10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-31135

INSPIRE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	04-3209022
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
4222 Emperor Boulevard, Suite 200 Durham, North Carolina	27703
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (919) 941-9777

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  __     NO  __

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer	¨	Accelerated filer  x
Non-accelerated filer	¨  (do not check if a smaller reporting company)	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

As of March 31, 2010, there were 82,600,235 shares of Inspire Pharmaceuticals, Inc. common stock outstanding.

TABLE OF CONTENTS

	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Balance Sheets – March 31, 2010 and December 31, 2009	3
Condensed Statements of Operations – Three months ended March 31, 2010 and 2009	4
Condensed Statements of Cash Flows – Three months ended March 31, 2010 and 2009	5
Notes to Condensed Financial Statements	6
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	43
Item 4. Controls and Procedures	44
PART II: OTHER INFORMATION
Item 1A. Risk Factors	45
Item 6. Exhibits	66
SIGNATURES	67

We own or have rights to various trademarks, copyrights and trade names used in our business. AzaSite^® is a trademark owned by InSite Vision Incorporated. Restasis^®, Elestat^® and Prolacria^™ are trademarks owned by Allergan, Inc. This report also includes trademarks, service marks and trade names of other companies.

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

INSPIRE PHARMACEUTICALS, INC.

Condensed Balance Sheets

(in thousands, except per share amounts)

(Unaudited)

	March 31, 2010			December 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	30,935		$	52,256
Investments		64,660			54,367
Trade receivables, net		16,756			22,682
Prepaid expenses and other receivables		4,758			5,479
Inventories, net		1,741			1,717
Other assets		101			153
Total current assets		118,951			136,654
Property and equipment, net		4,875			4,429
Assets held-for-sale		379			402
Investments		18,963			21,861
Restricted deposits		615			615
Intangibles, net		14,350			14,748
Other assets		57			61
Total assets	$	158,190		$	178,770
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,466		$	10,056
Accrued expenses		18,341			21,246
Short-term debt		20,332			19,940
Total current liabilities		47,139			51,242
Long-term debt		-			5,235
Other long-term liabilities		1,915			3,125
Total liabilities		49,054			59,602
Stockholders’ equity:
Preferred stock, $0.001 par value, 1,860 shares authorized; no shares issued and outstanding		-			-
Common stock, $0.001 par value, 100,000 shares authorized; 82,600 and 82,346 shares issued and outstanding, respectively		83			82
Additional paid-in capital		524,188			519,462
Accumulated other comprehensive income		96			68
Accumulated deficit		(415,231	)		(400,444	)
Total stockholders’ equity		109,136			119,168
Total liabilities and stockholders’ equity	$	158,190		$	178,770

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

3

INSPIRE PHARMACEUTICALS, INC.

Condensed Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	March 31, 2010			March 31, 2009
Revenues:
Product sales, net	$	8,696		$	6,186
Product co-promotion and royalty		13,372			8,145
Total revenue		22,068			14,331
Operating expenses:
Cost of sales		3,015			1,961
Research and development		9,593			12,267
Selling and marketing		13,694			13,020
General and administrative		10,236			3,820
Restructuring		-			1,931
Total operating expenses		36,538			32,999
Loss from operations		(14,470	)		(18,668	)
Other income/(expense):
Interest income		169			160
Interest expense		(486	)		(899	)
Other expense, net		(317	)		(739	)
Net loss	$	(14,787	)	$	(19,407	)
Basic and diluted net loss per common share	$	(0.18	)	$	(0.34	)
Weighted average common shares used in computing basic and diluted net loss per common share		82,402			56,678

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

4

INSPIRE PHARMACEUTICALS, INC.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

