roche has stated that they expect to file for regulatory approval of subcutaneous Herceptin in 2012.
          In February 2011, Roche began a Phase 3 clinical trial for a subcutaneous formulation of MabThera (rituximab). The study will investigate pharmacokinetics, efficacy and safety of MabThera SC. Intravenously administered MabThera is approved for the treatment of non-Hodgkin’s lymphoma (NHL) and Chronic Lymphocytic Leukemia (CLL), types of cancer that affects lymphocytes, or white blood cells. An estimated 66,000 new cases of NHL were diagnosed in the U.S. in 2009 with approximately 125,000 new cases reported worldwide.
          In 2009, Roche completed a Phase 1 clinical trial for a subcutaneous formulation of Actemra. This trial investigated the safety and pharmacokinetics of subcutaneous Actemra in patients with rheumatoid arthritis. The results from this Phase 1 trial suggest that further exploration may be warranted. Actemra administered intravenously is approved for the treatment of rheumatoid arthritis. Roche is separately developing a subcutaneous form of Actemra that does not use rHuPH20 and is being investigated for weekly or biweekly administration.
          Additional information about the Phase 3 subcutaneous Herceptin and Phase 3 subcutaneous MabThera clinical trials can be found at www.clinicaltrials.gov and www.roche-trials.com.
           Baxter Gammagard Partnership
          GAMMAGARD LIQUID is a current Baxter product that is indicated for the treatment of primary immunodeficiency disorders associated with defects in the immune system. In September 2007, Halozyme and Baxter entered into an Enhanze Technology partnership, or the Gammagard Partnership. Under the terms of this partnership, Baxter obtained a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID, or HyQ. Pending the successful completion of various regulatory and sales milestones, Baxter will be obligated to make milestone payments to us, as well as royalty payments on the sales of products that result from the partnership. Baxter is responsible for all development, manufacturing, clinical, regulatory, sales and marketing costs under the Gammagard Partnership, while we will be responsible for the supply of the rHuPH20 enzyme. The Company performs research and development activities at the request of Baxter, which are reimbursed by Baxter under the terms of the Gammagard Partnership. In addition, Baxter has certain product development and commercialization obligations in major markets identified in the Gammagard License. In January 2011, Baxter announced the completion of a Phase 3 clinical trial for HyQ. Baxter has stated that they expect to file for regulatory approval of HyQ in 2011.
HYLENEX Partnership
          HYLENEX is a formulation of rHuPH20 that, when injected under the skin, enhances the dispersion and absorption of other injected drugs or fluids. In February 2007, Halozyme and Baxter amended certain existing agreements relating to HYLENEX and entered into the HYLENEX Partnership for kits and formulations with rHuPH20. Pending the successful completion of a series of regulatory and sales events, Baxter would have been obligated to make milestone payments to us, as well as royalty payments on the sales of products that result from the partnership. Baxter was responsible for development, manufacturing, clinical, regulatory, sales and marketing costs of the products covered by the HYLENEX Partnership. We supplied Baxter with API for HYLENEX, and Baxter prepared, filled, finished and packaged HYLENEX and held it for subsequent distribution.
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          In October 2009, Baxter commenced the commercial launch of HYLENEX recombinant (hyaluronidase human injection) for use in pediatric rehydration at the 2009 American College of Emergency Physicians (ACEP) scientific assembly. In addition, under the HYLENEX Partnership, Baxter had a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20 with Baxter hydration fluids and generic small molecule drugs, with the exception of combinations with (i) bisphosphonates, (ii) cytostatic and cytotoxic chemotherapeutic agents and (iii) proprietary small molecule drugs, the rights to which had been retained by Halozyme.
          Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. In May 2010, we delivered a notice of breach to Baxter due to Baxter’s failure to manufacture HYLENEX in accordance with the terms of existing development and supply contracts. The notice was sent after Baxter informed us that a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying agreements with Baxter. In August 2010, we announced the withdrawal, without prejudice, of the notice of breach to Baxter. We have been in communication with the FDA and have provided them materials relating to the root cause and remediation plans. We are also generating data requested by the FDA and currently expect, pending regulatory review and approval, that we could reintroduce the product in the second half of 2011.
          Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. The parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period including Baxter’s manufacture of an interim supply of Standalone Product (as defined in the HYLENEX Development and Supply Agreement), all on mutually acceptable terms and conditions. The termination of these agreements does not affect the other relationships between the parties, including the application of our Enhanze Technology to Baxter’s GAMMAGARD LIQUID.
Cumulase
          Cumulase is an ex vivo (used outside of the body) formulation of rHuPH20 to replace the bovine (bull) enzyme currently used for the preparation of oocytes (eggs) prior to IVF during the process of intracytoplasmic sperm injection (ICSI), in which the enzyme is an essential component. Cumulase strips away the HA that surrounds the oocyte, allowing the clinician to then perform the ICSI procedure.
Revenues
          Revenues from product sales depend on our ability to develop, manufacture, obtain regulatory approvals for and successfully commercialize our products and product candidates.
          Elements of our collaborative partnerships include nonrefundable upfront payments, license fees, annual license maintenance fees, reimbursements of research and development services, various clinical, regulatory or sales-based milestones and future product-based or royalty payments, as applicable. Revenues from collaborative agreements and licensing agreements are recognized based on the performance requirements of the underlying agreements. Revenue is deferred for fees received before they are earned. Nonrefundable upfront payments, license fees and annual license maintenance fees from collaborative agreements entered into prior to January 1, 2011, where we have an ongoing involvement or performance obligation, are recorded as deferred revenue and recognized as revenue over the terms of the underlying agreement or development period. If and when we enter into a new collaborative agreement or materially modify an existing collaborative agreement, we will be required to apply the new revenue recognition guidance for multiple-deliverable arrangements.
          Prior to January 1, 2011, milestone payments were generally recognized as revenue upon the achievement of the milestones as specified in the underlying agreement, assuming we met certain criteria. Effective January 1, 2011, we adopted on a prospective basis the milestone method of revenue recognition guidance ("Milestone Method"). Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety.
          Reimbursements of research and development services are recognized as revenue during the period in which the services are performed. Royalty revenues from the sale of licensed products are recognized upon the sale of such products.
Costs and Expenses
           Cost of Sales. Cost of sales consists primarily of raw materials, third-party manufacturing costs, fill and finish costs, and freight costs associated with the sales of API for Cumulase and API for HYLENEX. Cost of sales also consists of the write-down of obsolete inventory.
