UNIGENE LABORATORIES INC - FORM 10-K

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EX-3.2 - EXHIBIT 3.2 - UNIGENE LABORATORIES INC	ex3-2.htm
EX-23.1 - EXHIBIT 23.1 - UNIGENE LABORATORIES INC	ex23-1.htm
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EX-10.8 - EXHIBIT 10.8 - UNIGENE LABORATORIES INC	ex10-8.htm
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EX-32.1 - EXHIBIT 32.1 - UNIGENE LABORATORIES INC	ex32-1.htm
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EX-10.38 - EXHIBIT 10.38 - UNIGENE LABORATORIES INC	ex10-38.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2010

¨	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 0-16005

UNIGENE LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		22-2328609
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

81 Fulton Street

Boonton, New Jersey 07005

(973) 265-1100

(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

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

Title of class:

Common Stock, $.01 Par Value

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

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

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value as of June 30, 2010 was approximately $62,063,000.

APPLICABLE ONLY TO CORPORATE REGISTRANTS:

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: Common Stock, $.01 Par Value, 92,540,982 shares as of March 2, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from portions of Unigene’s definitive proxy statement for its 2011 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2010.

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Table of Contents

		Page Number
PART I
ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	9
ITEM 1B.	UNRESOLVED STAFF COMMENTS	13
ITEM 2.	PROPERTIES	13
ITEM 3.	LEGAL PROCEEDINGS	14
ITEM 4.	(REMOVED AND RESERVED)	14

PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	14
ITEM 6.	SELECTED FINANCIAL DATA	15
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	26
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	50
ITEM 9A.	CONTROLS AND PROCEDURES	50
ITEM 9B.	OTHER INFORMATION	52
2
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	52
ITEM 11.	EXECUTIVE COMPENSATION	52
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	52
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	52
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	52

PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	52

SIGNATURES

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various statements in the items captioned “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or activities of our business, or industry results, to be materially different from any future results, performance or activities expressed or implied by the forward-looking statements. These factors include: general economic and business conditions, our financial condition, product sales and royalties, competition, our dependence on other companies to commercialize, manufacture and sell products using our technologies, the uncertainty of results of animal and human testing, the risk of product liability and liability for human trials, our dependence on patents and other proprietary rights, dependence on key management officials, the availability and cost of capital, the availability of qualified personnel, changes in, or the failure to comply with, governmental regulations, the failure to obtain regulatory approvals for our products, litigation, and other factors discussed in this Form 10-K.

Item 1.

Business.

Overview

Unigene Laboratories, Inc., a biopharmaceutical company, was incorporated in the State of Delaware in 1980. Our single business segment focuses on the research, production and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream. We have three operating locations: administrative and regulatory offices in Boonton, New Jersey; a laboratory research facility in Fairfield, New Jersey; and a pharmaceutical production facility in Boonton, New Jersey.

In March 2010, the Company entered into an amended and restated financing agreement for $33,000,000 three-year convertible senior secured term notes. Unigene issued $33,000,000 of new convertible senior secured notes due in 2013, in exchange for approximately $19,358,000 of existing non-convertible senior secured term notes which were due in 2011 and the payment to the Company of approximately $13,642,000 in cash at the closing, minus fees related to the restructuring. An entity managed by Victory Park Capital Advisors, LLC was the sole investor in the transaction. Richard P. Levy of Victory Park Capital was appointed Chairman of the Board in connection with the restructuring. Unigene also restructured notes held by founding family members and initiated a reorganization of the management team.

In June 2010, Ashleigh Palmer was appointed President and Chief Executive Officer. In the third quarter of 2010, the Company completed a comprehensive business audit and situational analysis resulting in a new strategy for the Company, an organizational realignment with the creation of two highly focused strategic business units, Unigene Biotechnologies and Unigene Therapeutics, and the appointment of a new executive leadership team.

Strategy

Our new three-step strategic intent is focused on increasing available cash for operations by prudent cash conservancy and incremental revenue generation; as resources permit, retiring debt and selectively investing in the advancement of existing core development programs; and maximizing shareholder value by exploiting the full potential of the Company's "Peptelligence(TM)" technology platform.

We are pursuing this strategic intent and, for marketing purposes only, we have focused our resources into two strategic business units.

Peptides are a rapidly growing therapeutic class with more than 130 programs currently in active development throughout the industry. To date, more than fifty peptide-based therapeutics have reached the market. Our goal is to see our Peptelligence(TM) platform, which represents a distinctive set of capabilities and assets, incorporated into as many peptide programs as possible as they advance through development towards commercialization.

Our Peptelligence(TM) encompasses extensive intellectual property covering drug delivery and manufacturing technologies, peptide research and development expertise, and proprietary know-how. Our core Peptelligence(TM) assets include proprietary oral and nasal peptide drug delivery technologies, and proprietary, high-yield, scalable and reproducible recombinant manufacturing technologies.

We are focusing our Unigene Therapeutics pipeline on metabolic and inflammatory diseases with significant unmet medical and socioeconomic needs. Programs which do not fit our core focus will be monetized, out-licensed or terminated. We also intend to focus our Unigene Biotechnologies business unit on generating near-term fee-for-service revenues and longer-term milestone payments and royalties by customizing delivery and manufacturing solutions for novel therapeutic peptides.

The Company's first product to market, Fortical(R), a nasal calcitonin product, received approval from the Food and Drug Administration (FDA) in 2005 and is marketed in the United States by Upsher-Smith Laboratories, Inc. (USL) for the treatment of postmenopausal osteoporosis. Other clinical programs include oral calcitonin licensed to Tarsa Therapeutics, Inc. (Tarsa), which recently completed Phase III testing for the treatment of osteoporosis, and oral parathyroid hormone (PTH), licensed to GlaxoSmithKline (GSK) and entering Phase II clinical studies for the treatment of osteoporosis. In addition, Unigene has a manufacturing license agreement with Novartis Pharma AG (Novartis), which is currently completing three Phase III studies of oral calcitonin for the treatment of osteoporosis and osteoarthritis.

Unigene Biotechnologies Business Unit

The Company is expanding its Peptelligence(TM) platform of peptide oral drug delivery and manufacturing assets and capabilities with the goal of establishing a portfolio of partnered opportunities. We plan to generate near-term revenue from feasibility studies and service fees and establish a solid foundation for potential high-value milestones and royalties. We hope to apply our Peptelligence platform to as many therapeutic peptide programs as possible and help our partners co-develop those peptides through advanced clinical testing and commercialization.

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Unigene Therapeutics Business Unit

Unigene Therapeutics constitutes the Company's own pipeline of proprietary peptide development programs focused on metabolic disease and inflammation. Currently, we are concentrating our peptide development expertise on advancing the Company's PTH program for the treatment of osteoporosis and the development of our lead proprietary preclinical anorexigenic peptide UGP281 for obesity.

In 2009, Unigene licensed its late-stage oral calcitonin formulation to Tarsa, a venture-financed company founded exclusively to conduct Phase III clinical testing and prepare Unigene’s proprietary oral calcitonin formulation for commercialization. Unigene currently owns a 26% stake in Tarsa, subject to possible future dilution. During the third quarter of 2010, Tarsa announced it had completed patient enrollment for its multinational, randomized, double-blind, placebo-controlled Phase III ORACAL trial in postmenopausal women with osteoporosis and that an independent Data Monitoring Committee had conducted two separate safety reviews of patient data and recommended the trial proceed as planned. Tarsa has announced that it expects to report Phase III study top-line results in the second quarter of 2011 and submit registration filings with the FDA and European Medicines Agency (EMA) in the second half of 2011.

In December 2010, the Company entered into an amended and restated exclusive worldwide license agreement with GSK to develop and commercialize an oral formulation of a recombinantly produced parathyroid hormone analog for the treatment of osteoporosis in postmenopausal women. Under the terms of the amended and restated agreement, Unigene will conduct the Phase II study. In addition to the remaining milestone payments of up to $142,000,000 from the original agreement that we are still eligible to receive based upon the achievement of regulatory and commercialization milestones, in December 2010 we received an upfront payment of $4,000,000 to pay for Phase II costs. We are also eligible to receive an additional $4,000,000 milestone payment upon completion of Phase II patient enrollment. In addition, we could be eligible to receive royalties at a rate in the low-to-mid teens based on GSK's global sales of the product, subject to a reduction under certain circumstances as described in the agreement. Once the Phase II study has been completed, and based on a review of the data, GSK may elect to assume responsibility for all future development and commercialization of the product.

We plan to initiate the Phase II oral PTH study and commence patient enrollment in the first quarter of 2011. This multicenter, double blind, randomized, repeat dose placebo controlled study will include an open label comparator arm and will evaluate approximately 90 postmenopausal osteoporotic women for a period of 24 weeks. The primary endpoint will be an increase in bone mineral density in subjects at 24 weeks compared to baseline. Patient enrollment for this study is expected to be completed in the first half of 2011 in which case top-line results are expected by year end.

Our satiety program is in advanced pre-clinical development. In February 2011, we announced our plans to accelerate the development of our lead proprietary anorexigenic peptide, UGP281. An anorexigenic peptide is one that diminishes or controls appetite and offers potential therapeutic benefit to morbidly obese patients. We expect to file an Investigational New Drug (IND) application with the FDA and initiate Phase I clinical studies in the first half of 2012. Additionally, we are also currently exploring the opportunity to license a pharmacologically distinct sister analog to a veterinary partner for companion animal obesity to help subsidize a portion of the human proof of concept development costs of UGP281.

The Company's Annexin 1 analog and Site Directed Bone Growth (SDBG) programs have been put on hold to conserve cash in the near term. We are currently evaluating strategic opportunities with our SDBG program, including out-licensing or divesting this asset.

Scientific Accomplishments

Among our major accomplishments are:

•

Development, Licensing and Commercialization of Proprietary Technology for Nasal Delivery. We have developed and patented Fortical, our nasal calcitonin formulation that, in human studies, demonstrated similar blood levels to a competitor’s existing nasal calcitonin product and also demonstrated a comparable decrease in bone loss as measured by several industry-accepted blood markers and a comparable increase in bone mineral density. During 2002, we licensed U.S. rights to our nasal calcitonin product, Fortical, to USL. We filed a new drug application, or NDA, for Fortical in March 2003 and Fortical was approved by the FDA in August 2005. This was our first product approval in the United States. The launch of Fortical has resulted in sales to, and royalty payments from, USL.

•

Development and Licensing of a Proprietary Peptide Production Process. One of our principal scientific accomplishments is our success in developing a highly efficient biotechnology-based peptide production process. Several patents relating to this process have issued. We believe that this proprietary process is a key step in the more efficient and economical commercial production of medically-useful peptides. Many of these peptides cannot be produced at a reasonable cost in sufficient quantities for human testing or commercial use by other currently available production processes. We have constructed and are operating a manufacturing facility employing this process which is capable of producing PTH and calcitonin, and we have also produced laboratory-scale quantities of several other peptides. In 2004, we licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis.

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•

Development and Licensing of Proprietary Technology for Oral Delivery. We have licensed worldwide rights to our manufacturing and delivery technologies for PTH for the treatment of osteoporosis to GSK. We have developed and patented an oral formulation that has successfully delivered therapeutically relevant quantities of calcitonin and PTH into the bloodstream of human subjects in studies performed by Unigene and our collaborators. We believe that the components of our patented oral product also can enable the delivery of other peptides and we have initiated studies to investigate this possibility internally and in collaboration with others. During 2001, we reported successful oral delivery in animal studies of various peptides including PTH for the treatment of osteoporosis and insulin for the treatment of diabetes. During 2002, we licensed rights to our manufacturing and delivery technologies for oral PTH to GSK. During 2004, GSK successfully completed a Phase I study for oral PTH. During 2007, a small, short-term human study for oral calcitonin was initiated by us and successfully concluded. In February 2008, we initiated a Phase I/II clinical study for oral calcitonin. The tablets used in these studies utilized an improved solid dosage form of Unigene’s oral delivery technology for which a patent application has been filed A small, short-term Phase I human study for PTH was initiated in 2008 and successfully concluded in 2009 using our improved oral delivery technology. During 2009, we initiated a Phase III human study for our oral calcitonin technology and licensed this program to Tarsa. This study was fully enrolled in the first quarter of 2010 and completed in the first quarter of 2011.