	Three Months Ended
	March 31, 2010			March 31, 2009
Cash flows from operating activities:
Net loss	$	(14,787	)	$	(19,407	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense		454			505
Depreciation of property and equipment		221			221
Asset impairment		-			484
Loss/(gain) on disposal of property and equipment		1			(1	)
Stock-based compensation expense		4,793			1,198
Allowance for doubtful accounts		(18	)		3
Inventory reserve		10			-
Changes in operating assets and liabilities:
Trade receivables		5,944			1,762
Prepaid expenses and other receivables		691			206
Inventories		(34	)		71
Accounts payable		(407	)		(2,425	)
Accrued expenses and other liabilities		(3,957	)		627
Deferred revenue		-			3,695
Net cash used in operating activities		(7,089	)		(13,061	)
Cash flows from investing activities:
Purchase of investments		(16,817	)		(8,665	)
Proceeds from sale of investments		9,450			6,998
Purchase of property and equipment		(2,000	)		(231	)
Proceeds from sales of property and equipment		44			-
Net cash used in investing activities		(9,323	)		(1,898	)
Cash flows from financing activities:
Issuance of common stock, net – stock compensation plans		137			-
Payments related to settlement of employee stock-based awards		(203	)		-
Payments on notes payable and capital lease obligations		(4,843	)		(4,486	)
Net cash used in financing activities		(4,909	)		(4,486	)
Decrease in cash and cash equivalents		(21,321	)		(19,445	)
Cash and cash equivalents, beginning of period		52,256			58,488
Cash and cash equivalents, end of period	$	30,935		$	39,043
Supplemental disclosure of non-cash investing information:
Purchase of equipment included in accrued expenses	$	98		$	-

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

5

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

1. Organization

Inspire Pharmaceuticals, Inc. (the “Company” or “Inspire”) was incorporated in October 1993 and commenced operations in March 1995. Inspire is located in Durham, North Carolina, adjacent to the Research Triangle Park.

Inspire has incurred losses and negative cash flows from operations since inception. Based on current operating plans, the Company expects it has sufficient liquidity to continue its planned operations beyond 2010. The Company’s liquidity needs will largely be determined by the commercial success of its products and key development and regulatory events. In order to continue its operations substantially beyond 2010 it will need to: (1) successfully increase revenues; (2) obtain additional product candidate approvals; (3) out-license rights to certain of its product candidates; (4) raise additional capital through equity or debt financings or from other sources; (5) reduce spending on one or more research and development programs; and/or (6) further restructure its operations. The Company currently receives revenue from sales of AzaSite (azithromycin ophthalmic solution) 1%, its co-promotion of Elestat (epinastine HCl ophthalmic solution) 0.05% and royalties on Restasis (cyclosporine ophthalmic emulsion) 0.05%. The Company will continue to incur operating losses until revenues reach a level sufficient to support ongoing operations.

2. Basis of Presentation

The accompanying unaudited Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America and applicable Securities and Exchange Commission (“SEC”) regulations for interim financial information. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is presumed that users of this interim financial information have read or have access to the audited financial statements from the preceding fiscal year contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and operations for the interim periods presented have been made.

Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in the unaudited Condensed Financial Statements and accompanying notes may not be indicative of the results for the full year or any future period.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 materially from those estimates.

Fair Value of Financial Instruments

The Company discloses the fair value of financial instruments for assets and liabilities for which it is practicable to estimate that value. The carrying amounts of all cash equivalents, available-for-sale securities and restricted deposits approximate fair value based upon quoted market prices. The fair value of trade accounts receiveables, accounts payable and short-term debt approximates carrying value due to their short-term nature.

Other long-term assets include the Company’s common stock investment of $200 in a non-public entity for which fair value is not readily determinable. The investment is carried at cost and is subject to potential write-down for

6

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

impairment whenever events or changes in circumstances indicate that the carrying value is not recoverable. Other long-term liabilities typically represent deferred fees, credits and cost reimbursement arrangements. The carrying value of these long-term assets and liabilities approximate their fair values.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding and dilutive potential common shares then outstanding. Dilutive potential common shares consist of shares issuable upon the exercise of stock options and restricted stock units that are paid in shares of the Company’s stock upon conversion. The calculation of diluted earnings per share for the three months ended March 31, 2010 and 2009 does not include 1,129 and 124, respectively, of potential common shares, as their impact would be antidilutive.

Assets Held-For-Sale

In connection with the corporate restructuring that occurred in the first quarter of 2009, the Company began disposing of its laboratory equipment in the fourth quarter of 2009. The assets held-for-sale are reported at the lower of the carrying value or fair value less costs to sell and the assets are no longer being depreciated. See Note 7 “Restructuring” for additional information.

Intangible Assets

Costs associated with obtaining patents on the Company’s product candidates and license initiation and preservation fees, including milestone payments by the Company to its licensors, are evaluated based on the stage of development of the related product candidate and whether the underlying product candidate has an alternative use. Costs of these types incurred for product candidates not yet approved by the U.S. Food and Drug Administration (“FDA”) and for which no alternative future use exists are recorded as expense. In the event a product candidate has been approved by the FDA or an alternative future use exists for a product candidate, patent and license costs are capitalized and amortized over the expected life of the related product candidate. Milestone payments to the Company’s collaborators are recognized when the underlying requirement is met.