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           Research and Development. Our research and development expenses include salaries and benefits, research-related manufacturing services, clinical trials, contract research services, supplies and materials, facilities and other overhead costs and other outside expenses. We charge all research and development expenses to operations as they are incurred. Our research and development activities are primarily focused on the development of our various product candidates.
          Since our inception in 1998 through March 31, 2011, we have incurred research and development expenses of $215.3 million. From January 1, 2008 through March 31, 2011, approximately 28% and 16% of our research and development expenses were associated with the development of our ultrafast insulin and PEGPH20 product candidates, respectively. Due to the uncertainty in obtaining the FDA and other regulatory approvals, our reliance on third parties and competitive pressures, we are unable to estimate with any certainty the additional costs we will incur in the continued development of our proprietary product candidates for commercialization. However, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development.
          Clinical development timelines, likelihood of success and total costs vary widely. We anticipate that we will make ongoing determinations as to which research and development projects to pursue and how much funding to direct to each project on an ongoing basis in response to existing resource levels, the scientific and clinical progress of each product candidate, and other market and regulatory developments. We plan on focusing our resources on those proprietary and partnered product candidates that represent the most valuable economic and strategic opportunities.
          Product candidate completion dates and costs vary significantly for each product candidate and are difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could cause our research and development expenditures to increase and, in turn, have a material adverse effect on our results of operations. We cannot be certain when, or if, our product candidates will receive regulatory approval or whether any net cash inflow from our other product candidates, or development projects, will commence.
           Selling, General and Administrative. Selling, general and administrative, or SG&A, expenses consist primarily of compensation and other expenses related to our corporate operations and administrative employees, accounting and legal fees, other professional services expenses, marketing expenses, as well as other expenses associated with operating as a publicly traded company.
Critical Accounting Policies and Estimates
          Our discussion and analysis of our financial position and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
           Revenue Recognition
          We generate revenues from product sales and collaborative agreements. Payments received under collaborative agreements may include nonrefundable fees at the inception of the agreements, license fees, milestone payments for specific achievements designated in the collaborative agreements, reimbursements of research and development services and/or royalties on sales of products resulting from collaborative arrangements.
          We recognize revenue in accordance with the authoritative guidance on revenue recognition. Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
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           Product Sales
          Revenues from the sales of API for Cumulase are recognized when the transfer of ownership occurs, which is upon shipment to our distributor. We are obligated to accept returns for product that does not meet product specifications. Historically, we have not had any product returns as a result of not meeting product specifications.
          Under the terms of the HYLENEX Partnership, we supplied Baxter the API for HYLENEX at our fully burdened cost plus a margin. Baxter filled and finished HYLENEX and held it for subsequent distribution, at which time we ensured it met product specifications and released it as available for sale. Because of our continued involvement in the development and production process of HYLENEX, the earnings process was not considered to be complete. Accordingly, we deferred the revenue and related product costs on the API for HYLENEX until the product was filled, finished, packaged and released. Baxter could only return the API for HYLENEX to us if it did not conform to certain specified criteria set forth in the HYLENEX Partnership or upon termination of such agreement.
          Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. In addition, the parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period including Baxter’s manufacture of an interim supply of Standalone Product (as defined in the HYLENEX Development and Supply Agreement), all on mutually acceptable terms and conditions. As a result, in the quarter ended December 31, 2010 we have established a reserve for inventory obsolescence of approximately $875,000 for HYLENEX API and a reserve for product returns for HYLENEX API previously delivered to Baxter that could be returned to us of approximately $991,000. As of March 31, 2011 and December 31, 2010, the reserve for inventory obsolescence for HYLENEX API was approximately $875,000 and the reserve for product returns for HYLENEX API was approximately $991,000.
          In addition, we received product-based payments upon the sale of HYLENEX by Baxter, in accordance with the terms of the HYLENEX Partnership. Product sales revenues were recognized as we earned such revenues based on Baxter’s shipments of HYLENEX to its distributors when such amounts could be reasonably estimated. Baxter had prepaid $10.0 million of non-refundable product-based payments. The prepaid product-based payments were initially deferred and were being recognized as product sales revenue as we earned such revenue from the sales of HYLENEX by Baxter. As a result of the HYLENEX Partnership termination, we will reassess the period over which the unamortized deferred revenue relating to the prepaid product-based payments totaling approximately $9.3 million at March 31, 2011 will be recognized. The period over which this amount will be amortized will be based on the final outcome of the definitive agreements.
           Revenues under Collaborative Agreements
          Revenues from collaborative and licensing agreements are recognized based on the performance requirements of the underlying agreements. Revenue is deferred for fees received before they are earned. Nonrefundable upfront payments and license fees from collaborative agreements entered into prior to January 1, 2011, in which we have an ongoing involvement or performance obligation, are recorded as deferred revenue and recognized as revenue over the contract or development period. If and when we enter into a new collaborative agreement or materially modify an existing collaborative agreement, we will be required to apply the new revenue recognition guidance for multiple-deliverable arrangements.
          Prior to the adoption of the Milestone Method of revenue recognition, we recognize milestone payments upon the achievement of specified milestones if: (1) the milestone was substantive in nature and the achievement of the milestone was not reasonably assured at the inception of the agreement, (2) the fees were nonrefundable and (3) our performance obligations after the milestone achievement would continue to be funded by our collaborator at a level comparable to the level before the milestone achievement.
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          Effective January 1, 2011, we adopted on a prospective basis the Milestone Method. Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