Partnerships

•

Upsher-Smith Laboratories License Agreement. In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. Fortical was approved by the FDA and launched by USL in August 2005. We received the $10,000,000 from 2002 through 2005. We are responsible for manufacturing the product and USL packages the product and distributes it nationwide. Royalty revenue, computed in a range from the transfer price of product to USL to a royalty rate in the mid-thirties depending on the circumstances, is earned on net sales of Fortical by USL and is recognized in the period Fortical is sold by USL. Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the market place and, therefore, are difficult to predict. In July 2006, we and USL jointly filed a lawsuit against Apotex for infringement of our Fortical patent. We are seeking a ruling that Apotex’s ANDA and its nasal calcitonin product infringe our Fortical patent and its ANDA should not be approved before the expiration date of the Fortical patent. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Our agreement with USL is subject to certain termination provisions. We are currently dependent on USL to market and distribute Fortical and to provide a very significant portion of our revenue. The loss of USL as a licensee would have a material adverse effect on our business (see Note 19 to the audited financial statements and Item 3. Legal Proceedings).

•

Tarsa License Agreement. In October 2009, we licensed our Phase III oral calcitonin program to Tarsa, a new company formed by a syndicate of three venture capital funds specializing in the life sciences: MVM Life Science Partners; Quaker BioVentures; and Novo A/S. Simultaneously, Tarsa announced the closing of a $24 million Series A financing from the investor syndicate. In consideration for our sale to Tarsa of an exclusive license for the oral calcitonin program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa (which currently represents a 26% ownership, subject to possible future dilution). We are also eligible to receive milestone payments based on the achievement of certain sales benchmarks, as well as royalties, at rates in the single digits, on product sales. Tarsa will be responsible for the future costs of the global Phase III clinical program that was initiated in 2009. Tarsa shall pay us for any services, if requested and agreed upon by us. This agreement is subject to certain termination provisions. We may terminate this agreement in the event of Tarsa’s insolvency, material breach or in certain circumstances where Tarsa has ceased development and commercialization activities of the licensed product. Tarsa may terminate this agreement in the event of our insolvency, material breach or, in certain circumstances, without cause. (See Notes 10 and 19 to the audited financial statements).

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•

GlaxoSmithKline License Agreement. In April 2002, we signed a licensing agreement with GSK for a value before royalties, PTH sales and reimbursement for development expenses, of up to $150,000,000 to develop an oral formulation of an analog of PTH currently in clinical development for the treatment of osteoporosis. In December 2010, we and GSK amended and restated this licensing agreement. Under the terms of the agreement, GSK received an exclusive worldwide license to develop and commercialize the product. GSK will reimburse us for certain development activities during the program, including our activities in the production of raw material for development and clinical supplies, and will pay us a royalty at a rate in the low to mid-teens based on its worldwide sales of the product, subject to a reduction under certain circumstances as described in the agreement. The royalty rate will be increased if certain sales milestones are achieved. A Phase I human trial, which commenced in 2004, demonstrated positive preliminary results. An aggregate of $12,000,000 in up-front and milestone payments has been received from inception through December 31, 2010 including the $4,000,000 payment described below. We have also received an additional $5,000,000 from GSK for PTH sales and in support of our PTH development activities from inception through December 31, 2010. Although there were no milestones achieved or PTH sales to GSK during 2010, we received $4,000,000 from GSK for Phase II development costs in December 2010. We are eligible to receive an additional $4,000,000 upon completion of Phase II patient enrollment, which is expected in the first half of 2011, in which case top-line Phase II results are expected before year-end. Bulk product sales to licensees, prior to product approval, are unpredictable and subject to the needs of the licensee. GSK could make additional milestone payments in the aggregate amount of up to $142,000,000 subject to the progress of the compound through clinical development and through to the market. As agreed with GSK, we conducted further development including a small Phase I study, which we initiated in 2008 and successfully completed in 2009, and we will conduct the Phase II study, which is expected to begin in the first quarter of 2011. This agreement is subject to certain termination provisions. Either party may terminate the license agreement if the other party (i) materially breaches the license agreement, which breach is not cured within 60 days (or 30 days for a payment default), (ii) voluntarily files, or has served against it involuntarily, a petition in bankruptcy or insolvency, which, in the case of involuntary proceedings, remains undismissed for 60 days, or (iii) makes an assignment for the benefit of creditors. Additionally, GSK may terminate the license agreement at any time for various reasons including safety or efficacy concerns of the PTH product, significant increases in development timelines or costs, or significant changes in the osteoporosis market or in government regulations (see Note 19 to the audited financial statements).

•

Novartis Agreement. In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented peptide production process. Through December 31, 2010, an aggregate of $13,700,000 has been received from Novartis under this agreement, including calcitonin purchases and a $5,500,000 milestone payment that we received in 2007 for the initiation of their oral calcitonin Phase III study for osteoporosis. There were no milestones achieved or additional calcitonin purchases in 2010. Sandoz, a Novartis affiliate, concluded a manufacturing campaign in 2005 based on our process and produced multiple kilograms of calcitonin at a scale that represents a ten-fold increase above our then current production capacity. Calcitonin produced by Sandoz is being used by Novartis in its ongoing Phase III clinical trials. Novartis will be conducting all future product development and clinical trials for its oral calcitonin product in conjunction with its partner, a competitor of ours. Therefore, the anticipated completion date is outside our control and unknown to us. We will receive royalties, at rates in the single digits, on net sales of any existing or future Novartis products that contain recombinant salmon calcitonin which in the future are approved for sale by health authorities, and are manufactured by Novartis using our technology. This agreement may be terminated by either party due to a material breach not cured within 60 days or due to insolvency or bankruptcy proceedings not dismissed within 60 days and for other customary events of default (see Note 19 to the audited financial statements).

Other License or Distribution Arrangements. To expand our product pipeline, we periodically perform feasibility studies for third parties. We are also working on the development of our anorexigenic peptide to diminish or control appetite, which would utilize our manufacturing and oral delivery technologies. In addition, we are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for our products and technologies. However, we may not be successful in achieving milestones under our current agreements, obtaining regulatory approval for our products or in licensing any of our other products.

We operate as a single business segment and our revenue for the last three years, including product sales, royalties, licensing revenue and development services, has almost entirely been pursuant to our agreements with USL, Novartis and Tarsa, all primarily U.S. sources.

Revenue from Licensees:

	2010			2009			2008
USL		73	%		87	%		87	%
Novartis		12	%		9	%		8	%
Tarsa		9	%		-			-
GSK		2	%		1	%		1	%
Other revenue		4	%		3	%		4	%

For information regarding revenue, losses and total assets, please see our Selected Financial Data in Part II, Item 6 of this report.

Competition

Our primary business activity is biotechnology research and development. Biotechnology research is highly competitive, particularly in the field of human health care. We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies, universities and other non-profit research organizations, many of which can devote considerably greater financial resources than we can to research activities. We believe that one of our main competitors in the field of oral delivery of peptides is Emisphere Technologies, Inc. Novartis’ nasal calcitonin product was the main competition for Fortical until December 2008, which was when Apotex and Sandoz launched nasal calcitonin products that are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. There could also be future competition from products that are directly generic to our product. In July 2006, we and USL jointly filed a lawsuit against Apotex for infringement of our Fortical patent. We are seeking a ruling that Apotex’s abbreviated NDA, or ANDA, and its nasal calcitonin product infringe our Fortical patent and its ANDA should not be approved before the expiration date of the Fortical patent. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval (see Item 3. Legal Proceedings).

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Our calcitonin and PTH products have potential applications in the treatment of osteoporosis. A third-party has conducted studies with an analog of PTH demonstrating the ability to build new bone and has launched an injectable PTH product in the U.S. Fortical currently faces competition from large pharmaceutical companies that produce other osteoporosis products and, if any of our other products receive regulatory approval, these other products would also face competition from large pharmaceutical companies that have substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we do. Major companies in the field of osteoporosis treatment include Novartis, Merck, Eli Lilly and Sanofi-Aventis. We believe that we should be able to compete with these companies due both to our partnerships with GSK, USL and Tarsa and to our patented technologies. Our success will further depend on our ability to obtain adequate funding and on developing, testing, protecting, producing and marketing products and obtaining their timely regulatory approval. However, any of our competitors could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete.

Product Manufacture

We have been producing calcitonin since 1992. We constructed a facility that complies with current good manufacturing practice guidelines, or cGMP, for the production of calcitonin at leased premises located in Boonton, New Jersey. The facility began producing calcitonin under cGMP guidelines in 1996. The facility is capable of producing our proprietary amidating enzyme for use in producing calcitonin as well as PTH. During 2008, we implemented refinements to our manufacturing process which improved our productivity and efficiency. We believe that our facility’s current capacity is sufficient to support expected Fortical sales. The facility also contains a filling line to fill and label Fortical. Since we currently maintain an adequate inventory of calcitonin and enzyme to support Fortical for the next several years, we have temporarily suspended manufacturing of those materials at our Boonton facility. However, we have been able to maintain the cGMP status of the facility and the ability to manufacture peptides at that location. Most of the raw materials we use in our peptide production process are readily available in sufficient quantities from a number of sources. However, certain raw materials have a single supplier. For example, for Fortical production, the pumps currently used are purchased by USL from a single source.

Although our facility currently is devoted primarily to calcitonin and Fortical production, it also is suitable for producing other peptide products. The facility can be modified to increase peptide production capacity. Because we manufacture peptides for human use, the FDA, European health authorities and our licensing partners have all inspected our facility at various times. However, there is always the risk that our operations might not remain in compliance or that approval by required regulatory agencies will not be obtained.

Government Regulation

Our laboratory research, development and production activities and those of our collaborators are subject to significant regulation by numerous federal, state, local and foreign governmental authorities. FDA approval, following the successful completion of various animal and human studies, is required for the sale of a pharmaceutical product in the U.S. Foreign sales require similar studies and approval by regulatory agencies.

The regulatory approval process for a pharmaceutical product requires substantial resources and can take many years. There is always a risk that any additional regulatory approvals required for our production facility or for any of our products will not be obtained in a timely manner. Our inability to obtain, or delays in obtaining, these approvals, would adversely affect our ability to continue to fund our programs, to produce marketable products, or to receive revenue from milestone payments, product sales or royalties. We also cannot predict the extent of any adverse governmental regulation that may arise from future legislative and administrative action such as healthcare reform.

The FDA or foreign regulatory agencies may audit our production facility at any time to ensure that it is operating in compliance with cGMP guidelines. These guidelines require that production operations be conducted in strict compliance with our established rules for manufacturing and quality control. These agencies are empowered to suspend our production operations and/or product sales if, in their opinion, significant or repeated deviations from these guidelines have occurred. A suspension by any of these agencies could have a material adverse impact on our operations.

In addition, we are subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business is, and will continue to be, subject to various other laws, rules and/or regulations applicable to us as a result of our international business.

Patents and Proprietary Technology

We have filed a number of applications for U.S. patents relating to our proprietary peptide manufacturing process and our delivery technologies. Our most important U.S. manufacturing and delivery patents expire from 2017 to 2025. To date, the following fifteen U.S. patents are currently in force:

•

six patents covering improvements in our manufacturing technology;

•

three patents covering oral delivery of peptides;

•

two patents covering our nasal calcitonin formulation; and

•

four patents covering our SDBG technology;

We believe that our manufacturing patents give us a competitive advantage in producing peptides cost-effectively and in large quantities, because they cover a highly efficient bacterial fermentation process for producing peptides.

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We also believe that our oral delivery patents give us a competitive advantage in enabling us to develop peptide products in oral forms, because they cover a process allowing delivery of significant quantities of peptides into the bloodstream. Peptides are small proteins that get broken down in the digestive system. Most commercial peptide products are currently available only in injectable or nasal spray formulations.

We also believe that our nasal formulation patent gives us a competitive advantage by enabling us to deliver the desired amount of calcitonin without requiring the presence of compounds that have been shown to cause irritation to the lining of the nasal cavity.

We also believe that our SDBG patent gives us a competitive advantage by enabling us to facilitate and accelerate bone growth at precisely targeted locations in the body using a simple surgical procedure that can be performed on an outpatient basis with minimal invasiveness. Animal studies have shown that, in combination with one or more therapeutic compounds, SDBG can grow significant amounts of high quality bone.