Upon FDA approval of AzaSite in April 2007, the Company paid a $19,000 milestone to InSite Vision Incorporated (“InSite Vision”). The $19,000 is being amortized ratably on a straight-line basis through the term of the underlying patent coverage for AzaSite, or March 2019, which represents the expected period of commercial exclusivity. As of March 31, 2010 and December 31, 2009, the Company had $4,650 and $4,252, respectively, in accumulated amortization related to this milestone.

The carrying values of intangible assets are periodically reviewed to determine if the facts and circumstances suggest that a potential impairment may have occurred. The review includes a determination of the carrying values of intangible assets based on an analysis of undiscounted cash flows over the remaining amortization period. If the review indicates that carrying values may not be recoverable, the Company will reduce the carrying values to the estimated fair value. The Company had no impairments of its intangible assets for the three months ended March 31, 2010 and 2009.

Debt

In December 2006, the Company entered into a loan and security agreement with two financial institutions, which provided a term loan facility to the Company in an aggregate amount of $40,000. In June 2007, the Company amended the loan and security agreement with the two participating financial institutions to enable the Company to

7

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

draw upon a new supplemental term loan facility in the amount $20,000, effectively increasing the total term loan facility to $60,000. The Company has borrowed the full $60,000 available under the term loan facility. The interest rates associated with the individual borrowings under the facility range from approximately 7.6% to 8.0%. As of March 31, 2010, the Company had net borrowings under the term loan facility of $20,332. The final maturity date for all loan advances under the original term loan facility and the supplemental term loan facility is March 2011. As a result, the full amount net borrowings as of March 31, 2010 have been classified as short-term debt. Additionally, the Company is subject to a final payment of $1,200 equal to 2% of the principal amount being repaid.

The loan and security agreement contains a financial covenant that requires the Company to maintain certain levels of liquidity based on its cash, investment and account receivables balances, as well as negative covenants that may limit the Company from assuming additional indebtedness and entering into other transactions as defined in the agreement. In addition to other financial and non-financial covenants within the agreement, the agreement contains a subjective acceleration clause such that repayment could be accelerated upon a material adverse change to the business, properties, assets, financial condition or results of operations of the Company. At March 31, 2010, the Company was in compliance with all of the covenants under its loan and security agreement.

Revenue Recognition

The Company records all of its revenue from: (1) sales of AzaSite; (2) product co-promotion activities and earned royalties; and (3) collaborative research agreements when realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the seller’s price to the buyer is fixed or determinable; and 4) collectibility is reasonably assured.

Product Revenues

The Company recognizes revenue for sales of AzaSite when title and substantially all the risks and rewards of ownership have transferred to the customer, which generally occurs on the date of shipment. In the United States, the Company sells AzaSite to wholesalers and distributors, who, in turn, sell to pharmacies and federal, state and commercial health care organizations.

Sales deductions consist of statutory rebates to state Medicaid, Medicare and other government agencies, contractual rebates with commercial managed care organizations, wholesaler chargebacks, sales discounts (including trade discounts and distribution service fees), allowances for coupon and voucher programs and product returns. These deductions are recorded as reductions to revenue from AzaSite in the same period as the related sales with estimates of future utilization derived from historical experience adjusted to reflect known changes in the factors that impact such reserves.

The Company utilizes data from external sources to help it estimate gross-to-net sales adjustments as they relate to the recognition of revenue for AzaSite sold. External sourced data includes, but is not limited to, information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers, targeted surveys as well as data from IMS Health, a third-party supplier of market research data to the pharmaceutical industry. The Company also utilizes this data to help estimate and identify prescription trends and patient demand, as well as product levels in the supply chain.

The Company accounts for these sales deductions in accordance with the Financial Accounting Standards Board (“FASB”) authoritative guidance on revenue recognition when consideration is given by a vendor to a customer as well as when the right of return exists.

8

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

The Company has categorized and described more fully the following significant sales deductions, all of which involve estimates and judgments which the Company considers to be critical accounting estimates, and requires it to use information from external sources.