 	4.	 	The consideration is commensurate with either the entity’s performance to achieve the milestone, or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone,	
 		
 	5.	 	The consideration relates solely to past performance, and	
 		
 	6.	 	The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.	
          A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.
          Reimbursements of research and development services are recognized as revenue during the period in which the services are performed. Royalties to be received based on sales of licensed products by our collaborators incorporating our products are recognized as earned in accordance with the terms of the underlying agreements.
          The Roche Partnership provides for payments to us which could potentially reach a value of up to $111.0 million for the initial three exclusive targets upon achievement of the following milestones:

 	•	 	Clinical — Enrollment of the first subject in a clinical trial for a licensed product candidate by Roche.	
 		
 	•	 	Regulatory — Regulatory approval of a licensed product.	
 		
 	•	 	Sales-Based — Achievement of specified sales volumes of commercialized products by Roche.	
          We may receive further upfront and milestone payments of up to $47.0 million per target, as well as royalties on product sales for each of the additional five targets. We have determined that the clinical and regulatory milestones are substantive; therefore, we expect to recognize such clinical and regulatory milestone payments as revenue upon achievement. Given the challenges inherent in developing and obtaining approval for pharmaceutical and biologic products, there was substantive uncertainty whether any of the clinical and regulatory milestones would be achieved at the time the Roche Partnership was entered into. In addition, we evaluated whether the clinical and regulatory milestones met the remaining criteria to be considered substantive. We have determined that the sales-based milestone payments are similar to royalty payments and, therefore, we will recognize such sales-based milestone payments as revenue upon achievement of the milestone. In the quarter ended March 31, 2011, we recognized a $5.0 million payment as revenue in accordance with the Milestone Method of revenue recognition related to the achievement of certain clinical milestones pursuant to the terms of the Roche Partnership.
          The Gammagard Partnership provides for payments totaling $37.0 million to us upon the achievement of regulatory approval for the licensed product candidate and specified sales volumes of the commercialized product by Baxter. We have determined that the regulatory milestones are substantive; therefore, we expect to recognize such regulatory milestone payments as revenue upon achievement. Given the challenges inherent in developing and obtaining approval for pharmaceutical and biologic products, there was substantive uncertainty whether any of the regulatory events would be achieved at the time the Gammagard Partnership was entered into. In addition, we evaluated whether the regulatory milestones met the remaining criteria to be considered substantive. We have determined that sales-based milestone payments are similar to royalty payments and, therefore, will be recognized as revenue upon achievement of the milestone.
          Under the terms of the HYLENEX Partnership, Baxter paid us a nonrefundable upfront payment of $10.0 million in 2007. Due to our continuing involvement obligations (for example, support activities associated with rHuPh20 enzyme), the $10.0 million upfront payment was deferred and was being recognized over the term of the HYLENEX Partnership. As a result of the termination of the HYLENEX Partnership in January 2011, we will reassess the period over which the unamortized deferred revenue relating to the upfront payment totaling approximately $7.7 million at March 31, 2011 will be recognized. The period over which this amount will be amortized will be based on the final outcome of the definitive agreements.
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           Share-Based Payments
          We use the fair value method to account for share-based payments in accordance with the authoritative guidance for stock compensation. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model, or Black-Scholes model, that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the historical volatility of our common stock. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do not expect to pay dividends on our common stock in the foreseeable future, we estimated the dividend yield to be 0%. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate pre-vesting forfeitures based on our historical experience.
          If factors change and we employ different assumptions for determination of fair value in future periods, the share-based compensation expense that we record may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with authoritative guidance on stock compensation using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
           Research and Development Expenses
          Research and development expenses include salaries and benefits, facilities and other overhead expenses, clinical trials, research-related manufacturing services, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred. Advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts will be recognized as an expense as the related goods are delivered or the related services are performed or such time that the Company does not expect the goods to be delivered or services to be rendered.
          Milestone payments that we make in connection with in-licensed technology or product candidates are expensed as incurred when there is uncertainty in receiving future economic benefits from the licensed technology or product candidates. We consider the future economic benefits from the licensed technology or product candidates to be uncertain until such licensed technology or product candidates are approved for marketing by regulatory bodies such as the FDA or when other significant risk factors are abated. Management has viewed future economic benefits for all of our licensed technology or product candidates to be uncertain and has expensed these amounts for accounting purposes.
          Payments in connection with our clinical trials are often made under contracts with multiple contract research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee, unit price or on a time-and-material basis. Payments under these contracts depend on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones. Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient
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enrollment, completion of patient studies and clinical trials progress. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the contracted amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we modify our accruals accordingly on a prospective basis. Revisions in scope of contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. Because of the uncertainty of possible future changes to the scope of work in clinical trials contracts, we are unable to quantify an estimate of the reasonably likely effect of any such changes on our consolidated results of operations or financial position. Historically, we have had no material changes in our clinical trial expense accruals that would have had a material impact on our consolidated results of operations or financial position.
           Inventory
          Inventory consists of raw materials used in production, work in process and finished goods inventory on hand related to our HYLENEX and Cumulase products. Inventory is valued at lower of cost or market (net realizable value) using the first-in, first-out method. Inventory is reviewed periodically for slow-moving or obsolete status. To the extent that its net realizable value is lower than cost, an impairment would be recorded. In connection with the termination of the HYLENEX Partnership in January 2011, we have established a reserve for inventory obsolescence of approximately $875,000 for HYLENEX API in the quarter ended December 31, 2010.
          The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto included in Part II — Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010, which contain accounting policies and other disclosures required by U.S. GAAP.
Results of Operations
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
           Product Sales – Product sales were $165,000 for the three months ended March 31, 2011 compared to $398,000 for the three months ended March 31, 2010. The decrease of $233,000, or 59%, was primarily due to a $332,000 decrease in amortization of product-based payments resulting from zero HYLENEX sales in the current period; offset in part by a $100,000 increase in the sales of Cumulase API. Based on the recall of HYLENEX in May 2010 and the termination of the HYLENEX Partnership in January 2011, we expect only product sales of API for Cumulase in future periods until HYLENEX could be reintroduced to the market. As a result of the HYLENEX Partnership termination, we will reassess the period over which the unamortized deferred revenue relating to the prepaid product-based payments totaling approximately $9.3 million at March 31, 2011 will be recognized. The period over which this amount will be amortized will be based on the final outcome of the definitive agreements with Baxter.
           Revenues Under Collaborative Agreements – Revenues under collaborative agreements were approximately $7.4 million for the three months ended March 31, 2011 compared to $3.0 million for the three months ended March 31, 2010. Revenues under collaborative agreements primarily consisted of the amortization of license fees and milestone payments received from Roche and Baxter of approximately $5.7 million and $804,000 for the three months ended March 31, 2011 and 2010, respectively. The increase of $4.9 million was primarily due to the receipt of a $5.0 million milestone payment in the quarter ended March 31, 2011. As a result of the termination of the HYLENEX Partnership in January 2011, we will reassess the periods over which the unamortized deferred revenue relating to the upfront payment totaling approximately $7.7 million at March 31, 2011 will be recognized. The period over which this amount will be amortized will be based on the final outcome of the definitive agreements with Baxter.
          Revenues under collaborative agreements also included reimbursements for research and development services from Roche of $1.5 million and $566,000 and Baxter of $141,000 and $1.5 million for the three months ended March 31, 2011 and 2010, respectively. Such reimbursements are for research and development services rendered by us at the request of Roche and Baxter and the amount of future revenues related to reimbursable research and development services is uncertain. We expect the non-reimbursement revenues under our collaborative agreements to continue to increase in future periods provided that our partners meet various clinical and regulatory milestones set forth in such agreements.
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           Cost of Product Sales – Cost of sales were $12,000 for the three months ended March 31, 2011 compared to $6,000 for the three months ended March 31, 2010. Based on the termination of the HYLENEX Partnership in January 2011, we expect only cost of product sales of API for Cumulase in future periods until HYLENEX could be reintroduced to the market.
           Research and Development – Research and development expenses were $13.8 million for the three months ended March 31, 2011 compared to $11.5 million for the three months ended March 31, 2010. The increase of $2.3 million, or 20%, was primarily due to a $4.4 million increase in clinical trial activities mainly supporting our ultrafast insulin program. The increase was offset in part by a $1.7 million decrease in compensation costs mainly due to the reduction in force in October 2010. We expect research and development costs to increase slightly in future periods as we continue with our clinical trial programs and continue to develop and manufacture our product candidates.
           Selling, General and Administrative – SG&A expenses were $3.4 million for the three months ended March 31, 2011 compared to $3.8 million for the three months ended March 31, 2010. The decrease of $351,000, or 9%, was primarily due to a $162,000 decrease in market research expense and a $147,000 decrease in compensation costs. We expect SG&A expenses to increase in future periods as we plan to increase sales and marketing activities.
           Interest and Other Income, net – Interest and other income, net consisted of interest income of $23,000 for the three months ended March 31, 2011 compared to $3,000 for the three months ended March 31, 2010. The increase in interest income was primarily due to higher interest rates and higher average cash and cash equivalent balances in 2011 as compared to the same period in 2010.
           Net Loss – Net loss for the three months ended March 31, 2011 was $9.6 million, or $0.10 per common share, compared to $11.8 million, or $0.13 per common share for the three months ended March 31, 2010. The decrease in net loss was primarily due to an increase in revenues under collaborative agreements; offset in part by an increase in operating expenses.
Liquidity and Capital Resources
Overview
          Our principal sources of liquidity are our existing cash and cash equivalents. As of March 31, 2011, we had cash and cash equivalents of approximately $73.8 million. We will continue to have significant cash requirements to support product development activities. The amount and timing of cash requirements will depend on the success of our clinical development programs, regulatory and market acceptance, and the resources we devote to research and other commercialization activities.