We believe that the greatest competitive advantage of our manufacturing and oral delivery patent estates is realized through the combination of both technologies. To successfully commercialize an oral peptide product, an efficient manufacturing process is necessary because oral delivery systems are typically less efficient than injectable or nasal spray products. Reduced efficiency requires an increase in the amount of active pharmaceutical ingredient in each dose. Therefore, an efficient manufacturing process is needed to cost-effectively manufacture the increased quantities that are necessary to make a product that is commercially viable.

We believe that our manufacturing and oral delivery patent estates provide us with both a current and future advantage. Currently, the patent estates protect our intellectual property rights in the development of our manufacturing and oral delivery processes. In the future, we expect that the patent estates will give us a competitive advantage in commercializing our products.

Other patent applications are pending. We also have made filings in selected foreign countries, and fifty-eight foreign patents have issued. However, our pending applications may not issue as patents and our issued patents may not provide us with significant competitive advantages. Furthermore, our competitors may independently develop or obtain similar or superior technologies.

Although we believe our patents and patent applications are valid, the invalidity or unenforceability of one or more of our key patents could have a significant adverse effect upon our business. We are currently involved in ANDA litigation in which Apotex claims that our patent for Fortical is invalid. (See Item 3. Legal Proceedings.)

Detecting and proving infringement generally is more difficult with process patents than with product patents. In addition, a process patent’s value is diminished if others have patented the product that can be produced using the process. Under these circumstances, we would require the cooperation of, and likely be required to share royalties with, the product patent holder or its sublicensees in order to make and sell the product. In addition, the patent holder can refuse to license the product to us.

In some cases, we rely on trade secrets to protect our inventions. Our policy is to include confidentiality provisions in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. All of our employees, consultants and prospective partners sign confidentiality agreements. However, there is a risk that these secrecy obligations could be breached, causing us harm. To the extent licensees, consultants or other third parties apply technological information independently developed by them or by others to our projects, disputes may arise as to the ownership rights to information, which may not be resolved in our favor.

Employees

As of February 28, 2011, we had 68 full-time employees. Twenty-four were engaged in research, development and regulatory activities, 26 were engaged in production activities and 18 were engaged in general, administrative and support functions. Our employees are experts in molecular biology, including DNA cloning, synthesis, sequencing and expression; protein chemistry, including purification, amino acid analysis, synthesis and sequencing of proteins; immunology, including tissue culture, monoclonal and polyclonal antibody production and immunoassay development; chemical engineering; pharmaceutical production; quality assurance; and quality control. None of our employees is covered by a collective bargaining agreement.

Research and Development

We have established a multi-disciplinary research team to adapt proprietary amidation, biological production and oral and nasal delivery technologies to the development of proprietary products and processes. Approximately 74% of our employees are directly engaged in activities relating to production of, regulatory compliance for, and the research and development of pharmaceutical products. We spent $6.4 million on research and development activities in 2010, $12.4 million on research and development activities in 2009 ($3.3 million related to oral calcitonin), and $9.5 million in 2008.

Availability of Reports

Our Internet website address is www.unigene.com. The contents of our website are not part of this annual report on Form 10-K, and our Internet address is included in this document as an inactive textual reference only. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and all amendments to those reports and statements filed by us with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are accessible free of charge through our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the SEC. The SEC also maintains a website at www.sec.gov where such information is available.

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Item 1A.

Risk Factors.

Our business is subject to the following risks:

We may require additional cash to sustain our operations and our ability to secure additional cash is uncertain.

We had cash flow deficits from operations of $1,669,000 for the year ended December 31, 2010, $11,291,000 for the year ended December 31, 2009 and $8,575,000 for the year ended December 31, 2008. We believe that, in the near-term, we will generate cash to apply toward funding a portion of our operations through sales of Fortical to USL and from royalties from USL sales of Fortical, as well as our anticipated receipt of a $4,000,000 milestone payment from GSK upon completion of Phase II patient enrollment. These funds may not be adequate to fully support our operations. Therefore, we may need additional sources of cash in order to maintain all of our future operations. Based upon our current level of revenue and expenses, we believe our current cash should be sufficient to support our current operations into the second half of 2012.

We may be unable to raise on acceptable terms, if at all, the substantial capital resources necessary to conduct our operations. If we are unable to raise the required capital, we may be forced to limit some or all of our research and development programs and related operations, curtail development of our product candidates and, ultimately, cease operations. Our future capital requirements will depend on many factors, including:

•

the level of Fortical sales, particularly in light of new and potential competition;

•

our ability to successfully defend our Fortical patent against Apotex’s ANDA;

•

the generation of revenue from our Tarsa, Novartis and GSK agreements;

•

continued scientific progress in our discovery and research programs;

•

progress with preclinical studies and clinical trials;

•

the magnitude and scope of our discovery, research and development programs;

•

our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;

•

our partners’ ability to sell and market our products or their products utilizing our technologies;

•

the time and costs involved in obtaining regulatory approvals;

•

the time and costs involved in maintaining our production facility;

•

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims including our current litigation regarding Apotex’s ANDA; and

•

the pharmaceutical industry’s need to acquire or license new technologies and products.

There are numerous default provisions under our financing agreement with Victory Park.

Under our amended and restated March 2010 financing agreement with Victory Park, so long as our outstanding note balance is at least $5,000,000, we must maintain a minimum cash balance equal to at least $2,500,000 and our cash flow (as defined in the agreement) must be at least $2,000,000 in any fiscal quarter or $7,000,000 in any three consecutive quarters. These default provisions were temporarily waived under a forbearance agreement executed in December 2010. The forbearance period began December 10, 2010 and will end no later than June 30, 2012. The financing agreement specifies certain events of default including, without limitation: failure to pay principal or interest; filing for bankruptcy; breach of covenants, representations or warranties; the occurrence of a material adverse effect (as defined in the agreement); a change in control (as defined in the agreement); the failure of any registration statement required to be filed to be declared effective by the SEC, and maintained effective pursuant to the terms of our registration rights agreement with Victory Park; and any material decline or depreciation in the value or market price of the collateral. We are subject to certain cash damages, as set forth in the convertible notes, in the case of a failure to timely convert the notes and a failure to timely convert is also an event of default, subject to additional remedies. Upon any default, among other remedies, both principal and interest would be accelerated and additional charges would apply. There is no assurance that, after the forbearance period ends, we will be able to maintain a minimum cash balance of $2,500,000, or maintain an adequate cash flow, in order to avoid default. In addition, there is no assurance that the notes will be converted into common stock, in which case, we may not have sufficient cash from operations or from new financings to repay the Victory Park debt when it comes due in 2013, or that new financings will be available on favorable terms, if at all.

The conversion of the Victory Park notes will likely have a dilutive effect on our stock price and could lead to a change in control.

In March 2010, we issued to Victory Park $33,000,000 in convertible notes, which come due in 2013. As of March 17, 2011, these notes will be convertible into shares of Common Stock at the holder’s option. The initial conversion rate, which is subject to adjustment as set forth in the notes, is calculated by dividing the sum of the principal to be converted, plus all accrued and unpaid interest thereon, by $0.70 per share. If we subsequently make certain issuances of Common Stock or Common Stock equivalents at an effective purchase price less than the then-applicable conversion price, the conversion price of the notes will be reduced to such lower price. Assuming that the convertible notes are convertible in full on March 17, 2011 (with conversion of the original principal amount plus interest thereon into the conversion shares), then, together with the shares and other securities owned by them, Victory Park and its affiliates would beneficially own in the aggregate approximately 41% of our outstanding Common Stock (as diluted by outstanding options) as of that date.

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We are required to make payments under the Levy loans, most of which are payable in June 2013.

We owe an aggregate original principal amount of $14,737,518 on notes payable to the Estate of Jean Levy and the Jaynjean Levy Family Limited Partnership. As of December 31, 2010, principal and interest on these notes aggregated $19,670,120. We may not be able to generate sufficient cash from operations or from other sources in order to make the payments when due which are required under these notes.

Our strategic realignment might not be successful.

In September 2010, we announced a realignment of our business and the creation of two new highly focused strategic business units. Our new strategic business units may not be successful or effectively implemented. Implementation of our new business strategy will require the intense involvement of our executive management team and may divert their efforts away from other important projects. Also, we may be unable to enter into mutually acceptable agreements with third party partners to use our peptide drug delivery platform and/or manufacturing capabilities. If we are unsuccessful, it could have a material adverse effect on our financial condition, results of operations and cash flow.

Our operations for future years are highly dependent on the successful marketing and sales of Fortical and could be further impacted by generic or other competition.

Fortical is our only product approved by the FDA. Any factors that adversely impact the marketing of Fortical including, but not limited to, competition, including generic competition and/or product substitutions, acceptance in the marketplace, or delays related to production and distribution or regulatory issues, will have a negative impact on our cash flow and operating results. For 2010, compared to 2009, Fortical sales decreased 12% while Fortical royalties decreased 40%. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Further decreases in Fortical sales or royalties could have a material adverse effect on our business, financial condition and results of operations. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes our Fortical patent. We have sued Apotex for infringement of our Fortical Patent and Apotex has been enjoined from conducting any activities which would infringe the patent. Apotex has appealed that decision and if we do not prevail in this litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

We have significant historical losses and may continue to incur losses in the future.

We have incurred annual losses since our inception. As a result, at December 31, 2010, we had an accumulated deficit of approximately $171,000,000. Our gross revenues for the years ended December 31, 2010, 2009 and 2008 were $11,340,000, $12,792,000 and $19,229,000, respectively. Our revenues have not been sufficient to sustain our operations. Revenue for 2010, 2009 and 2008 consisted primarily of Fortical sales and royalties. As of December 31, 2010, we had four material revenue generating license agreements. We believe that to achieve profitability we will require at least the successful commercialization of one or more of our licensees’ oral or nasal calcitonin products, our oral PTH product, our obesity program or another peptide product or biotechnology in the U.S. and/or abroad. However, our products or technologies may never become commercially successful. For 2010, 2009 and 2008, we had losses from operations of $10,324,000, $12,380,000 and $4,950,000, respectively. Our net losses for the years ended December 31, 2010, 2009 and 2008 were $27,868,000, $13,380,000 and $6,078,000, respectively. We might never be profitable.

Most of our products are in early stages of development and we and our licensees may not be successful in efforts to develop a calcitonin, PTH or other peptide product that will produce revenues sufficient to sustain our operations.

Our success depends on our and our licensees’ ability to commercialize a calcitonin, PTH or other peptide product that will produce revenues sufficient to sustain our operations. Except for Fortical, most of our products are in early stages of development and we and our licensees may never develop a calcitonin, PTH or other peptide product that makes us profitable. Our ability to achieve profitability is dependent on a number of factors, including our and our licensees’ ability to complete development efforts, obtain regulatory approval for additional product candidates and successfully commercialize those product candidates or our technologies. We believe that the development of more desirable formulations is essential to expand consumer acceptance of peptide pharmaceutical products. However, we may not be successful in our development efforts, or other companies may develop such products, or superior products, before we do.

We may not be successful in our efforts to gain regulatory approval for our products other than Fortical and, if approved, the approval may not be on a timely basis.

Even if we or our licensees are successful in our development efforts, we may not be able to obtain the necessary regulatory approval for our products other than Fortical. The FDA must approve the commercial manufacture and sale of pharmaceutical products in the United States. Similar regulatory approvals are required for the sale of pharmaceutical products outside of the United States. None of our products other than Fortical has been approved for sale in the United States, and our other products may never receive the approvals necessary for commercialization. We must conduct further human testing on certain of our products before they can be approved for commercial sale and such testing requires the investment of significant resources. Any delay in receiving, or failure to receive, these approvals would adversely affect our ability to generate product revenues.

We may not be successful in efficiently developing, manufacturing or commercializing our products.

Because of our limited financial resources and our lack of a marketing organization, we are likely to rely on licensees or other parties to perform one or more tasks for the commercialization of our pharmaceutical products, such as USL to market and distribute Fortical in the U.S. If any of our products are approved for commercial sale, the product will need to be manufactured in commercial quantities at a reasonable cost in order for it to be a successful product that can generate profits. We may incur additional costs and delays while working with these parties, and these parties may ultimately be unsuccessful in the commercialization of a product.