Rebates and Chargebacks

Statutory rebates to state Medicaid agencies and Medicare and contractual rebates to commercial managed care organizations are based on statutory or negotiated discounts to the selling price. As it can take up to nine months or more for information to be received on actual usage of AzaSite in managed care and Medicaid and other governmental programs as well as on the total discounts to be reimbursed, the Company maintains reserves for amounts payable under these programs relating to AzaSite sales.

Chargebacks claimed by wholesalers are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs.

The amount of the reserve for rebates and chargebacks is based on multiple qualitative and quantitative factors, including the historical and projected utilization levels, historical payment experience, changes in statutory laws and interpretations as well as contractual terms, product pricing (both normal selling prices and statutory or negotiated prices), changes in prescription demand patterns and utilization of our product through private or public benefit plans, and the levels of AzaSite inventory in both the wholesale and retail distribution channel. Other factors that the Company may consider, if determined relevant, would include price changes from competitors and introductions of generics and/or competitive new products. The Company acquires prescription utilization data from IMS Health, a third-party supplier of market research data to the pharmaceutical industry. The Company applies these multiple factors, the quantitative historical data along with other qualitative aspects, such as management’s judgment regarding future utilization trends, to the respective period’s sales of AzaSite to determine the rebate accrual and related expense. The Company updates its estimates and assumptions each period and records any necessary adjustments to its reserves. Settlements of rebates and chargebacks typically occur within nine months from point of sale. To the extent actual rebates and chargebacks differ from the Company’s estimates, additional reserves may be required or reserves may need to be reversed, either of which would impact current period product revenue. As of March 31, 2010 and December 31, 2009, reserves for rebates and chargebacks were $4,591 and $3,488, respectively.

Discounts and Other Sales Incentives

Discounts and other sales incentives consist of the following:

Ÿ Prompt pay discounts —Prompt payment discounts are offered to all wholesalers in return for payment within 30 days following the invoice date. The Company records sales of AzaSite net of the discount amount based on historical experience. The Company adjusts the reserve at the end of each reporting period to approximate the percentage discount applicable to the outstanding gross accounts receivable balances.

Ÿ Inventory Management Agreement (“IMA”) Fees —Per contractual agreements with the Company’s largest wholesalers, the Company provides an IMA fee based on a percentage of their purchases of AzaSite. The IMA fee rates are set forth in the individual contracts. The Company tracks sales to these wholesalers each period and accrues a liability relating to the unpaid portion of these fees by applying the contractual rates to such sales.

Ÿ Product coupons and vouchers —Product coupons and vouchers, made available by us online or through pharmacies and prescribing physicians, offer patients the ability to receive free or discounted product. The Company uses a third-party administrator who coordinates program activities and invoices on a periodic

9

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

basis for the cost of coupons and vouchers redeemed in the period. The Company bases its estimates on the historical coupon and voucher redemption rate of similar programs.

As of March 31, 2010 and December 31, 2009, reserves for discounts and other sales incentives were $731 and $889, respectively.

Product Returns

At the time of sale of AzaSite, the Company records product returns allowances based on its estimate of the portion of sales that will be returned by its customers in the future. The return allowances are established in accordance with the Company’s return policy. The Company’s return goods policy generally allows for returns of AzaSite within an 18-month period, from six months prior to the expiration date and up to 12 months following the expiration date, but may differ from customer to customer, depending on certain factors. Future estimated returns of AzaSite are based primarily on the return data for comparative products and the Company’s own historical experience with AzaSite. Historical returns data on AzaSite is analyzed on a specific production lot basis. In determining the Company’s return allowance, the Company also considers other relevant factors, including:

Ÿ Levels of inventory in the distribution channel and any significant changes to these levels

Ÿ Estimated expiration date or remaining shelf life of inventory in the distribution channel

Ÿ Current and projected demand of AzaSite that could be impacted by introductions of generic products and/or introductions of competitive new products; and

Ÿ Competitive product shortages, recalls and/or discontinuances

The Company’s estimates of the level of AzaSite inventory in the distribution channel is based on inventory data provided by wholesalers and third-party prescription data. As of March 31, 2010 and December 31, 2009, reserves for returns of AzaSite were $1,623 and $1,523, respectively.