          We believe that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months. Currently, we anticipate total net cash burn of approximately $47.0 to $52.0 million for the year ending December 31, 2011, depending on the progress of various preclinical and clinical programs, the timing of our manufacturing scale up and the achievement of various milestones under our existing collaborative agreements. We do not expect our revenues to be sufficient to fund operations for several years. We expect to fund our operations going forward with existing cash resources, anticipated revenues from our existing collaborations and cash that we will raise through future transactions. We may finance future cash needs through any one of the following financing vehicles: (i) the public offering of securities; (ii) new collaborative agreements; (iii) expansions or revisions to existing collaborative relationships; (iv) private financings; and/or (v) other equity or debt financings.
          In January 2010, we filed a shelf registration statement on Form S-3 (Registration No. 333-164215) which allows us, from time to time, to offer and sell up to $100.0 million of equity or debt securities. In September 2010, we sold approximately $60.2 million of our common stock in an underwritten public offering at a net price of $7.25 per share. We may utilize this universal shelf in the future to raise capital to fund the continued development of our product candidates, the commercialization of our products or for other general corporate purposes.
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          Our existing cash and cash equivalents will not be adequate to fund our operations until we become cash flow positive, if ever. We cannot be certain that additional financing will be available when needed or, if available, financing will be obtained on favorable terms. If we are unable to raise sufficient funds, we will need to delay, scale back or eliminate some or all of our research and development programs, delay the launch of our product candidates, if approved, and/or restructure our operations. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders could result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations, the issuance of warrants that may ultimately dilute existing stockholders when exercised, and covenants that may restrict our ability to operate our business.
Cash Flows
          Net cash used in operations was $11.1 million during the three months ended March 31, 2011 compared to $12.6 million of net cash used in operations during the three months ended March 31, 2010. This change was primarily due to the decrease in net loss of $2.2 million adjusted for non-cash items including stock-based compensation and depreciation and amortization in addition to changes in the working capital. The decrease in net loss was mainly due to the receipt of a $5.0 million milestone payment; offset in part by an increase in R&D expenses.
          Net cash used in investing activities was $203,000 during the three months ended March 31, 2011 compared to $149,000 during the three months ended March 31, 2010. This was primarily due to an increase in purchases of property and equipment during 2011.
          Net cash provided by financing activities was $1.9 million during the three months ended March 31, 2011 compared to $464,000 during the three months ended March 31, 2010. Net cash provided by financing activities consisted of net proceeds from stock option exercises.
Off-Balance Sheet Arrangements
          As of March 31, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Recent Accounting Pronouncements
          See Note 3, Adoption of Recent Accounting Pronouncements , in the Notes to Condensed Consolidated Financial Statements for discussions of new accounting pronouncements and their effect, if any on us.
Risk Factors
           The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q, our most recent Annual Report on Form 10-K and those we may make from time to time. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occurs, our business, financial position and results of operations could be materially and adversely affected and the value of our securities could decline significantly.
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Risks Related To Our Business
We have generated only minimal revenue from product sales to date; we have a history of net losses and negative cash flow, and we may never achieve or maintain profitability.
          Relative to expenses incurred in our operations, we have generated only minimal revenue from product sales, licensing fees and milestone payments to date and we may never generate sufficient revenues from future product sales, licensing fees and milestone payments to offset expenses. Even if we ultimately do achieve significant revenues from product sales, licensing fees and/or milestone payments, we expect to incur significant operating losses over the next few years. We have never been profitable, and we may never become profitable. Through March 31, 2011, we have incurred aggregate net losses of approximately $234.9 million.
If our proprietary and partnered product candidates do not receive and maintain regulatory approvals, or if approvals are not obtained in a timely manner, such failure or delay would substantially impair our ability to generate revenues.
          Approval from the FDA is necessary to manufacture and market pharmaceutical products in the United States and the other countries in which we anticipate doing business have similar requirements. The process for obtaining FDA and other regulatory approvals is extensive, time-consuming and costly, and there is no guarantee that the FDA or other regulatory bodies will approve any applications that may be filed with respect to any of our proprietary or partnered product candidates, or that the timing of any such approval will be appropriate for the desired product launch schedule for a product candidate. We, and our partners, attempt to provide guidance as to the timing for the filing and acceptance of such regulatory approvals, but such filings and approvals may not occur on the originally anticipated timeline, or at all. There are no proprietary or partnered product candidates currently in the regulatory approval process, and we and our partners may not be successful in obtaining such approvals for any potential products in a timely manner, or at all (please also refer to the risk factor titled “ Our proprietary and partnered product candidates may not receive regulatory approvals for a variety of reasons, including unsuccessful clinical trials. ” for additional information relating to the approval of product candidates).
          Additionally, in order to continue to manufacture and market pharmaceutical products, we must maintain our regulatory approvals. If we or any of our partners are unsuccessful in maintaining our regulatory approvals our ability to generate revenues would be adversely affected. For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. We have been in communication with the FDA and have provided them materials relating to the root cause and remediation plans. While we are generating data requested by the FDA and currently expect that we could reintroduce the product in the second half of 2011, this expectation is dependent upon regulatory review and approval and, therefore, we cannot guaranty that we will be able to meet this timeline.
If our contract manufacturers are unable to manufacture significant amounts of the API used in our products and product candidates, our product development and commercialization efforts could be delayed or stopped and our collaborative partnerships could be damaged.
          We have existing supply agreements with contract manufacturing organizations Avid Bioservices, Inc., or Avid, Cook Pharmica LLC, or Cook, and PacificGMP, Inc., or PacificGMP, to produce bulk API. These manufacturers each produce API under current Good Manufacturing Practices, or cGMP, for clinical uses. In addition, Avid currently produces API for commercialized products. Avid and Cook will also provide support for the chemistry, manufacturing and controls sections for FDA and other regulatory filings. We rely on their ability to successfully manufacture these batches according to product specifications and Cook and PacificGMP have relatively limited experience manufacturing our API. In addition, as a result of our contractual obligations to Roche, we will be required to significantly scale up our commercial API production at Cook during the next two years. If Cook is unable to obtain status as a cGMP-approved manufacturing facility, or if either Avid, Cook or PacificGMP: (i) are unable to retain status as cGMP-approved manufacturing facilities; (ii) are unable to otherwise successfully scale up our API production; or (iii) fail to manufacture the API required by our proprietary and partnered products and product candidates for any other reason, our business will be adversely affected. We have not established, and may not be able to establish, favorable arrangements with additional API manufacturers and suppliers of the ingredients necessary to manufacture the API should the existing manufacturers and suppliers become unavailable
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or in the event that our existing manufacturers and suppliers are unable to adequately perform their responsibilities. We have attempted to mitigate the impact of supply interruption through the establishment of excess API inventory, but there can be no assurances that this safety stock will be maintained or that it will be sufficient to address any delays, interruptions or other problems experienced by Avid, Cook and/or PacificGMP. Any delays, interruptions or other problems regarding the ability of Avid, Cook and/or PacificGMP to supply API on a timely basis could: (i) cause the delay of clinical trials or otherwise delay or prevent the regulatory approval of proprietary or partnered product candidates; (ii) delay or prevent the effective commercialization of proprietary or partnered products and/or (iii) cause us to breach contractual obligations to deliver API to our partners. Such delays would likely damage our relationship with our partners under our key collaboration agreements and they would have a material adverse effect on our business and financial condition.
If any party to a key collaboration agreement, including us, fails to perform material obligations under such agreement, or if a key collaboration agreement, or any other collaboration agreement, is terminated for any reason, our business could significantly suffer.
          We have entered into multiple collaboration agreements under which we may receive significant future payments in the form of maintenance fees, milestone payments and royalties. In the event that a party fails to perform under a key collaboration agreement, or if a key collaboration agreement is terminated, the reduction in anticipated revenues could delay or suspend our product development activities for some of our product candidates, as well as our commercialization efforts for some or all of our products. In addition, the termination of a key collaboration agreement by one of our partners could materially impact our ability to enter into additional collaboration agreements with new partners on favorable terms, if at all. In certain circumstances, the termination of a key collaboration agreement would require us to revise our corporate strategy going forward and reevaluate the applications and value of our technology.
          For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. In January 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and we reacquired all rights to HYLENEX. We are in communication with the FDA, and have provided them materials relating to the root cause and remediation plans. We are also generating data requested by the FDA and currently expect, pending regulatory review and approval, that we could reintroduce the product in the second half of 2011.
Most of our current proprietary and partnered products and product candidates rely on the rHuPH20 enzyme.
          The rHuPH20 enzyme is a key technological component of Enhanze Technology, our ultrafast insulin program, HYLENEX and other proprietary and partnered products and product candidates. An adverse development for rHuPH20 (e.g., an adverse regulatory determination relating to rHuPH20, we are unable to obtain sufficient quantities of rHuPH20, we are unable to obtain or maintain material proprietary rights to rHuPH20 or we discover negative characteristics of rHuPH20) would substantially impact multiple areas of our business, including current and potential partnerships, as well as proprietary programs.
Our proprietary and partnered product candidates may not receive regulatory approvals for a variety of reasons, including unsuccessful clinical trials.
          Clinical testing of pharmaceutical products is a long, expensive and uncertain process and the failure or delay of a clinical trial can occur at any stage. Even if initial results of preclinical studies or clinical trial results are promising, we or our partners may obtain different results that fail to show the desired levels of safety and efficacy, or we may not, or our partners may not, obtain applicable regulatory approval for a variety of other reasons. Clinical trials for any of our proprietary or partnered product candidates could be unsuccessful, which would delay or prohibit regulatory approval and commercialization of the product candidates. In the United States and other jurisdictions, regulatory approval can be delayed, limited or not granted for many reasons, including, among others:

 	•	 	regulatory review may not find a product candidate safe or effective enough to merit either continued testing or final approval;	
 		
 	•	 	regulatory review may not find that the data from preclinical testing and clinical trials justifies approval, or they may require additional studies that would significantly delay or make continued pursuit of approval commercially unattractive;	
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 	•	 	a regulatory agency may reject our trial data or disagree with our interpretations of either clinical trial data or applicable regulations;	
 		
 	•	 	the cost of a clinical trial may be greater than what we originally anticipate, and we may decide to not pursue regulatory approval for such a trial;	
 		
 	•	 	a regulatory agency may not approve our manufacturing processes or facilities, or the processes or facilities of our partners, our contract manufacturers or our raw material suppliers;	
 		
 	•	 	a regulatory agency may identify problems or other deficiencies in our existing manufacturing processes or facilities, or the existing processes or facilities of our partners, our contract manufacturers or our raw material suppliers;	
 		
 	•	 	a regulatory agency may change its formal or informal approval requirements and policies, act contrary to previous guidance, adopt new regulations or raise new issues or concerns late in the approval process; or	
 		
 	•	 	a product candidate may be approved only for indications that are narrow or under conditions that place the product at a competitive disadvantage, which may limit the sales and marketing activities for such product candidate or otherwise adversely impact the commercial potential of a product.	
          If a proprietary or partnered product candidate is not approved in a timely fashion on commercially viable terms, or if development of any product candidate is terminated due to difficulties or delays encountered in the regulatory approval process, it could have a material adverse impact on our business and we will become more dependent on the development of other proprietary or partnered product candidates and/or our ability to successfully acquire other products and technologies. There can be no assurances that any proprietary or partnered product candidate will receive regulatory approval in a timely manner, or at all.
          We anticipate that certain proprietary and partnered products will be marketed, and perhaps manufactured, in foreign countries. The process of obtaining regulatory approvals in foreign countries is subject to delay and failure for the reasons set forth above, as well as for reasons that vary from jurisdiction to jurisdiction. The approval process varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. Foreign regulatory agencies may not provide approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA.
Our key partners are responsible for providing certain proprietary materials that are essential components of our partnered product candidates, and any failure to supply these materials could delay the development and commercialization efforts for these partnered product candidates and/or damage our collaborative partnerships.
          Our partners are responsible for providing certain proprietary materials that are essential components of our partnered product candidates. For example, Roche is responsible for producing the Herceptin and MabThera required for its subcutaneous product candidates and Baxter is responsible for producing the GAMMAGARD LIQUID for its product candidate. If a partner, or any applicable third party service provider of a partner, encounters difficulties in the manufacture, storage, delivery, fill, finish or packaging of either components of the partnered product candidate or the partnered product candidate itself, such difficulties could: (i) cause the delay of clinical trials or otherwise delay or prevent the regulatory approval of partnered product candidates; and/or (ii) delay or prevent the effective commercialization of partnered products. Such delays could have a material adverse effect on our business and financial condition. For example, Baxter received a Warning Letter from the FDA in January 2010 regarding Baxter’s GAMMAGARD LIQUID manufacturing facility in Lessines, Belgium. The FDA indicated in March 2010 that the issues raised in the Warning Letter had been addressed by Baxter and we do not expect these issues to impact the development of the GAMMAGARD LIQUID product candidate.
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If we have problems with third parties that either distribute API on our behalf or prepare, fill, finish and package our products and product candidates for distribution, our commercialization and development efforts for our products and product candidates could be delayed or stopped.
          We rely on third parties to store and ship API on our behalf and to also prepare, fill, finish and package our products and product candidates prior to their distribution. If we are unable to locate third parties to perform these functions on terms that are acceptable to us, or if the third parties we identify fail to perform their obligations, the progress of clinical trials could be delayed or even suspended and the commercialization of approved product candidates could be delayed or prevented. For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. We are in communication with the FDA, and have provided them materials relating to the root cause and remediation plans. We are also generating data requested by the FDA and currently expect, pending regulatory review and approval, that we could reintroduce the product in the second half of 2011.
          Effective January 7, 2011, we and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. In addition, the parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period including Baxter’s manufacture of an interim supply of Standalone Product (as defined in the HYLENEX Development and Supply Agreement), all on mutually acceptable terms and conditions. The Baxter facility is the only facility currently approved by the FDA to prepare, fill, finish and package HYLENEX. Any delay in reaching a new agreement with Baxter would likely delay our ability to reintroduce the product in the second half of 2011.
We may wish to raise additional capital in the next twelve months and there can be no assurance that we will be able to obtain such funds.
          During the next twelve months, we may wish to raise additional capital to continue the development of our product candidates or for other current corporate purposes. Our current cash position and expected revenues during the next few years may not constitute the amount of capital necessary for us to continue the development of our proprietary product candidates and to fund general operations. In addition, if we engage in acquisitions of companies, products or technology in order to execute our business strategy, we may need to raise additional capital. We will need to raise additional capital in the future through one or more financing vehicles that may be available to us. Potential financing vehicles include: (i) the public or private issuance of securities; (ii) new collaborative agreements; and/or (iii) expansions or revisions to existing collaborative relationships.
          Considering our stage of development, the nature of our capital structure and general market conditions, if we are required to raise additional capital in the future, the additional financing may not be available on favorable terms, or at all. If additional capital is not available on favorable terms when needed, we will be required to significantly reduce operating expenses through the restructuring of our operations. If we are successful in raising additional capital, a substantial number of additional shares may be issued and these shares will dilute the ownership interest of our current investors.
If we are unable to sufficiently develop our sales, marketing and distribution capabilities or enter into successful agreements with third parties to perform these functions, we will not be able to fully commercialize our products.
          We may not be successful in marketing and promoting our existing product candidates or any other products we develop or acquire in the future. Our sales, marketing and distribution capabilities are very limited. In order to commercialize any products successfully, we must internally develop substantial sales, marketing and distribution capabilities or establish collaborations or other arrangements with third parties to perform these services. We do not have extensive experience in these areas, and we may not be able to establish adequate in-house sales, marketing and distribution capabilities or engage and effectively manage relationships with third parties to perform any or all of such services. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, whose efforts may not meet our expectations or be successful. These third parties would be largely responsible for the speed and scope of sales and marketing efforts, and may not dedicate the resources necessary to maximize product opportunities. Our ability to cause these third parties to increase the speed and scope of their efforts may also be limited. In addition, sales and marketing efforts could be negatively impacted by the delay or failure to obtain additional supportive clinical trial data for our products. In some cases, third party partners are responsible for conducting these additional clinical trials and our ability to increase the efforts and resources allocated to these trials may be limited.
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          For example, in January 2011 we and Baxter mutually agreed to terminate the HYLENEX Partnership and the associated agreements. The parties are currently negotiating two definitive agreements setting forth the services to be provided by the respective parties during a transition period on mutually acceptable terms and conditions. We may not successfully negotiate favorable terms of such transition service agreements which may cause a delay in the reintroduction of HYLENEX to the market.
If we or our partners fail to comply with regulatory requirements, regulatory agencies may take action against us or them, which could significantly harm our business.
          Any approved products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA and other regulatory bodies. Regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to continual review and periodic inspections. We, and our partners, will be subject to ongoing regulatory requirements, including required submissions of safety and other post-market information and reports, registration requirements, cGMP regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements. The cGMP regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of our products. We and our partners are also subject to state laws and registration requirements covering the distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies. We or our partners may be slow to adapt or may not be able to adapt to these changes or new requirements.
          Regulatory requirements applicable to pharmaceutical products make the substitution of suppliers and manufacturers costly and time consuming. We have minimal internal manufacturing capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers and suppliers for the manufacture of our products and for their active and other ingredients. The disqualification of these manufacturers and suppliers through their failure to comply with regulatory requirements could negatively impact our business because the delays and costs in obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we cannot assure) could delay clinical trials or otherwise inhibit our ability to bring approved products to market, which would have a material adverse effect on our business and financial condition.
          Later discovery of previously unknown problems with our proprietary or partnered products, manufacturing processes or failure to comply with regulatory requirements, may result in any of the following:

 	•	 	restrictions on our products or manufacturing processes;	
 		
 	•	 	warning letters;	
 		
 	•	 	withdrawal of the products from the market;	
 		
 	•	 	voluntary or mandatory recall;	
 		
 	•	 	fines;	
 		
 	•	 	suspension or withdrawal of regulatory approvals;	
 		
 	•	 	suspension or termination of any of our ongoing clinical trials;	
 		
 	•	 	refusal to permit the import or export of our products;	
 		
 	•	 	refusal to approve pending applications or supplements to approved applications that we submit;	
 		
 	•	 	product seizure; or	
 		
 	•	 	injunctions or the imposition of civil or criminal penalties.	
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          For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. We are in communication with the FDA, and have provided them materials relating to the root cause and remediation plans. We are also generating data requested by the FDA and currently expect, pending regulatory review and approval, that we could reintroduce the product in the second half of 2011.
If proprietary or partnered product candidates are approved by regulatory bodies such as the FDA but do not gain market acceptance, our business may suffer and we may not be able to fund future operations.
          Assuming that our proprietary or partnered product candidates obtain the necessary regulatory approvals, a number of factors may affect the market acceptance of these existing product candidates or any other products which are developed or acquired in the future, including, among others:

 	•	 	the price of products relative to other therapies for the same or similar treatments;	
 		
 	•	 	the perception by patients, physicians and other members of the health care community of the effectiveness and safety of these products for their prescribed treatments;	
 		
 	•	 	our ability to fund our sales and marketing efforts and the ability and willingness of our partners to fund sales and marketing efforts;	
 		
 	•	 	the degree to which the use of these products is restricted by the approved product label;	
 		
 	•	 	the effectiveness of our sales and marketing efforts and the effectiveness of the sales and marketing efforts of our partners;	
 		
 	•	 	the introduction of generic competitors; and	
 		
 	•	 	the extent to which reimbursement for our products and related treatments will be available from third party payors.	
          If these products do not gain market acceptance, we may not be able to fund future operations, including the development or acquisition of new product candidates and/or our sales and marketing efforts for our approved products, which would cause our business to suffer.
          In addition, our proprietary and partnered product candidates will be restricted to the labels approved by applicable regulatory bodies such as the FDA, and these restrictions may limit the marketing and promotion of the ultimate products. If the approved labels are restrictive, the sales and marketing efforts for these products may be negatively affected.
Developing and marketing pharmaceutical products for human use involves product liability risks, for which we currently have limited insurance coverage.
          The testing, marketing and sale of pharmaceutical products involves the risk of product liability claims by consumers and other third parties. Although we maintain product liability insurance coverage, product liability claims can be high in the pharmaceutical industry and our insurance may not sufficiently cover our actual liabilities. If product liability claims were to be made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage could materially and adversely affect our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products and the imposition of higher insurance requirements could impose additional costs on us. In addition, since many of our partnered product candidates include the pharmaceutical products of a third party, we run the risk that problems with the third party pharmaceutical product will give rise to liability claims against us.
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Our inability to attract, hire and retain key management and scientific personnel could negatively affect our business.
          Our success depends on the performance of key management and scientific employees with biotechnology experience. Given our relatively small staff size relative to the number of programs currently under development, we depend substantially on our ability to hire, train, motivate and retain high quality personnel, especially our scientists and management team. If we are unable to retain existing personnel or identify or hire additional personnel, we may not be able to research, develop, commercialize or market our product candidates as expected or on a timely basis and we may not be able to adequately support current and future alliances with strategic partners.
          Furthermore, if we were to lose key management personnel, such as Gregory Frost, Ph.D., our President and Chief Executive Officer, we would likely lose some portion of our institutional knowledge and technical know-how, potentially causing a substantial delay in one or more of our development programs until adequate replacement personnel could be hired and trained. For example, Dr. Frost has been with us from soon after our inception, and he possesses a substantial amount of knowledge about our development efforts. If we were to lose his services, we would experience delays in meeting our product development schedules. In 2008, we adopted a severance policy applicable to all employees and a change in control policy applicable to senior executives. We have not adopted any other policies or entered into any other agreements specifically designed to motivate officers or other employees to remain with us.
          We do not have key man life insurance policies on the lives of any of our employees, including Dr. Frost.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.
          Our operations, including laboratories, offices and other research facilities, are located in a three building campus in San Diego, California. We depend on our facilities and on our partners, contractors and vendors for the continued operation of our business. Natural disasters or other catastrophic events, interruptions in the supply of natural resources, political and governmental changes, wildfires and other fires, floods, explosions, actions of animal rights activists, earthquakes and civil unrest could disrupt our operations or those of our partners, contractors and vendors. Even though we believe we carry commercially reasonable business interruption and liability insurance, and our contractors may carry liability insurance that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our and our contractors’ insurance policies or for which we or our contractors do not have coverage. Any natural disaster or catastrophic event could have a significant negative impact on our operations and financial results. Moreover, any such event could delay our research and development programs.
If we or our partners do not achieve projected development goals in the timeframes we publicly announce or otherwise expect, the commercialization of our products and the development of our product candidates may be delayed and, as a result, our stock price may decline.
          We publicly articulate the estimated timing for the accomplishment of certain scientific, clinical, regulatory and other product development goals. The accomplishment of any goal is typically based on numerous assumptions and the achievement of a particular goal may be delayed for any number of reasons both within and outside of our control. If scientific, regulatory, strategic or other factors cause us to not meet a goal, regardless of whether that goal has been publicly articulated or not, the commercialization of our products and the development of our proprietary and partnered product candidates may be delayed. In addition, the consistent failure to meet publicly announced milestones may erode the credibility of our management team with respect to future milestone estimates.
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Future acquisitions could disrupt our business and harm our financial condition.
          In order to augment our product pipeline or otherwise strengthen our business, we may decide to acquire additional businesses, products and technologies. As we have limited experience in evaluating and completing acquisitions, our ability as an organization to make such acquisitions is unproven. Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:

 	•	 	we may have to issue convertible debt or equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock;	
 		
 	•	 	an acquisition may negatively impact our results of operations because it may require us to amortize or write down amounts related to goodwill and other intangible assets, or incur or assume substantial debt or liabilities, or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;	
 		
 	•	 	we may encounter difficulties in assimilating and integrating the business, products, technologies, personnel or operations of companies that we acquire;	
 		
 	•	 	certain acquisitions may impact our relationship with existing or potential partners who are competitive with the acquired business, products or technologies;	
 		
 	•	 	acquisitions may require significant capital infusions and the acquired businesses, products or technologies may not generate sufficient value to justify acquisition costs;	
 		
 	•	 	an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;	
 		
 	•	 	acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience; and	
 		
 	•	 	key personnel of an acquired company may decide not to work for us.	
          If any of these risks occurred, it could adversely affect our business, financial condition and operating results. We cannot assure you that we will be able to identify or consummate any future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from such acquisitions or that the market will not view such acquisitions positively.
Risks Related To Ownership of Our Common Stock
Our stock price is subject to significant volatility.
          We participate in a highly dynamic industry which often results in significant volatility in the market price of common stock irrespective of company performance. As a result, our high and low sales prices of our common stock during the twelve months ended March 31, 2011 were $9.11 and $5.79, respectively. We expect our stock price to continue to be subject to significant volatility and, in addition to the other risks and uncertainties described elsewhere in this Quarterly Report on Form 10-Q, in the annual report on Form 10-K for the year ended December 31, 2010 and all other risks and uncertainties that are either not known to us at this time or which we deem to be immaterial, any of the following factors may lead to a significant drop in our stock price:

 	•	 	a dispute regarding our failure, or the failure of one of our third party partners, to comply with the terms of a collaboration agreement;	
 		
 	•	 	the termination, for any reason, of any of our collaboration agreements;	
 		
 	•	 	the sale of common stock by any significant stockholder, including, but not limited to, direct or indirect sales by members of management or our Board of Directors;	
 		
 	•	 	the resignation, or other departure, of members of management or our Board of Directors;	
 		
 	•	 	general negative conditions in the healthcare industry;	
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 	•	 	general negative conditions in the financial markets;	
 		
 	•	 	the failure, for any reason, to obtain regulatory approval for any of our proprietary or partnered product candidates;	
 		
 	•	 	the failure, for any reason, to secure or defend our intellectual property position;	
 		
 	•	 	for those products that are waiting to be approved by the FDA, the failure of the FDA to approve such products in a timely manner consistent with the FDA’s historical approval process;	
 		
 	•	 	the suspension of any clinical trial due to safety or patient tolerability issues;	
 		
 	•	 	the suspension of any clinical trial due to market and/or competitive conditions;	
 		
 	•	 	our failure, or the failure of our third party partners, to successfully commercialize products approved by applicable regulatory bodies such as the FDA;	
 		
 	•	 	our failure, or the failure of our third party partners, to generate product revenues anticipated by investors;	
 		
 	•	 	problems with an API contract manufacturer or a fill and finish manufacturer for any product or product candidate;	
 		
 	•	 	the sale of additional debt and/or equity securities by us;	
 		
 	•	 	our failure to obtain financing on acceptable terms; or	
 		
 	•	 	a restructuring of our operations.	
Future sales of shares of our common stock pursuant to our universal shelf registration statement may negatively affect our stock price.
          We currently have the ability to offer and sell up to $39.8 million of additional equity or debt securities under an effective universal shelf registration statement. Sales of substantial amounts of shares of our common stock or other securities under our universal shelf registration statement could lower the market price of our common stock and impair our ability to raise capital through the sale of equity securities. In the future, we may issue additional options, warrants or other derivative securities convertible into our common stock.
Trading in our stock has historically been limited, so investors may not be able to sell as much stock as they want to at prevailing market prices.
          Our stock has historically traded at a low daily trading volume. If low trading volume continues, it may be difficult for stockholders to sell their shares in the public market at any given time at prevailing prices.
Risks Related To Our Industry
Compliance with the extensive government regulations to which we are subject is expensive and time consuming and may result in the delay or cancellation of product sales, introductions or modifications.
          Extensive industry regulation has had, and will continue to have, a significant impact on our business. All pharmaceutical companies, including ours, are subject to extensive, complex, costly and evolving regulation by the federal government, principally the FDA and, to a lesser extent, the U.S. Drug Enforcement Administration, or DEA, and foreign and state government agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and foreign statutes and regulations govern or influence the testing, manufacturing, packaging, labeling, storing, recordkeeping, safety, approval, advertising, promotion, sale and distribution of our products. Under certain of these regulations, we and our contract suppliers and manufacturers are subject to periodic inspection of our or their respective facilities, procedures and operations and/or the testing of products by the FDA, the DEA and other authorities, which conduct periodic inspections to confirm that we and our contract suppliers and manufacturers are in compliance with all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems, or our contract suppliers’ and manufacturers’ processes, are in compliance with cGMP and other FDA regulations. If we, or our contract supplier, fail these inspections, we may not be able to commercialize our product in a timely manner without incurring significant additional costs, or at all.
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          In addition, the FDA imposes a number of complex regulatory requirements on entities that advertise and promote pharmaceuticals including, but not limited to, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet.
          We are dependent on receiving FDA and other governmental approvals prior to manufacturing, marketing and shipping our products. Consequently, there is always a risk that the FDA or other applicable governmental authorities will not approve our products, or will take post-approval action limiting or revoking our ability to sell our products, or that the rate, timing and cost of such approvals will adversely affect our product introduction plans or results of operations.
We may be required to initiate or defend against legal proceedings related to intellectual property rights, which may result in substantial expense, delay and/or cessation of the development and commercialization of our products.
          We primarily rely on patents to protect our intellectual property rights. The strength of this protection, however, is uncertain. For example, it is not certain that:

 	•	 	our patents and pending patent applications cover products and/or technology that we invented first;	
 		
 	•	 	we were the first to file patent applications for these inventions;	
 		
 	•	 	others will not independently develop similar or alternative technologies or duplicate our technologies;	
 		