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Our success is dependent on our ability to establish and maintain commercial partnerships and currently we have only four significant license agreements.

We do not currently have, nor do we expect to have in the near future, sufficient financial resources and personnel to develop and market products on our own. Accordingly, we expect to continue to depend on pharmaceutical companies for revenues from sales of products, research sponsorship and distribution of our products.

The process of establishing partnerships is difficult and time-consuming. Our discussions with potential partners may not lead to the establishment of new partnerships on favorable terms, if at all. If we successfully establish new partnerships, the partnerships may never result in the successful development of our product candidates or the generation of significant revenue. Management of our relationships with these partners would require:

•

significant time and effort from our management team;

•

coordination of our research with the research priorities of our corporate partners;

•

effective allocation of our resources to multiple projects; and

•

an ability to attract and retain key management, scientific, production and other personnel.

We may not be able to manage these relationships successfully.

We currently have significant license agreements with Novartis worldwide for the production of calcitonin, with GSK worldwide for oral PTH, with USL in the United States for nasal calcitonin and with Tarsa worldwide (except for China) for oral calcitonin. We are pursuing additional opportunities to license or enter into distribution arrangements for products that utilize our oral and nasal delivery technologies and/or our manufacturing technology, as well as our other technologies. However, we may not be successful in any of these efforts.

Because we are a biopharmaceutical company, our operations are subject to extensive government regulation.

Our laboratory research, development and production activities, as well as those of our collaborators and licensees, are subject to significant regulation by federal, state, local and foreign governmental authorities. In addition to obtaining FDA approval and other regulatory approvals for our products, we must maintain approvals for our manufacturing facility to produce calcitonin, PTH and other peptides for human use. The regulatory approval process for a pharmaceutical product requires substantial resources and may take many years. Our inability to obtain approvals or delays in obtaining approvals would adversely affect our ability to continue our development program, to manufacture and sell our products, and to receive revenue from milestone payments, product sales or royalties.

The FDA and other regulatory agencies may audit our production facility at any time to ensure compliance with cGMP guidelines. These guidelines require that we conduct our production operation in strict compliance with our established rules for manufacturing and quality controls. Any of these agencies can suspend production operations and product sales if they find significant or repeated deviations from these guidelines. A suspension would likely cause us to incur additional costs or delays in product development. In addition, we are subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business is, and will continue to be, subject to various other laws, rules and/or regulations applicable to us as a result of our international business.

Fortical currently faces competition from large pharmaceutical companies and, if our other products receive regulatory approval, these other products would also face competition from large pharmaceutical companies with superior resources.

We are engaged in developing pharmaceutical products, which is a rapidly changing and highly competitive field. To date, we have concentrated our efforts primarily on products to treat one indication — osteoporosis. Like the market for any pharmaceutical product, the market for treating osteoporosis has the potential for rapid, unpredictable and significant technological change. Competition is intense from specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. There could also be future competition from products that are generic to Fortical, including Apotex’s product that is the subject of our ANDA litigation. Fortical also faces competition from large pharmaceutical companies that produce other osteoporosis products and, if any of our other products receive regulatory approval, these other products likely would also face competition from large pharmaceutical companies with substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we have. Major companies in the field of osteoporosis treatment include Novartis, Merck, Eli Lilly and Sanofi-Aventis. One or more of these potential competitors could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete.

Our success depends upon our ability to protect our intellectual property rights.

We filed applications for U.S. patents relating to proprietary peptide manufacturing technology and oral and nasal formulations that we have invented in the course of our research. Our most important U.S. manufacturing and delivery patents expire from 2017 to 2025 and we have applications pending that could extend that protection. To date, fifteen U.S. patents have issued and other applications are pending. We have also made patent application filings in selected foreign countries and fifty-eight foreign patents have issued with other applications pending. We face the risk that any of our pending applications will not be issued as patents. In addition, our patents may be found to be invalid or unenforceable, including in the pending ANDA litigation with Apotex. Our business also is subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor were to independently develop or obtain similar or superior technologies. To the extent we are unable to protect our patents and patent applications, our investment in those technologies may not yield the benefits that we expect.

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We also rely on trade secrets to protect our inventions. Our policy is to include confidentiality obligations in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. However, parties with confidentiality obligations could breach their agreements causing us harm. If a secrecy obligation were to be breached, we may not have the financial resources necessary for a legal challenge. If licensees, consultants or other third parties use technological information independently developed by them or by others in the development of our products, disputes may arise from the use of this information and as to the ownership rights to products developed using this information. These disputes may not be resolved in our favor and could materially impact our business.

Our technology or products could give rise to product liability claims.

Our business exposes us to the risk of product liability claims from human testing, manufacturing and sale of pharmaceutical products. The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims even if our products are not actually at fault for causing an injury. Furthermore, our products may cause, or may appear to cause, adverse side effects or potentially dangerous drug interactions that we may not learn about or understand fully until the drug is actually manufactured and sold. Product liability claims can be expensive to defend and may result in large judgments against us. Even if a product liability claim is not successful, the adverse publicity, time and expense involved in defending such a claim may interfere with our business. We may not have sufficient resources to defend against or satisfy these claims. We currently maintain $10,000,000 in product liability insurance coverage. However, this amount may not be sufficient to protect us against losses or may be unavailable in the future on acceptable terms, if at all.

We may have financial obligations under the various agreements related to our joint venture in China.

Although we do not believe that we are required to make any further contributions to our joint venture in China, there exists a misunderstanding as to whether we owe an additional $1.2 million for discretionary loans or equity contributions to the China Joint Venture and we have recorded a $1.2 million liability on our balance sheet. To date, we have paid our cash capital requirement of $1,050,000 and also completed our required technology transfer, thereby satisfying in full our registered capital contribution. In addition, we believe that the China Joint Venture owes us the amount of $678,000 as reimbursement for monies paid, and engineering services provided to, or on behalf of, the China Joint Venture by us. The reimbursement amount is subject to confirmation by our China Joint Venture partner and therefore has not been recorded as a receivable since its collectability is uncertain. While there are no assurances that the parties will reach agreement with respect to these disputed amounts, we believe that we will reach an amicable resolution of the amounts due and owing each party. If we are unsuccessful in reaching an amicable resolution, it could have a material adverse effect on our financial condition, results of operations and cash flow.

The global financial crisis may adversely affect our business and financial results.

The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the fall of 2008, which continued in 2009 and 2010. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. Based upon our current level of revenue and expenses, we believe our current cash should be sufficient to support our current operations into the second half of 2010. At that time, we may not be able to raise capital on reasonable terms, if at all. In addition, uncertainty about current and future global economic conditions may impact our ability to license our products and technologies to other companies and may cause consumers to defer purchases of prescription medicines, such as Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.

We have a new Chief Executive Officer and other new executives.

In June 2010 we hired a new Chief Executive Officer and recently hired certain other new members of our executive management team. Our new Chief Executive Officer or these other new executives may not be successfully integrated into our management team and may not effectively implement our business strategy. If the management team is unable to work together to successfully implement our business strategy, it could have a material adverse effect on our financial condition, results of operations and cash flow.

We may be unable to retain key employees or recruit additional qualified personnel.

Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical, production and managerial personnel. There is intense competition for qualified personnel in our business. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical, production and managerial personnel in a timely manner, could harm our programs and our business.

Compliance with regulations governing public company corporate governance and reporting is complex and expensive.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. For example, on January 30, 2009, the SEC adopted rules requiring companies to provide their financial statements in interactive data format using the eXtensible Business Reporting Language, or XBRL. We will have to comply with these rules by June 15, 2011. More recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted into law. This legislation makes significant changes to corporate governance and executive compensation rules for public companies across all industries. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

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The market price of our common stock is volatile.

The market price of our common stock has been, and we expect it to continue to be, highly unstable. Factors, including our announcement of technological improvements or announcements by other companies, regulatory matters, research and development activities, new or existing products or procedures, signing or termination of licensing agreements, concerns about competition, sales, our financial condition, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, and public concern over the safety of activities or products have had a significant impact on the market price of our stock. We expect such factors to continue to impact our market price for the foreseeable future. In addition, future sales of shares of Unigene common stock by us or our stockholders, and by the exercise and subsequent sale of Unigene common stock by the holders of outstanding and future warrants and options, could have an adverse effect on the price of our stock.

Our common stock is classified as a “penny stock” under SEC rules, which may make it more difficult for our stockholders to resell our common stock.

Our common stock is traded on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it was listed on a stock exchange. Because Unigene common stock is not traded on a stock exchange and the market price of the common stock is less than $5.00 per share, the common stock is classified as a “penny stock.” Rule 15g-9 of the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” These include the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock could adversely affect the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock.

In addition to the conversion of the Victory Park notes, the exercise of warrants and options, as well as other issuances of shares, will likely have a dilutive effect on our stock price.

As of December 31, 2010, there were outstanding warrants to purchase 60,000 shares of our common stock, all but 20,000 of which are currently exercisable, at an average exercise price of $2.13 per share. There were also outstanding stock options to purchase an aggregate of 9,208,200 shares of common stock, at an average exercise price of $1.03, of which 3,659,949 are currently exercisable. If our stock price should increase above the exercise price of these derivative securities, then such exercise at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection with collaborations or licensing agreements or in connection with other financing efforts, including our issuance of stock upon the conversion of Victory Park's notes.

If provisions in our stockholder rights plan or Delaware law delay or prevent a change in control of Unigene, we may be unable to consummate a transaction that our stockholders consider favorable.

In December 2002, we adopted a stockholder rights plan. This stockholder rights plan increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding common stock. The plan is designed to assure our board of directors a full opportunity to review any proposal to acquire us. However, the plan could prolong the take-over process and, arguably, deter a potential bidder. These provisions apply even if the offer may be considered beneficial by some stockholders, and a takeover bid otherwise favored by a majority of our stockholders might be rejected by our board of directors. In addition, specific sections of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.

Accounting for our revenues and costs involves significant estimates which, if actual results differ from estimates, could have a material adverse effect on our financial position and results of operations.

As further described in “Summary of Critical Accounting Policies” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” accounting for our contract related revenues and costs as well as other cost items requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes in place to enable us to formulate appropriate assumptions and produce reliable estimates, these assumptions and estimates may change significantly in the future and these changes could have a material adverse effect on our financial position and the results of our operations.

Item 1B.

Unresolved Staff Comments.

Not applicable.

Item 2.

Properties.

We own a one-story office and laboratory facility consisting of approximately 12,500 square feet. The facility is located on a 2.2 acre site in Fairfield, New Jersey. At December 31, 2010, Victory Park and Jay Levy had first and second security interests, respectively, in this property. (See Notes 4 and 8 to the financial statements). In January 2011 we executed an agreement of sale on the property and expect to close on the sale of this property in the second quarter of 2011. One of the conditions of the sale is that we will lease the property from the new owner for an initial seven year term, which may be extended for one renewal term of five years. (See Note 25 to the financial statements.)

Our 32,000 square foot cGMP production facility, which has been used for the production of Fortical and calcitonin, and can be used for the production of other peptides, was constructed in a building located in Boonton, New Jersey. We lease the facility under a lease which began in February 1994. The current lease will expire in 2014. We have a 10-year renewal option under the lease, as well as an option to purchase the facility. We are currently leasing approximately 10,000 square feet of administrative and regulatory office space in Boonton, New Jersey. The initial term of the lease runs through May 2017. We have a 10-year renewal option under the lease, as well as an option to purchase the facility.

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Item 3.

Legal Proceedings.