Product Co-promotion and Royalty Revenues

The Company recognizes co-promotion revenue based on net sales of Elestat and royalty revenue based on net sales of Restasis, as defined in the co-promotion agreements, and as reported to Inspire by Allergan. Through the year ended December 31, 2008, the Company actively promoted both Restasis and Elestat through its commercial organization. As of January 1, 2009, the Company is no longer responsible for the co-promotion of Restasis, but the Company continues to receive royalties on Allergan’s net sales of Restasis. The Company’s co-promotion and royalty revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which the Company has limited or no control and on the underlying terms of the co-promotion agreements. Allergan recognizes revenue from product sales when goods are shipped and title and risk of loss transfers to the customer. The co-promotion agreements provide for gross sales to be reduced by estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs as defined in the agreements, all of which are determined by Allergan and are outside the Company’s control. The Company records a percentage of Allergan’s reported net sales to Inspire for Elestat and Restasis, as co-promotion revenue and royalty revenue, respectively. The Company receives monthly sales information from Allergan and performs analytical reviews and trend analyses using prescription information that it receives from IMS Health. In addition, the Company exercises its audit rights under the contractual agreements with Allergan to annually perform an examination of Allergan’s sales records of both Restasis and Elestat. The Company makes no adjustments to the amounts reported to it by Allergan other than reductions in net sales to reflect the incentive programs managed by the Company. The Company offers and manages certain incentive programs associated with Elestat, which are utilized by it in addition to those programs managed by Allergan. The Company reduces co-promotion revenue from net sales of Elestat by estimating the portion of sales

10

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

that are subject to these incentive programs based on information reported to it by a third-party administrator of the incentive program. The rebates associated with the programs that the Company manages represent an insignificant amount, as compared to the rebate and discount programs administered by Allergan and as compared to the Company’s aggregate co-promotion and royalty revenue. Prior to January 1, 2010, under the co-promotion agreement for Elestat, the Company was obligated to meet predetermined minimum calendar year net sales target levels. If the annual minimum was not achieved, the Company recorded revenues using a reduced percentage of net sales based upon its level of achievement of the predetermined calendar year net sales target levels. Amounts receivable from Allergan in excess of recorded co-promotion revenue were recorded as deferred revenue. Calendar year 2009 was the last year in which there was a minimum annual net sales target level for Elestat under the co-promotion agreement. Accordingly, effective January 1, 2010, all co-promotion revenue from net sales of Elestat is recognized in the same period in which the sales occur.

Collaborative Research and Development Revenues

The Company recognizes revenue under its collaborative research and development agreements when it has performed services under such agreements or when the Company or its collaborative partner have met a contractual milestone triggering a payment to the Company. The Company recognizes revenue from its research and development service agreements ratably over the estimated service period as related research and development costs are incurred and the services are substantially performed. Upfront non-refundable fees and milestone payments received at the initiation of collaborative agreements for which the Company has an ongoing research and development commitment are deferred and recognized ratably over the period in which the services are substantially performed. This period, if not defined in the collaborative agreement, is based on estimates by the Company’s management and the progress towards agreed upon development events as set forth in the collaborative agreements. These estimates are subject to revision as the Company’s development efforts progress and it gains knowledge regarding required additional development. Revisions in the commitment period are made in the period that the facts related to the change first become known. If the estimated service period is subsequently modified, the period over which the upfront fee or revenue related to ongoing research and development services is modified on a prospective basis. The Company is also entitled to receive milestone payments under its collaborative research and development agreements based upon the achievement of agreed upon development events that are substantively at-risk by its collaborative partners or the Company. This collaborative research and development revenue is recognized upon the achievement and acknowledgement of the Company’s collaborative partner of a development event, which is generally at the date payment is received from the collaborative partner or is reasonably assured. Accordingly, the Company’s revenue recognized under its collaborative research and development agreements may fluctuate significantly from period to period.

11

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Comprehensive Loss

Accumulated other comprehensive loss is comprised of unrealized gains and losses on marketable securities and is disclosed as a component of stockholders’ equity. The Company had $96 and $68 of unrealized gains on its investments that are classified as accumulated other comprehensive loss at March 31, 2010 and December 31, 2009, respectively. Comprehensive loss consists of the following components:

	Three Months Ended March 31,
	2010		2009
Net loss	$	(14,787)	$	(19,407)
Change in unrealized gain on investments		28		27
Total comprehensive loss	$	(14,759)	$	(19,380)

Risks from Third Party Manufacturing and Distribution Concentration

The Company relies on single source manufacturers for its commercial products and product candidates. Allergan is responsible for the manufacturing of both Restasis and Elestat and relies on single source manufacturers for the active pharmaceutical ingredients in both products. The Company relies on InSite Vision for the supply of the active pharmaceutical ingredient for AzaSite, which InSite Vision obtains from a single source manufacturer. The Company is responsible for the remaining finished product manufacturing of AzaSite, for which it relies on a single source manufacturer. Additionally, the Company relies upon a single third party to provide distribution services for AzaSite.