 	•	 	any of our pending patent applications will result in issued patents; and	
 		
 	•	 	any of our issued patents, or patent pending applications that result in issued patents, will be held valid and infringed in the event the patents are asserted against others.	
          We currently own or license several patents and also have pending patent applications applicable to rHuPh20 and other proprietary materials. There can be no assurance that our existing patents, or any patents issued to us as a result of our pending patent applications, will provide a basis for commercially viable products, will provide us with any competitive advantages, or will not face third party challenges or be the subject of further proceedings limiting their scope or enforceability. For example, a European patent, EP1603541, claiming rHuPH20 was granted to us on November 11, 2009. Claims to the human PH20 glycoprotein, PEGylated variants, the glycoprotein produced by recombinant methods, and pharmaceutical compositions with other agents, including antibodies, insulins, cytokines, anti-infectives and additional therapeutic classes were awarded in this patent and additional claims are in prosecution. On August 13, 2010, however, we learned that an opposition to this patent was filed with the European Patent Office. We have contested the opposition with written submissions to the European Patent Office and we expect to obtain European patent protection that is equal or superior to claims previously issued in a counterpart United States patent (U.S. Patent No. 7,767,429). Any limitations in our patent portfolio could have a material adverse effect on our business and financial condition. In addition, if any of our pending patent applications do not result in issued patents, or result in issued patents with narrow or limited claims, this could have a material adverse effect on our business and financial condition.
          We may become involved in interference proceedings in the U.S. Patent and Trademark Office, or other proceedings in other jurisdictions, to determine the priority, validity or enforceability of our patents. In addition, costly litigation could be necessary to protect our patent position.
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          We also rely on trademarks to protect the names of our products. These trademarks may not be acceptable to regulatory agencies. In addition, these trademarks may be challenged by others. If we enforce our trademarks against third parties, such enforcement proceedings may be expensive. We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect with confidentiality agreements with employees, consultants and others with whom we discuss our business. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of these agreements, and we might not be able to resolve these disputes in our favor.
          In addition to protecting our own intellectual property rights, third parties may assert patent, trademark or copyright infringement or other intellectual property claims against us based on what they believe are their own intellectual property rights. If we become involved in any intellectual property litigation, we may be required to pay substantial damages, including but not limited to treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s intellectual property rights. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from other business concerns. Further, we may be stopped from developing, manufacturing or selling our products until we obtain a license from the owner of the relevant technology or other intellectual property rights. If such a license is available at all, it may require us to pay substantial royalties or other fees.
Patent protection for protein-based therapeutic products and other biotechnology inventions is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on our discoveries.
          Patent protection for protein-based therapeutic products is highly uncertain and involves complex legal and factual questions. In recent years, there have been significant changes in patent law, including the legal standards that govern the scope of protein and biotechnology patents. Standards for patentability of full-length and partial genes, and their corresponding proteins, are changing. Recent court decisions have made it more difficult to obtain patents, by making it more difficult to satisfy the requirement of non-obviousness, have decreased the availability of injunctions against infringers, and have increased the likelihood of challenging the validity of a patent through a declaratory judgment action. Taken together, these decisions could make it more difficult and costly for us to obtain, license and enforce our patents. In addition, in recent years, several members of the United States Congress have made numerous proposals to change the patent statute. These proposals include measures that, among other things, would expand the ability of third parties to oppose United States patents, introduce the “first to file” standard to the United States patent system, and limit damages an infringer is required to pay. If the patent statute is changed, the scope, validity and enforceability of our patents may be significantly decreased.
          There also have been, and continue to be, policy discussions concerning the scope of patent protection awarded to biotechnology inventions. Social and political opposition to biotechnology patents may lead to narrower patent protection within the biotechnology industry. Social and political opposition to patents on genes and proteins may lead to narrower patent protection, or narrower claim interpretation, for genes, their corresponding proteins and inventions related to their use, formulation and manufacture. Patent protection relating to biotechnology products is also subject to a great deal of uncertainty outside the United States, and patent laws are evolving and undergoing revision in many countries. Changes in, or different interpretations of, patent laws worldwide may result in our inability to obtain or enforce patents, and may allow others to use our discoveries to develop and commercialize competitive products, which would impair our business.
If third party reimbursement and customer contracts are not available, our products may not be accepted in the market.
          Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be available from government health administration authorities, private health insurers, managed care organizations and other healthcare providers.
          Third-party payors are increasingly attempting to limit both the coverage and the level of reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Third party payors may not establish adequate levels of reimbursement for the products that we commercialize, which could limit their market acceptance and result in a material adverse effect on our financial condition.
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          Customer contracts, such as with group purchasing organizations and hospital formularies, will often not offer contract or formulary status without either the lowest price or substantial proven clinical differentiation. If our products are compared to animal-derived hyaluronidases by these entities, it is possible that neither of these conditions will be met, which could limit market acceptance and result in a material adverse effect on our financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to cost containment pressures that could cause us to sell our products at lower prices, resulting in less revenue to us.
          Any of the proprietary or partnered products that have been, or in the future are, approved by the FDA may be purchased or reimbursed by state and federal government authorities, private health insurers and other organizations, such as health maintenance organizations and managed care organizations. Such third party payors increasingly challenge pharmaceutical product pricing. The trend toward managed healthcare in the United States, the growth of such organizations, and various legislative proposals and enactments to reform healthcare and government insurance programs, including the Medicare Prescription Drug Modernization Act of 2003, could significantly influence the manner in which pharmaceutical products are prescribed and purchased, resulting in lower prices and/or a reduction in demand. Such cost containment measures and healthcare reforms could adversely affect our ability to sell our products.
          In March 2010, the United States adopted the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the Healthcare Reform Act. This law substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, fraud and abuse and enforcement. These changes will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program.
          Additional provisions of the Healthcare Reform Act, some of which become effective in 2011, may negatively affect our revenues in the future. For example, the Healthcare Reform Act imposes a non-deductible excise tax on pharmaceutical manufacturers or importers that sell branded prescription drugs to U.S. government programs that we believe will impact our revenues from our products. In addition, as part of the Healthcare Reform Act’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), we will also be required to provide a 50% discount on branded prescription drugs dispensed to beneficiaries within this donut hole. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to maintain or increase our product sales or successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.
          Furthermore, individual states have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third party payors or other restrictions could negatively and materially impact our revenues and financial condition. We anticipate that we will encounter similar regulatory and legislative issues in most other countries outside the United States.
We face intense competition and rapid technological change that could result in the development of products by others that are superior to our proprietary and partnered products under development.
          Our proprietary and partnered products have numerous competitors in the United States and abroad including, among others, major pharmaceutical and specialized biotechnology firms, universities and other research institutions that have developed competing products. Pending the reintroduction of HYLENEX, the competitors for HYLENEX will include, but are not limited to ISTA Pharmaceuticals, Inc. and Amphastar Pharmaceuticals, Inc. among others. For our analog insulin with rHuPH20 product candidates, such competitors may include Biodel Inc., Novo Nordisk Inc. and Mannkind Corporation. These competitors may develop technologies and products that are more effective, safer, or less costly than our current or future proprietary and partnered product candidates or that could render our technologies and product candidates obsolete or noncompetitive. Many of these competitors have substantially more resources and product development, manufacturing and marketing experience and capabilities than we do. In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of pharmaceutical product candidates and obtaining FDA and other regulatory approvals of products and therapies for use in healthcare.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
          Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk, we typically invest all, or substantially all, of our cash in money market funds that invest primarily in government securities. Our investment policy also permits investments in a variety of securities including commercial paper and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of March 31, 2011, we did not have any holdings of derivative financial or commodity instruments, or any foreign currency denominated transactions, and all of our cash and cash equivalents were in money market mutual funds and other investments that we believe to be highly liquid.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
          We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
          Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
          There have been no significant changes in our internal control over financial reporting that occurred during the three months ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
          From time to time, we may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject us to costly legal expenses and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on our consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
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Item 1A. Risk Factors
          We have provided updated Risk Factors in the section labeled “Risk Factors” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The “Risk Factors” section provides updated information in certain areas, particularly with respect to uncertainties regarding the regulatory approval of proprietary and partnered product candidates. We do not believe the updates have materially changed the type or magnitude of the risks we face in comparison to the disclosure provided in our most recent Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
          Not applicable.
Item 3. Defaults Upon Senior Securities
          Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
          Not applicable.
Item 6. Exhibits
 	 	 	
Exhibit	 	      Title	
 	 	 	
31.1	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
31.2	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
32	 	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 	 	 	 	 	
 	 	Halozyme Therapeutics, Inc.,	 	 	
 	 	a Delaware corporation	 	 	

Dated: May 6, 2011	 	/s/ Gregory I. Frost, Ph.D.
 
Gregory I. Frost, Ph.D.	 	 	
 	 	President and Chief Executive Officer	 	 	
 	 	(Principal Executive Officer)	 	 	

Dated: May 6, 2011	 	/s/ Kurt A. Gustafson
 
Kurt A. Gustafson	 	 	
 	 	Vice President, Secretary and Chief Financial Officer	 	 	
 	 	(Principal Financial and Accounting Officer)	 	 	
 43 

EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory I. Frost, Ph.D., President and Chief Executive Officer of Halozyme Therapeutics, Inc. (the “Registrant”), certify that:

1.	 	I have reviewed this quarterly report on Form 10-Q of Halozyme Therapeutics, Inc.;	
 		
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 		
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;	
 		
4.	 	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	c)	 	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	d)	 	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and	

5.	 	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.	

Dated: May 6, 2011 	/s/ Gregory I. Frost, Ph.D.  	 	
 	Gregory I. Frost, Ph.D. 	 	
 	President and Chief Executive Officer 	 	

 	 	 	 	 	
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kurt A. Gustafson, Vice President, Secretary and Chief Financial Officer of Halozyme Therapeutics, Inc. (the “Registrant”), certify that:

1.	 	I have reviewed this quarterly report on Form 10-Q of Halozyme Therapeutics, Inc.;	
 		
2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 		
3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;	
 		
4.	 	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	c)	 	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	d)	 	disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and	

5.	 	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.	

Dated: May 6, 2011 	/s/ Kurt A. Gustafson  	 	
 	Kurt A. Gustafson 	 	
 	Vice President, Secretary and Chief Financial Officer 	 	

 	 	 	 	 	
EXHIBIT 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Halozyme Therapeutics, Inc. (the “Registrant”) on Form 10-Q for the quarter ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory I. Frost, Ph.D., Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 	(1)	 	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	
 		
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.	

Dated: May 6, 2011 	/s/ Gregory I. Frost, Ph.D.  	 	
 	Gregory I. Frost, Ph.D. 	 	
 	President and Chief Executive Officer 	 	
 	
In connection with the Quarterly Report of Halozyme Therapeutics, Inc. (the “Registrant”) on Form 10-Q for the quarter ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kurt A. Gustafson, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 	(1)	 	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	
 		
 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.	

Dated: May 6, 2011 	/s/ Kurt A. Gustafson  	 	
 	Kurt A. Gustafson 	 	
 	Vice President, Secretary and Chief Financial Officer