Fortical, our nasal calcitonin product for the treatment of postmenopausal osteoporosis, is covered by U.S. Patent No. 6,440,392 (the “Fortical Patent”). In June 2006, we received a “Paragraph IV certification letter” from Apotex Inc., a Canadian generic pharmaceutical manufacturer, alleging that this patent is invalid and therefore not infringed by Apotex’s nasal calcitonin product which is the subject of an Apotex pending ANDA. On July 24, 2006, we and USL jointly filed a lawsuit against Apotex Inc. and Apotex Corp., its U.S. subsidiary (together “Apotex”), in the U.S. District Court for the Southern District of New York for infringement of our Fortical Patent. Due to our filing of the above-mentioned lawsuit, the Hatch-Waxman Act provided for an automatic stay of FDA approval for Apotex’s ANDA of up to 30 months. In December 2008, this stay ended and we and Apotex entered a preliminary injunction enjoining Apotex from engaging in the commercial manufacture, use, marketing, distribution, selling, transportation or importation of any Fortical® generic equivalent product in the United States. The preliminary injunction will remain in effect until the court renders a final decision on the validity and infringement of Unigene’s U.S. Patent. In obtaining the preliminary injunction, Unigene and USL were required to post a bond and, if we do not prevail in the lawsuit, Unigene would be responsible for paying $1,662,500 to Apotex under the injunction agreement. In August 2009, the U.S. District Court, Southern District of New York, confirmed the validity of Unigene’s patent and issued an order permanently enjoining Apotex from engaging in any activity that infringes the patent. The motion of the plaintiffs, Unigene and its licensee USL, for summary judgment in the case was granted. The Court upheld the validity of the Fortical Patent and entered a permanent injunction against Apotex. Apotex appealed this decision. In October 2009, the District Court vacated its Order subject to reinstatement and asked the parties to identify any claims that remain in the case. As a result, Apotex’s appeal was deactivated. In July 2010, the Court ruled that no claims remain at issue and it reinstated its opinion and order of August 2009 in its entirety. Accordingly, the motion for summary judgment was entered in favor of Unigene and USL. Apotex appealed this decision to the United States Court of Appeals for the Federal Circuit and the parties are currently submitting briefs on appeal. There is the usual litigation risk that we will not be successful in the appeal and potentially subsequent litigation if it is remanded. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval. This could have a material adverse impact on our results and financial position.

Item 4.

(Removed and Reserved).

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

We have not declared or paid any cash dividends since inception, and do not anticipate paying any in the near future.

We became a public company in 1987. As of March 2, 2011, there were 537 holders of record of our common stock. Our common stock is traded on the OTC Bulletin Board under the symbol UGNE. The prices below represent high and low sale prices per share of our common stock.

	2010		2009
	High-Low		High-Low
1st Quarter:	$	1.01-0.56	$	0.68-0.37
2nd Quarter:		0.95-0.61		1.55-0.51
3rd Quarter:		0.78-0.52		1.54-0.91
4th Quarter:		0.75-0.40		1.96-0.61

This stock performance information is “furnished” and shall not be deemed to be “soliciting material” or subject to Rule 14A of the Exchange Act, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation by reference language in any such filing, except to the extent that we specifically incorporate this information by reference.

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Item 6.

Selected Financial Data.

STATEMENT OF OPERATIONS DATA

(In thousands, except per share data)

	Year Ended December 31,
	2010			2009			2008			2007			2006
Revenue:
Product sales, royalties, licensing and other revenue	$	11,340		$	12,792		$	19,229		$	20,423			6,059
Costs and expenses:
Costs of goods sold and inventory reserve		3,325			2,171			5,845			7,222			2,049
Research and development expenses and unallocated facility expenses		9,534			14,062			10,445			8,485			8,564
General and administrative and severance expenses		8,805			8,938			7,889			7,812			6,423
Net loss		(27,868	)		(13,380	)		(6,078	)		(3,448	)		(11,784	)
Net loss per share, basic and diluted		(.30	)		(.15	)		(.07	)		(.04	)		(.14	)
Weighted average number of shares outstanding		91,962			90,662			88,751			87,742			86,813

BALANCE SHEET DATA

(In thousands)

	December 31,
		2010			2009			2008			2007			2006
Cash and cash equivalents	$	12,201		$	4,894		$	8,583		$	3,678		$	3,357
Working capital (deficiency)		8,758			(1,251	)		14,914			6,390			(9,527	)
Total assets		28,471			23,955			28,641			16,874			14,051
Total debt, including accrued interest-short-term		1,200			5,904			--			--			16,186
Total debt, including accrued interest-long-term		49,813			33,746			32,131			16,521			--
Other long-term obligations, primarily deferred revenue, including current portion		13,915			11,217			12,354			13,712			9,361
Total liabilities		68,900			54,397			47,613			33,545			28,239
Total stockholders’ deficit		(40,429	)		(30,442	)		(18,972	)		(16,671	)		(14,188	)

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion together with our financial statements and the notes appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include those discussed in “Risk Factors” and elsewhere in this Form 10-K.

RESULTS OF OPERATIONS - Years ended December 31, 2010, 2009 and 2008

Introduction

We are a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various peptides into the bloodstream. We currently have three operating locations: administrative and regulatory offices in Boonton, New Jersey, a laboratory research facility in Fairfield, New Jersey and a pharmaceutical production facility in Boonton, New Jersey.

In June 2010, we appointed Ashleigh Palmer as our Chief Executive Officer and since then, we have hired a number of new executive officers, and a new director has joined our Board of Directors. In addition, in September 2010, we announced a strategic realignment of our business into two strategic business units. One strategic business unit will concentrate on our pipeline of proprietary peptide development programs focused on metabolic disease and inflammation. The other strategic business unit will focus on opportunities where we can apply our platform of peptide drug delivery and manufacturing assets, expertise and capabilities to partners’ proprietary development programs. As part of this strategic realignment, we also determined that certain programs that do not fit our core focus, such as our China Joint Venture and our SDBG program will be monetized, out-licensed or terminated.

Historically, our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in 2005. This is our first product approval in the United States. We have licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. We have licensed worldwide rights to our manufacturing and delivery technologies for oral PTH for the treatment of osteoporosis to GSK. In October 2009, we licensed on a worldwide basis (except for China) our Phase III oral calcitonin program to Tarsa.

We have expanded our product pipeline with: (i) a novel peptide treatment for obesity; (ii) potential therapies for inflammation and cardiovascular disease based on technology we have in-licensed from Queen Mary, University of London; and (iii) SDBG technology, which we developed in conjunction with Yale University pursuant to a research agreement that terminated in the second quarter of 2010. In September 2010, we determined that SDBG does not fit our core focus and we will seek to monetize the investment or out-license or partner it to another company. All of these programs are in a preclinical, early stage of development. We also periodically perform feasibility studies for third parties. Our products, other than Fortical in the United States, will require clinical trials and/or approvals from regulatory agencies and all of our products will require acceptance in the marketplace. There are risks that these clinical trials will not be successful and that we will not receive regulatory approval or significant revenue for these products.

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We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. For 2010, compared to 2009, our Fortical sales decreased 12% while Fortical royalties decreased 40%. We cannot forecast whether, or to what extent, we will continue to experience further declines in sales or royalties. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

The current need of major pharmaceutical companies to add products to their pipeline is a favorable sign for us and for other small biopharmaceutical companies. However, this need is subject to rapid change and it is uncertain whether any additional pharmaceutical companies will have interest in licensing our products or technologies.

REVENUE

Revenue is summarized as follows for the years ended December 31, 2010, 2009 and 2008:

	2010		2009		2008
Product Sales	$	5,246,159	$	5,941,254	$	10,057,938
Royalty Revenue		2,974,365		4,991,266		6,519,942
Licensing Revenue		1,300,763		1,253,260		1,256,760
Development Fees and Other Revenue		1,818,927		606,058		1,394,793

	$	11,340,214	$	12,791,838	$	19,229,433

Revenue for the year ended December 31, 2010 decreased $1,452,000 or 11% to $11,340,000 from $12,792,000 in 2009. Revenue for the year ended December 31, 2009 decreased $6,437,000, or 33%, to $12,792,000 from $19,229,000 in 2008. These decreases in revenue were due to a decline in Fortical sales and royalties as a result of increased competition in the nasal calcitonin market since the launch of competitive products in December 2008. In 2010, our Fortical sales declined $695,000, or 12%, and Fortical royalties declined $2,017,000, or 40%, from 2009. In 2009, Fortical sales to USL declined $4,117,000, or 41%, and Fortical royalties from USL declined $1,529,000, or 23%, from 2008. Fortical royalties fluctuate each quarter based upon the timing and pricing of USL’s shipment to its customers. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. Licensing revenue represents the partial recognition of milestones and up-front payments received in prior years. Licensing revenue remained relatively constant in 2010 from 2009 and in 2009 from 2008.

Development fees and other revenue increased 200% to $1,819,000 in 2010 from $606,000 in 2009 primarily due to an increase in development work and feasibility studies we did for various pharmaceutical and biotechnology companies, including Tarsa. Development fees and other revenue decreased 57% to $606,000 in 2009 from $1,395,000 in 2008 primarily due to the timing and amount of development work and feasibility studies we did. This revenue is dependent upon the needs of our partners.

Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the marketplace and, therefore, are difficult to predict. Milestone revenue is based upon one-time events and is generally correlated with the development strategy of our licensees. It is therefore subject to uncertain timing and not predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide sales are dependent upon the future needs of our partners, which we cannot currently estimate. Sales revenue from Fortical in the future will depend on Fortical’s continued acceptance in the marketplace, as well as competition and other factors. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis’ nasal calcitonin product, but not to Fortical. In June 2009, Par also launched a product generic to Novartis’ nasal calcitonin product. Certain providers have substituted these products for Fortical, causing Fortical sales and royalties to decrease. Therefore, it is highly unlikely that Fortical alone will ever generate sufficient revenue for us to achieve profitability. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not ultimately prevail in defending our patent, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

EXPENSES

In December 2009, we announced a restructuring plan that included a reduction in workforce and expenses to improve operational efficiencies and to better match resources with market demand. Our restructuring expenses for 2009 were $353,000, of which $242,000 represented severance pay. These expenses are included in research and development expenses and in general and administrative expenses. There were no restructuring expenses in 2010. Under the comprehensive plan, we continued Fortical production and maintained all of our core programs and partnered activities while decreasing cash expenditures. We reached our target of decreasing cash expenditures by over $9 million for 2010. Since we currently maintain an adequate multi-year inventory of calcitonin and enzyme to support Fortical, we have temporarily suspended manufacturing of those materials at our Boonton facility. However, we are maintaining the cGMP status of the facility and the ability to manufacture peptides at that location.

Implementation of the plan resulted in an immediate company-wide workforce reduction of approximately 30%. The plan further provided for salary reductions in 2010 at all levels, including senior management, and resulted in other cost savings. From time to time, we will evaluate the feasibility of additional expenditures in areas such as preclinical and/or clinical studies in order to add value to certain of our current research projects.

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Cost of Goods Sold

Cost of goods sold varies by product and consists primarily of material costs, personnel costs, manufacturing supplies and overhead costs such as depreciation and maintenance. Cost of goods sold increased 20% in 2010 to $2,608,000 from $2,171,000 in 2009. This increase was due to the utilization in 2010 of older calcitonin from inventory which was manufactured by a less efficient production process. The less efficient process produced batches with a lower yield per batch, therefore cost per gram of calcitonin was higher. This older calcitonin was fully utilized in 2010. Cost of goods sold decreased 61% in 2009 to $2,171,000 from $5,622,000 in 2008, due to a 41% reduction in Fortical sales to USL, as well as improved margins which resulted from improved batch yields for calcitonin production. Cost of goods sold represented our costs associated with Fortical production. Cost of goods sold as a percentage of sales was 50%, 37% and 56% respectively, for 2010, 2009 and 2008. The improvement in margins in 2009 was due to the utilization of calcitonin produced by our more efficient manufacturing process. Future production related expenses will be dependent upon the level of future Fortical sales, as well as possible peptide production to meet our partners’ needs.

Research and Development Expenses

Research and development expenses primarily consist of personnel costs, pre-clinical and clinical trials, supplies, outside testing and consultants primarily related to our research and development efforts or activities related to our license agreements, as well as depreciation and amortization expense.

Research and development expenses decreased $5,923,000, or 48%, in 2010 to $6,428,000 from $12,351,000 in 2009. This decrease was largely due to a reduction of $3,283,000 in oral calcitonin expenditures following the licensing of our oral calcitonin program to Tarsa in October 2009, as well as a reduction of $2,964,000 in personnel expenditures allocated to research and development due to staff and salary reductions. Research and development expense increased 30% in 2009 to $12,351,000 from $9,517,000 in 2008. The 2009 increase was due to an increase of $1,467,000 for our Phase III oral calcitonin program which was licensed to Tarsa in October 2009. In addition, production salaries and supplies allocated to research and development expenses increased $1,333,000 primarily due to the production of PTH for research purposes, as well as certain peptide batch failures during 2009.