The Company relies upon one vendor as the sole manufacturer of the supply of active pharmaceutical ingredients for both Prolacria and denufosol; however, the Company has initiated development of a secondary supplier for denufosol.

In March 2010, the Company and Finorga S.A.S. (“Novasep”) entered into a Technical Transfer & Development Services Agreement for the purposes of enabling Novasep to become a qualified manufacturer of the active pharmaceutical ingredient (“API”) for denufosol.

Pursuant to the terms of the agreement, the Company has transferred to Novasep certain technology relating to the manufacture and production of denufosol. The Company has granted Novasep a non-exclusive, royalty-free, non-transferable, non-sublicensable license to use certain intellectual property to perform its obligations under the agreement.

Novasep is responsible for procuring, installing at one of its facilities, qualifying and maintaining certain equipment to be used for the manufacture of denufosol API. The manufacturing equipment is owned by the Company and will be used by Novasep for the manufacture of denufosol API. The Company has capitalized the equipment in accordance with US GAAP authoritative guidance. Novasep is responsible for various services relating to process development, process-improvement and scale-up of the manufacturing process for denufosol API, as well as the manufacture of various development, demonstration and validation batches of denufosol API in accordance with cGMPs, legal requirements and the terms of the agreement. The Company is obligated to pay an aggregate amount of up to 5,101 Euros or approximately $7,200 at prevailing exchange rates. A number of services provided for under the agreement have already been completed by Novasep. Accordingly, a significant portion of the aggregate payment

12

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

amount provided for in the agreement has already been paid by the Company. As of March 31, 2010, the Company had paid 3,251 Euros to Novasep under the agreement for services provided.

Effective September 25, 2009, the Company and Yamasa Corporation entered into a Technology License Agreement for the Manufacture of Denufosol. The purpose of the agreement is to facilitate the transfer of the current denufosol manufacturing technology, including intellectual property, to an additional manufacturer and thus enable a two-supplier strategy for denufosol. In consideration of the grant of rights under the agreement, in October 2009, the Company paid Yamasa three hundred million Japanese Yen, which was approximately $3,302 at the prevailing exchange rate. Additionally, the Company shall pay Yamasa (i) three hundred million Yen within thirty (30) days after the receipt of a process validation report by December 31, 2010 following the successful completion of three validation batches; and (ii) four hundred million Yen within thirty (30) days after both (a) the acceptance of a pre-approval inspection of denufosol at Yamasa by the FDA, and (b) the approval of a New Drug Application of a formulated denufosol drug product at Inspire by the FDA.

Delays in the manufacture or distribution of any product or manufacture of any product candidate could adversely impact the marketing of the Company’s products or the development of the Company’s product candidates. Furthermore, the Company has no control over the manufacturing or the overall product supply chain of Restasis and Elestat.

Significant Customers and Risk

The Company relies primarily on three pharmaceutical wholesalers to purchase and supply the majority of AzaSite at the retail level. These three pharmaceutical wholesalers accounted for greater than 85% of all AzaSite product sales in the three months ended March 31, 2010 and the year ended December 31, 2009, respectively, and account for 20% and 27% of the Company’s outstanding trade receivables as of March 31, 2010 and December 31, 2009, respectively. The loss of one or more of these wholesalers as a customer could negatively impact the commercialization of AzaSite. All co-promotion and royalty revenues recognized and recorded were from one collaborative partner, Allergan. The Company is entitled to receive co-promotion revenue from net sales of Elestat and royalty revenue from net sales of Restasis under the terms of its collaborative agreements with Allergan, and accordingly, all trade receivables for these two products are solely due from Allergan and account for 79% and 72% of the Company’s outstanding trade receivables as of March 31, 2010 and December 31, 2009, respectively. Due to the nature of these agreements, Allergan has significant influence over the commercial success of Restasis and Elestat.