Research and development expenses will fluctuate in future years depending on the timing of expenses, including preclinical and clinical trials. Expenditures for the sponsorship of collaborative research programs were $354,000, $712,000 and $702,000 in 2010, 2009 and 2008, respectively, which are included as research and development expenses. The 2009 and 2008 increases were due to expenses related to our collaboration with Queen Mary, University of London.

General and Administrative Expenses

General and administrative expenses decreased $1,253,000, or 14%, to $7,685,000 in 2010 from $8,938,000 in 2009. The decrease was due to a reduction of $1,267,000 in professional fees, primarily due to legal expenses in 2009 related to the Apotex litigation, as well as Tarsa licensing activities.

General and administrative expenses increased 13% to $8,938,000 in 2009 from $7,889,000 in 2008. The 2009 increase was primarily attributable to an increase of $1,216,000 in professional fees, including legal expenses related to the Tarsa transaction and to the Apotex litigation.

Unallocated Facility Cost

Unallocated facility cost represents underutilization of our Boonton manufacturing facility. These costs primarily consist of salaries, as well as overhead expenses, which increased $1,394,000 to $3,106,000 for 2010 as compared to $1,712,000 in 2009, and increased $784,000 in 2009 as compared to $928,000 in 2008. The expenses in 2010 primarily relate to our current cessation of calcitonin and enzyme production, as well as our decreased production of Fortical. The expenses in 2009 and 2008 primarily relate to manufacturing calcitonin, enzyme and Fortical at below normal production capacity.

Inventory Reserve

Inventory reserve charges were $717,000 for 2010. This expense is primarily due to our decision in the first quarter of 2010 not to pursue an additional improvement for our calcitonin manufacturing process. Therefore, calcitonin batches manufactured by this process have been fully reserved. There were no inventory reserve charges in 2009.

Inventory reserve charges in 2008 were $223,000, representing potential second source material components for Fortical which may not be usable.

Severance Expense

Severance expense of $1,120,000 in 2010 represents an accrual of salary and health insurance costs associated with the resignations of Warren Levy and Ronald Levy. These payments are expected to be paid out in March 2011 and are included in current accrued expenses.

Other Income/Expenses

Gain/Loss on Change in Fair Value of Embedded Conversion Feature

The Victory Park note is convertible into shares of our Common Stock and, until June 15, 2010, we did not have sufficient authorized shares to effectuate a full conversion of the notes. Therefore, the conversion feature was treated as a liability based on its fair value. The liability for the conversion feature was marked to the market at March 31, 2010 and at June 15, 2010, the date of our annual meeting of stockholders, when additional shares were authorized. We therefore recognized a non-cash expense of $10,034,000 in the first quarter of 2010 which represented the change in the fair value of the conversion feature of the note from the closing date of March 17, 2010 to the balance sheet date of March 31, 2010 and we recognized a non-cash gain of $1,909,000 which represented the change in the fair value of the conversion feature of the note from March 31, 2010 to June 15, 2010.

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Qualifying Therapeutic Discovery Grant

In November 2010, we received notification that we were awarded an aggregate of $978,000 in grants under the Qualifying Therapeutic Discovery Project (QTDP) program of the Internal Revenue Service (IRS). The program, which targets therapeutic discovery projects that show potential to result in new therapies to treat areas of unmet medical need or treat chronic or acute diseases and conditions potentially resulting in reduced health care costs, was awarded to us to help fund the development of four of our programs.

Net Gain on License to Tarsa

In October 2009, we licensed our Phase III oral calcitonin program to Tarsa Therapeutics, Inc. a new company formed by a syndicate of three venture capital funds. In consideration for our sale to Tarsa of an exclusive license for the oral calcitonin program, we received from Tarsa approximately $8,993,000 in cash and 9,215,000 shares of common stock in Tarsa (which represents a 26% ownership). We valued the common stock at $0.23 per share or a total of $2,119,000 with the assistance of an outside valuation firm. In October 2009 we recognized $4,854,000 in expenses for our oral calcitonin program as well as an additional $573,000 in expenses related to the warrant exchange with Victory Park related to the Tarsa transaction. We therefore recognized a net gain of $5,685,000 on the licensing of our oral calcitonin program to Tarsa.

Interest Expense

Interest expense increased 91% in 2010 to $9,292,000 from $4,862,000 in 2009. The increase was primarily due to the debt restructuring with Victory Park in March 2010. The new notes for an aggregate of $33,000,000 bear interest at the prime rate plus 5%, with a floor of 15%. The prior Victory Park notes bore interest at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. During 2010 and 2009 we recognized $7,765,000 and $3,356,000, respectively, in cash and non-cash interest expense under these notes. In addition, interest expense on the Levy loans increased to $1,446,000 in 2010 from $1,403,000 in 2009 due to the increase in interest rate from 9% to 12% as a result of the Levy loan restructuring in March 2010. Due to the deferred payout schedules of both of the Levy notes , the effective interest rate of the restructured notes increased from 7.6% to 8.2%.

Interest expense increased 131% in 2009 to $4,862,000 from $2,102,000 in 2008. The increase was primarily due to the $15,000,000 and $5,000,000 notes issued to Victory Park on September 30, 2008 and May 22, 2009, respectively. These notes bore interest at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. During 2009 and 2008, we recognized $3,356,000 and $700,000, respectively, in cash and non-cash interest expense under these notes.

Gain/Loss On Equity Method Investments

China Joint Venture

This loss represents our 45% ownership percentage of our China joint venture’s profits and losses. Our share of the 2010 loss of the China joint venture was $149,000, a decrease of $20,000 from 2009.

Our technology and know-how contribution to our China joint venture gives rise to a basis difference between our investment in the joint venture and our 45% equity interest in the underlying assets of the joint venture. This basis difference is being recognized over 17 years, the estimated life of the transferred assets, at approximately $265,000 per year beginning in the fourth quarter of 2008 and is included under gain (loss) from investment in Tarsa and China joint venture on our statement of operations.

Tarsa

We currently have a 26% ownership interest in Tarsa, subject to possible future dilution. Our 2009 operations include a loss of $2,119,000 which represents our proportionate share of loss in Tarsa, limited to our total investment in Tarsa which was $2,119,000, as a result of our valuation of Tarsa’s common stock at $2,119,000, with the assistance of an outside appraiser. Our share of Tarsa’s loss would have been $3,795,000 so that the unrecognized loss of $1,676,000 is to be carried over to future periods. The loss reduced our investment in Tarsa to zero and, as a consequence, our 2010 and future financial results will not be negatively affected by Tarsa’s ongoing operations. We have no obligation to fund future operating losses of Tarsa as well as no further obligations of any kind.

Income Tax Benefit

The income tax benefits of $701,000 in 2010 and of $926,000 in 2008 consist primarily of proceeds received for sales of a portion of our state tax net operating loss carry forwards and research credits under a New Jersey Economic Development Authority program, which allows certain New Jersey taxpayers to sell their state tax benefits to third parties. The purpose of the New Jersey program is to provide financial assistance to high-technology and biotechnology companies in order to facilitate future growth and job creation. The income tax benefit of $67,000 in 2009 consists primarily of a partial refund of federal research and development tax credits. The New Jersey tax benefit sale for 2009 was concluded and recognized in February 2010.

Net Loss

Net loss for 2010 increased approximately $14,488,000, or 108%, to $27,868,000 from $13,380,000 for the corresponding period in 2009. This was primarily due to loss on change in fair value of embedded conversion feature of $8,125,000, debt issuance cost of $2,008,000, a reduction in revenue of $1,452,000, severance expense of $1,120,000, an inventory reserve of $717,000 and an increase in interest expense of $4,429,000. These were partially offset by a decrease in other operating expenses of $5,344,000. In addition, in 2009, we recognized a one-time, net gain in the amount of $5,685,000 on our license to Tarsa.

Net loss for 2009 increased 120% to $13,380,000 from $6,078,000 in 2008. This was due to increased operating expenses of $992,000, primarily due to expenditures for our oral calcitonin program partially offset by decreased cost of goods sold. Interest expenses increased $2,760,000, primarily due to our borrowings from Victory Park. In addition, Fortical revenue decreased $5,645,000 due to increased competition. These increased expenses and reduced Fortical revenue were partially offset by the Tarsa gain of $5,685,000.

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Net losses will continue unless we achieve sufficient non-deferred revenue under our USL, GSK, Tarsa or Novartis agreements or sign new revenue generating research, licensing or distribution agreements.

Summary of Critical Accounting Policies

The SEC defines “critical accounting policies” as those that are both important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The following discussion of critical accounting policies represents our attempt to bring to the attention of the readers of this report those accounting policies which we believe are critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 3 of the Notes to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles (“GAAP”), with no need for management’s judgment in the application of GAAP.

Revenue Recognition: We recognize revenue from the sale of products and from royalties, licensing agreements, research services and grants. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are elements of the revenue recognition requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services is recognized when services are rendered. We occasionally apply to various government agencies for research grants. Revenue from such research grants is recognized when work is conducted under the grant. Sales and grant revenues generally do not involve difficult, subjective or complex judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event, revenue would be recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and collectability is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL royalty report. This enables a reliable measure, as well as reasonable assurances of collectability. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL.

We follow the accounting guidance for licensing agreements which typically include several elements of revenue, such as up-front payments, milestones, royalties upon sales of product and the delivery of product and/or research services to the licensee. Non-refundable license fees received upon execution of license agreements where we have continuing involvement are deferred and recognized as revenue over the estimated performance period of the agreement. This requires management to estimate the expected term of the agreement or, if applicable, the estimated life of its licensed patents. For our USL and GSK agreements, the following describes our revenue recognition accounting policy. Non-refundable milestone payments that represent the completion of a separate earnings process and a substantive step in the research and development process are recognized as revenue when earned at the lesser of 1) the non-refundable cash received or 2) the proportionate level of effort expended to date during the development stage multiplied by the development stage revenue. This sometimes requires management to judge whether or not a milestone has been met and when it should be recognized in the financial statements. Typically, this would involve discussions between management and our licensing partner. Payments for milestones for which the completion of the earnings process is not yet complete (for example, payment received for the commencement of an activity that represents a separate earnings process) are recognized over the estimated performance period of such activity. This is to comply with accounting guidance which provides for revenue to be recognized once delivery has occurred or services have been rendered. Royalties and/or milestones relating to sales of products by our licensees, and the delivery of products and research services, will be recognized as such events occur as they represent the completion of a separate earnings process.

In addition, accounting guidance requires a company to evaluate its arrangements under which it will perform multiple revenue-generating activities. For example, a license agreement with a pharmaceutical company may involve a license, research and development activities and/or contract manufacturing. Management is required to determine if the separate components of the agreement have value on a standalone basis and qualify as separate units of accounting, whereby consideration is allocated based upon their relative “fair values.” A delivered item or item(s) that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered item(s) within the arrangement. The allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting.

Accounting for Stock Options: For stock options granted to employees and directors, we recognize compensation expense based on the grant-date fair value estimated in accordance with accounting guidance. We estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. Stock options and warrants issued to consultants are accounted for in accordance with accounting guidance. Compensation expense is calculated each quarter for consultants using the Black-Scholes option pricing model until the option is fully vested and is included in research and development expenses.

Inventory: Production inventories, at our Boonton, NJ location, are stated at the lower of cost or market, valued at specifically identified cost which approximates FIFO. Research inventories, at our Fairfield, NJ location, are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully reserved except for the amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant estimates involve estimating the lives of our license agreements, which typically are determined by the estimated useful lives of our licensed patents. This would determine the period over which certain revenue would be recognized. Other significant estimates relate to valuation of inventory and intangible assets, both of which involve management estimates of the lives of the assets and the recoverability of costs.

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Equity Method Investments: We account for our investment in the China joint venture and Tarsa under the equity method and therefore recognize our proportionate share of their earnings and losses. We own 45% of the Chinese joint venture and recognize 45% of the entity’s profits and losses. As part of the consideration for our sale to Tarsa of an exclusive license for our oral calcitonin program, we received 9,215,000 shares of common stock in Tarsa. This represents an approximate 26% ownership. In 2009, we therefore recognized 26% of the entity’s profits and losses, up to our investment in Tarsa. In 2009 our proportionate share of Tarsa’s loss was $3,795,000. However, our investment in Tarsa was $2,119,000 so the excess loss of $1,676,000 will be recognized in future years to offset our share of future profits, if any.

Patents and Other Intangibles: Amounts paid for patents and trademarks are capitalized. Patent and trademark costs are deferred pending the successful outcome of the relevant applications. These costs primarily consist of outside legal fees and typically relate to filings and prosecution of applications for improvements to existing patents or to the filings of foreign applications based upon domestic patents. Most of these applications relate to our patented peptide manufacturing and patented oral delivery technologies, as well as for our SDBG technology. Internal costs related to intangible assets are expensed as incurred. Successful patent costs are amortized using the straight-line method over the lives of the patents, typically five to fifteen years. Successful trademark costs are amortized using the straight-line method over their estimated useful lives of typically five to ten years. We assess the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, or we decide not to support the applications in certain jurisdictions. Some factors we consider important which could trigger an impairment review include (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (iii) significant negative industry or economic trends.

When we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we first will perform an assessment of the asset’s recoverability based on expected undiscounted future net cash flow, and if the amount is less than the asset’s value, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Unsuccessful patent costs are expensed when determined worthless or when patent applications will no longer be pursued. Other intangibles are recorded at cost and are amortized over their estimated useful lives.

LIQUIDITY AND CAPITAL RESOURCES.

We have a number of future payment obligations under various agreements. They are summarized, at December 31, 2010, as follows:

Contractual Obligations	Total		2011		2012		2013		2014		2015		Thereafter
Notes payable – Victory Park	$	33,000,000	$	—	$	—	$	33,000,000	$	—	$	—	$	—
Interest – Victory Park		4,352,757		—		—		4,352,757		—		—		—
China joint venture		1,200,000		1,200,000		—		—		—		—		—
Notes payable-Levys		14,737,518		—		750,000		13,987,518		—		—		—
Interest-Levys		4,932,602		—		—		4,932,602		—		—		—
Operating leases		1,206,765		290,021		291,021		292,021		108,369		92,583		132,750
Severance/vacation pay/deferred compensation-Levys		1,562,296		1,200,000		362,296		—		—		—		—

Total Contractual Obligations	$	60,991,938	$	2,690,021	$	1,403,317	$	56,564,898	$	108,369	$	92,583	$	132,750

At December 31, 2010, we had cash and cash equivalents of $12,201,000, an increase of $7,307,000 from December 31, 2009. The increase was primarily due to funds received pursuant to a restructuring of our debt with Victory Park, Fortical revenue and a $4,000,000 payment received from GSK in December under our amended agreement. In March 2010, we entered into an amended and restated financing agreement with Victory Park. The restated financing agreement amends and restates in its entirety and replaces the financing agreement dated as of September 30, 2008.

Under the terms of the restated financing agreement, we issued to Victory Park $33,000,000 aggregate principal amount of three-year, senior secured convertible notes by way of surrender of the three-year, senior secured non-convertible notes previously issued pursuant to the original financing agreement, in the aggregate principal amount of approximately $19,358,000, and by way of cash payment of approximately $13,642,000 for the balance. After fees and expenses, we received net cash proceeds of approximately $11,635,000 on March 17, 2010. In addition, under certain circumstances, we may request that Victory Park purchase (which purchase shall be in Victory Park’s sole discretion) up to an additional $3 million aggregate principal amount of convertible notes at one subsequent closing. The maturity date of the convertible notes has been extended to March 17, 2013 from September 30, 2011 under the original notes. (See Note 8 to the audited financial statements.) Based upon our current level of revenue and expenses, we believe our current cash should be sufficient to support our current operations into the second half of 2012.

In December 2009, we announced a restructuring plan that included a reduction in workforce and expenses to improve operational efficiencies and to better match resources with market demand. Under the comprehensive plan, we are continuing Fortical production and maintaining all of our core programs and partnered activities while decreasing cash expenditures. We reached our target of decreasing cash expenditures by over $9 million for 2010. Since we currently maintain an adequate inventory of calcitonin and enzyme to support Fortical, we have temporarily suspended manufacturing of those materials at our Boonton facility. However, we will maintain the cGMP status of the facility and the ability to manufacture peptides at that location. Implementation of the plan resulted in an immediate company-wide workforce reduction of approximately 30%. The plan further provided for salary reductions in 2010 at all levels, including senior management, and other cost savings. From time to time we will evaluate the feasibility of additional expenditures in areas such as preclinical and/or clinical studies in order to add value to certain of our current research projects.

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In addition to our debt restructuring in March 2010, other cash received during 2010 was primarily from Fortical sales and royalties received under our agreement with USL, as well as the $4,000,000 we received from GSK in December 2010. Our primary sources of cash have historically been (1) licensing fees for new agreements, (2) milestone payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply agreements, (4) stockholder loans, (5) the sale of our common stock and (6) since 2005, Fortical sales and royalties. We cannot be certain that any of these cash sources will continue to be available to us in the future. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under these agreements are based upon our licensees’ needs, which are sometimes difficult to predict. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and continued acceptance in the marketplace and could be impacted by manufacturing, distribution or regulatory issues. We believe that in 2011 we will generate cash to apply toward funding a portion of our operations through sales of Fortical to USL and royalties on USL’s sales of Fortical, as well as our anticipated receipt of a $4,000,000 milestone payment from GSK upon completion of Phase II patient enrollment, and, in the long term, on sales and royalties from the sale of Fortical and oral calcitonin, the achievement of milestones under our existing license agreements and revenue on future licensed products and technologies. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for various oral peptides, including our obesity peptide, and for our peptide manufacturing technology. However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of our other products or technologies.

Due to our limited financial resources, any further decline in Fortical sales and/or royalties, or delay in achieving milestones under our existing license agreements, or in signing new license or distribution agreements for our products or technologies or loss of patent protection, could have a material adverse effect on our cash flow and operations (see Notes 10, 19 and 20 to the audited financial statements).

If we are unable to achieve significant milestones or sales under our existing agreements and/or enter into a new significant revenue generating license or other arrangement, at a certain point we would need to either secure another source of funding in order to satisfy our working capital needs and to remain in compliance with covenants in our financing agreement with Victory Park (see Note 8 to the audited financial statements) or significantly curtail our operations. Should the funding we require to sustain our working capital needs be unavailable or prohibitively expensive, the consequence would be a material adverse effect on our business, operating results, financial condition and prospects. We believe that the Victory Park financing has satisfied our current cash requirements, but satisfying our cash requirements over the long term will require the successful commercialization of one or more of our biotechnologies or our licensees’ oral or nasal calcitonin products, our oral PTH product, the obesity program or another peptide product in the U.S. and/or abroad. However, it is uncertain whether any of these products other than Fortical will be approved or will be commercially successful. The amount of future revenue we will derive from Fortical is also uncertain.

We have incurred annual operating losses since our inception and, as a result, at December 31, 2010, had an accumulated deficit of approximately $171,000,000. Our cash requirements in 2010 to operate our research and peptide manufacturing facilities and develop our products decreased from 2009 due to our December 2009 restructuring.

The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the fall of 2008, which continued in 2009 and 2010. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. In addition, uncertainty about current and future global economic conditions may impact our ability to license our products and technologies to other companies and may cause consumers to defer purchases of prescription medicines, such as Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.

Net Cash Used in Operating Activities: Net cash used in operating activities was $1,669,000 in 2010, which was primarily due to our net loss adjusted for non-cash items of $14,302,000 and an increase in our operating assets and liabilities of $11,897,000, primarily from increased accrued interest and deferred revenue. Net cash used in operating activities was $11,291,000 in 2009, which was primarily due to our net loss adjusted for non-cash items of $2,836,000 and a decrease in our operating assets and liabilities of $4,925,000. The decrease in our operating assets and liabilities primarily resulted from a reduction in prepaid expenses and accounts receivable. Cash provided by operating activities has not been sufficient to meet our needs.

Net Cash Used in Investing Activities: Net cash used in investing activities was $678,000 in 2010, primarily resulting from costs related to our intellectual property. Net cash provided by investing activities was $3,030,000 in 2009, primarily due to our license to Tarsa.

Net Cash Provided by Financing Activities: Net cash provided by financing activities was $9,654,000 in 2010 and $4,572,000 in 2009 primarily resulting from our issuances of notes payable to Victory Park.

Off-Balance Sheet Arrangements.

None.

Recently Issued Accounting Pronouncements

In April 2010, an accounting standard update was issued to provide guidance on defining a milestone and determining when it is appropriate to apply the milestone method of revenue recognition for research and development transactions. Vendors can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period the milestone is achieved if the milestone meets all the criteria stated in the guidance to be considered substantive and it must be considered substantive in its entirety. The amendments in this update became effective for our quarter ending June 30, 2010. The adoption of this update did not have a significant effect on our financial statements.

In January 2010, an accounting standards update was issued which includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and information about purchases, sales, issuances and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and valuation techniques. The adoption of this update did not have a significant impact on the Company's financial statements (see Note 21 to the audited financial statements).

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In October 2009, an update to accounting guidance was issued to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The amendments in this update will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The amendments in this update will also require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The amendments in this update will become effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We do not expect that the adoption of this update will have a material effect on our financial statements.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

On September 30, 2008, we entered into a financing agreement with Victory Park whereby Victory Park purchased $15,000,000 of three-year senior secured non-convertible term notes from us. In May 2009, we issued an additional $5,000,000 in notes to affiliates of Victory Park. In March 2010, we restructured our debt with Victory Park and increased our borrowing to $33,000,000. These new convertible notes bear interest at the prime rate plus 5%, subject to a floor of 15% per annum. Therefore, we are exposed to interest rate fluctuations in the near-term and long-term until these notes are converted or repaid in full. We do not employ specific strategies, such as the use of derivative instruments or hedging, to manage our interest rate exposure. We estimate that, due to the short-term nature of our cash and investments, a change of 100 basis points in interest rates would not have materially affected their fair value.

The information below summarizes our market risks associated with interest bearing debt obligations as of December 31, 2010. The table below presents principal cash flows and related interest rates by year of maturity based on the terms of the debt. Given our financial condition, described in “Liquidity and Capital Resources,” it is not practicable to estimate the fair value of our debt.

Debt Obligations	Carrying Amount		2011		2012		2013		Thereafter

Note payable – Victory Park Variable interest rate: 15% (1)	$	33,000,000	$	--	$	--	$	33,000,000	$	--

Notes payable – Levys – Fixed interest rate: 12%		14,737,518		--		750,000		13,987,518		--

Loan payable – CPG Fixed interest rate: 0%		1,200,000		1,200,000		--		--		--

Total	$	48,937,518	$	1,200,000	$	750,000	$	46,987,518	$	--

(1) Prime rate plus 5%, with a floor of 15%

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

	Page Number

Report of Independent Registered Public Accounting Firm	24

Report of Independent Registered Public Accounting Firm	25

BALANCE SHEETS – December 31, 2010 and 2009	26

STATEMENTS OF OPERATIONS - Years Ended December 31, 2010, 2009 and 2008	27

STATEMENTS OF STOCKHOLDERS’ DEFICIT - Years Ended December 31, 2010, 2009 and 2008	28

STATEMENTS OF CASH FLOW - Years Ended December 31, 2010, 2009 and 2008	29

NOTES TO FINANCIAL STATEMENTS	30

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Unigene Laboratories, Inc.

We have audited the accompanying balance sheets of Unigene Laboratories, Inc. (the “Company) (a Delaware corporation) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The 2009 financial statements of Tarsa Therapeutics, Inc. (an equity method investment) have been audited by other auditors whose report has been furnished to us, and our opinion on the 2009 financial statements, insofar as it related to the amounts included for Tarsa Therapeutics, Inc., is based solely on the report of other auditors. In the financial statements, the Company investment in Tarsa Therapeutics, Inc. is stated at $0 at December 31, 2009 and the Company’s equity in the net loss of Tarsa Therapeutics, Inc. is stated at $2,119,000 for the year ended December 31, 2009.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Unigene Laboratories, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. The other auditor’s report on the 2009 financial statements of Tarsa Therapeutics, Inc., included an explanatory paragraph describing conditions that raised substantial doubt about its ability to continue as a going concern.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Unigene Laboratories, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2011, expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 16, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Tarsa Therapeutics, Inc.

We have audited the accompanying balance sheet of Tarsa Therapeutics, Inc. (a development-stage company) as of December 31, 2009, and the related statements of operations, shareholders’ deficit, and cash flows for the period from March 13, 2009 (date of inception) to December 31, 2009 (not presented separately herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tarsa Therapeutics, Inc. at December 31, 2009, and the results of its operations and its cash flows for the period from March 13, 2009 (date of inception) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Tarsa Therapeutics, Inc. will continue as a going concern. As more fully described in Note 2, the Company has incurred operating losses since inception and will need additional capital to continue its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The 2009 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

March 8, 2010

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UNIGENE LABORATORIES, INC.

BALANCE SHEETS

DECEMBER 31, 2010 and 2009

	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	12,200,800		$	4,894,210
Accounts receivable		1,553,091			2,201,505
Accounts receivable - Tarsa		186,263			19,593
Inventory, net		1,417,934			1,933,012
Prepaid expenses and other current assets		699,950			182,817

Total current assets		16,058,038			9,231,137

Noncurrent inventory		2,881,980			4,989,668
Property, plant and equipment, net		3,190,117			3,679,561
Patents and other intangibles, net		2,670,044			2,467,111
Investment in China joint venture		3,175,925			3,060,151
Investment in Tarsa		--			--
Deferred financing costs, net		181,457			279,892
Other assets		313,382			247,421


Total assets	$	28,470,943		$	23,954,941

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	974,998		$	1,144,396
Accrued expenses		2,834,345			2,106,719
Current portion - deferred licensing fees		2,290,916			1,326,606
Notes payable – Levys		--			2,360,628
Accrued interest		--			1,533,360
Due to China joint venture partner, net of discount of $64,571 in 2009		1,200,000			2,010,429
Total current liabilities		7,300,259			10,482,138


Notes payable – Levys, excluding current portion		14,737,518			13,376,889
Note payable – Victory Park –net of discount of $7,209,700 in 2010 and $1,357,003 in 2009		25,790,300			18,180,203
Accrued interest –Victory Park and Levys, excluding current portion		9,285,359			2,189,242
Accrued expenses, excluding current portion		162,296			277,908
Deferred licensing fees, excluding current portion		11,152,037			9,452,809
Deferred compensation		471,890			437,413


Total liabilities		68,899,659			54,396,602

Commitments and contingencies
Stockholders’ deficit:
Common Stock - par value $.01 per share, authorized 275,000,000 shares in 2010 and 135,000,000 shares in 2009; issued and outstanding: 92,475,597 shares in 2010 and 91,730,117 shares in 2009		924,756			917,301
Additional paid-in capital		129,227,058			111,352,807
Accumulated deficit		(170,580,263	)		(142,711,769	)
Treasury Stock – at cost (26,650 shares in 2010)		(267)			--

Total stockholders’ deficit		(40,428,716	)		(30,441,661	)

Total liabilities and stockholders’ deficit	$	28,470,943		$	23,954,941

The accompanying notes are an integral part of these financial statements.

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UNIGENE LABORATORIES, INC.

STATEMENTS OF OPERATIONS

Years Ended December 31, 2010, 2009 and 2008

	2010			2009			2008
Revenue:
Product sales	$	5,246,159		$	5,941,254		$	10,057,938
Royalties		2,974,365			4,991,266			6,519,942
Licensing revenue		1,300,763			1,253,260			1,256,760
Development fees and other revenues		811,992			545,788			1,394,793
Tarsa revenue		1,006,935			60,270			--

		11,340,214			12,791,838			19,229,433

Operating expenses:
Cost of goods sold		2,608,083			2,171,231			5,621,732
Research and development		6,428,041			12,350,796			9,517,448
General and administrative		7,685,039			8,937,683			7,889,260
Unallocated facility expenses		3,105,989			1,711,642			927,553
Inventory reserve		716,989			--			223,413
Severance expense - Levys		1,120,000			--			--

		21,664,141			25,171,352			24,179,406

Operating loss		(10,323,927	)		(12,379,514	)		(4,949,973	)

Other income (expense):
Loss on change in fair value of embedded conversion feature		(8,125,000	)		--			--
Debt issuance cost		(2,007,534	)		--			--
Qualifying therapeutic discovery grant		977,917			--			--
Gain on technology license to Tarsa - net		--			5,685,530			--
Interest and other income		85,546			133,581			120,654
Interest expense		(9,291,773	)		(4,862,319	)		(2,102,354	)
Gain (loss) from investment in Tarsa and China joint venture		115,774			(2,024,072	)		(72,337	)

Loss before income taxes		(28,568,997	)		(13,446,794	)		(7,004,010	)
Income tax benefit – principally from sale of New Jersey tax benefits in 2010 and 2008		700,503			67,115			925,588

Net loss	$	(27,868,494	)	$	(13,379,679	)	$	(6,078,422	)

Loss per share – basic and diluted:
Net loss per share	$	(0.30	)	$	(0.15	)	$	(0.07	)

Weighted average number of shares outstanding – basic and diluted		91,961,673			90,662,089			88,751,289

The accompanying notes are an integral part of these financial statements.

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UNIGENE LABORATORIES, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

Years Ended December 31, 2010, 2009 and 2008

	Common Stock				Additional
	Number of				Paid-in			Accumulated			Treasury
	Shares		Par Value		Capital			Deficit			Stock			Total

Balance, January 1, 2008		87,753,715	$	877,537	$	105,705,387		$	(123,253,668	)	$	—		$	(16,670,744	)

Sale of common stock to CPG at $1.86 per share (net of cash issuance costs of $74,000)		1,080,000		10,800		1,923,505			—			—			1,934,305
Issuance of stock to Victory Park		1,125,000		11,250		1,215,000			—			—			1,226,250
Recognition of stock option compensation expense – employees and directors		—		—		450,299			—			—			450,299
Recognition of stock option compensation benefit - consultants		—		—		(143,177	)		—			—			(143,177	)
Discount on note payable issued to joint venture partner		—		—		160,064			—			—			160,064
Issuance of restricted stock		178,961		1,790		(1,790	)		—			—			—
Recognition of restricted stock compensation expense		—		—		144,567			—			—			144,567
Cashless warrant exercise		47,844		478		(478	)		—			—			—
Exercise of stock options		10,000		100		4,300			—			—			4,400
Net loss		—		—		—			(6,078,422	)		—			(6,078,422	)

Balance, December 31, 2008		90,195,520		901,955		109,457,677			(129,332,090	)		—			(18,972,458	)

Issuance of stock to Victory Park in connection with debt issuance and Tarsa transaction		675,000		6,750		930,000			—			—			936,750
Stock issued in lieu of director fees		91,886		919		72,581			—			—			73,500
Recognition of restricted stock compensation expense		—		—		119,700			—			—			119,700
Issuance of restricted stock		60,000		600		(600	)		—			—			—
Discount on note payable issued to joint venture partner		—		—		27,978			—			—			27,978
Recognition of stock option compensation expense – employees and directors		—		—		378,212			—			—			378,212
Recognition of stock option compensation expense - consultants		—		—		43,393			—			—			43,393
Cashless warrant exercise		77,811		778		(778	)		—			—			—
Exercise of stock options		629,900		6,299		324,644			—			—			330,943
Net loss		—		—		—			(13,379,679	)		—			(13,379,679	)

Balance December 31, 2009		91,730,117		917,301		111,352,807			(142,711,769	)		—			(30,441,661	)

Stock issued in lieu of director fees		174,780		1,748		127,252			—			—			129,000
Issuance of restricted stock		372,100		3,721		(3,721	)		—			—			—
Exercise of stock options		158,600		1,586		71,762			—			—			73,348
Embedded conversion feature		—		—		16,724,000			—			—			16,724,000
Issuance of common stock to directors		40,000		400		30,400			—			—			30,800
Discount on note payable issued to joint venture partner		—		—		(1,918	)		—			—			(1,918	)
Forfeiture of restricted stock		—		—		267			—			(267	)		—
Recognition of restricted stock compensation		—		—		243,240			—			—			243,240
Recognition of stock option compensation expense – employees and directors		—		—		689,340			—			—			689,340
Recognition of stock option compensation expense - consultants		—		—		(6,371	)		—			—			(6,371	)
Net loss		—		—		—			(27,868,494	)		—			(27,868,494	)
Balance, December 31, 2010		92,475,597	$	924,756	$	129,227,058		$	(170,580,263	)	$	(267	)	$	(40,428,716	)

The accompanying notes are an integral part of these financial statements.

28 of 59

UNIGENE LABORATORIES, INC.

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2010, 2009 and 2008

	2010		2009		2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(27,868,494)	$	(13,379,679)	$	(6,078,422)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred revenue		(1,326,620)		(1,367,664)		(1,456,760)
Amortization of discounts and deferred financing fees		2,844,736		845,803		174,760
Non-cash equity compensation		1,086,009		614,805		451,689
Gain on technology license to Tarsa, net		—		(5,685,530)		—
Debt issuance cost		2,007,534		—		—
Loss on change in fair value of embedded conversion feature		8,125,000		—		—
Depreciation, amortization and impairment of long-lived assets		965,008		732,464		903,018
Inventory reserve provision		716,989		—		223,413
(Gain)/loss on investment in Tarsa and China joint venture		(115,774)		2,024,072		72,337

Changes in operating assets and liabilities:
Decrease (increase) in accounts receivables		481,744		2,413,938		(1,492,840)
Decrease (increase) in prepaid interest		—		525,000		(525,000)
Decrease (increase) in inventory		1,905,777		(2,092,971)		(1,098,813)
Decrease (increase) in other assets		(583,095)		1,716,948		(1,037,396)
Increase (decrease) in accounts payable and accrued expenses		505,271		503,892		(163,229)
Increase in accrued interest - Vicotory Park and Levys		5,562,757		1,627,629		1,311,694
Increase (decrease) in deferred compensation		34,477		66,267		(3,354)
Increase in deferred revenue		3,990,160		164,252		143,750

Net cash used in operating activities		(1,668,521)		(11,290,774)		(8,575,153)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from technology license to Tarsa		—		4,139,080		—
Investment in China joint venture		—		(317,354)		(583,491)
Construction of leasehold and building improvements		(2,941)		(76,916)		(521,474)
Purchase of equipment and furniture		(144,478)		(220,055)		(884,640)
Increase in patents and other intangibles		(531,078)		(494,548)		(559,892)
Decrease in other assets		—		—		4,335

Net cash (used in) provided by investing activities		(678,497)		3,030,207		(2,545,162)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of note payable – Victory Park, net		13,642,473		4,803,402		14,129,142
Expenses related to issuance of note payable – Victory Park		(2,007,534)		—		—
Proceeds from sale of stock, net		—		—		1,934,305
Repayment of notes payable – Levys		(1,000,000)		—		—
Repayment on note payable – Victory Park		(179,679)		(462,794)		—
Repayment on note payable-China joint venture		(875,000)		(100,000)		—
Repayment of capital lease obligations		—		—		(41,943)
Proceeds from exercise of stock options		73,348		330,943		4,400

Net cash provided by financing activities		9,653,608		4,571,551		16,025,904

Net increase (decrease) in cash and cash equivalents		7,306,590		(3,689,016)		4,905,589
Cash and cash equivalents at beginning of year		4,894,210		8,583,226		3,677,637

Cash and cash equivalents at end of year	$	12,200,800	$	4,894,210	$	8,583,226

SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Issuance of convertible note in exchange for non-convertible note	$	19,357,527	$	—	$	—
Common stock received for license to Tarsa	$	—	$	2,119,450	$	—
Contribution to joint venture financed through interest-free note payable to joint venture partner	$	—	$	1,200,000	$	975,000
Common stock issued with debt financing (see Note 8)	$	—	$	363,750	$	1,226,250

UNIGENE LABORATORIES INC - FORM 10-K - March 16, 2011

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