Risk from Generic Competition

The Company’s revenues are subject to risk due to generic product entrants. The Elestat co-promotion agreement provides that unless earlier terminated, the term of such agreement will be in effect until the earlier of (i) the approval and launch of the first generic epinastine product after expiration of the FDA exclusivity period covering Elestat in the United States, or (ii) the approval and launch of the first over-the-counter epinastine product after expiration of the listing of Elestat in the FDA’s Orange Book. Following the termination of such co-promotion agreement, the Company will no longer have rights to co-promote Elestat. The Company will be entitled to receive post-termination payments from Allergan, based on any remaining net sales of Elestat for a period of 36 months. The Company has been notified that Boehringer Ingelheim and Allergan received notices from four companies, advising that each company filed an Abbreviated New Drug Application (“ANDA”) for a generic version of Elestat. The date of submission of the first ANDA filing to the FDA Office of Generic Drugs was October 14, 2008. The Company does not know when the FDA will complete its review of these ANDAs, but it expects that a generic form of epinastine could be launched in the second half of 2010.

Following the expiration of a use patent in August 2009, the manufacture and sale of Restasis is protected in the United States by a formulation patent that expires in May 2014. While a formulation patent may afford certain

13

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

limited protection, a competitor may attempt to gain FDA approval for a cyclosporine product using a different formulation. Furthermore, following the expiration of the formulation patent in 2014, a generic form of Restasis could be introduced into the market. If and when Restasis experiences competition from a cyclosporine product, including a generic cyclosporine product, the Company’s revenues attributable to Restasis may be significantly impacted.

3. Recent Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance for improving disclosures about fair value measurements. This guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. The new disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Since the new guidance only impacts financial statement disclosures, there will be no impact to the Company’s financial position or results of operations upon adoption.

In October 2009, the FASB issued authoritative guidance regarding revenue arrangements with multiple deliverables. The guidance requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The guidance further eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. The new guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently assessing the impact of adopting this new guidance.

4. Inventories

The Company’s inventories are related to AzaSite and are valued at the lower of cost or market using the first-in, first-out (i.e., FIFO) method. Cost includes materials, labor, overhead, shipping and handling costs. The Company’s inventories are subject to expiration dating and the Company has reserved for potential overstocking. The Company’s inventories consisted of the following:

	As of
	March 31, 2010		December 31, 2009
Finished Goods	$	824	$	808
Work-in-Process		183		96
Raw Materials		759		838
Total Inventories	$	1,766	$	1,742
Less Valuation Reserve		(25)		(25)
Total Inventories, net	$	1,741	$	1,717

14

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

5. Investments

The following is a summary of the Company’s marketable debt securities which are classified as available-for-sale as of March 31, 2010 and December 31, 2009:

	Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
As of March 31, 2010:
Corporate bonds and commercial paper	$	46,115	$	87	$	(6)	$	46,196
U.S. Treasury		5,987		4		-		5,991
U.S. Government agencies		18,617		12		(1)		18,628
Negotiated certificates of deposit		12,607		-		-		12,607
Total	$	83,326	$	103	$	(7)	$	83,422
As of December 31, 2009:
Corporate bonds and commercial paper	$	44,702	$	88	$	(12)	$	44,778
U.S. Treasury		5,981				(1)		5,980
U.S. Government agencies		12,664		-		(6)		12,658
Negotiated certificates of deposit		12,612		-		-		12,612
Total	$	75,959	$	88	$	(19)	$	76,028

The following table shows the gross unrealized losses and fair value of the Company’s investment in marketable debt securities with unrealized losses that are deemed to be temporarily impaired, aggregated by length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2010 and December 31, 2009:

	Less than 12 months
	Fair Value		Unrealized Loss
As of March 31, 2010:
Corporate bonds	$	9,422	$	(6)
U.S. Government agencies		8,488		(1)
Total	$	17,910	$	(7)
As of December 31, 2009:
Corporate bonds	$	20,586	$	(12)
U.S. Treasury		5,980		(1)
U.S. Government agencies		9,158		(6)
Total	$	35,724	$	(19)

The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold its investments until a recovery of fair value, which may be at maturity, the Company does not consider its investments to be other-than-temporarily impaired at March 31, 2010. The Company did not have any investments in marketable debt securities that have been in a continuous unrealized loss position for 12 months or greater as of March 31, 2010 and December 31,

15

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

2009. There were no realized gains or losses on the Company’s available-for-sale securities for the three months ended March 31, 2010 and the year ended December 31, 2009.

As of March 31, 2010 and December 31, 2009, the Company had available-for-sale marketable debt securities with maturities of one year or less of $64,660 and $54,367, respectively. As of March 31, 2010 and December 31, 2009, the Company had available-for-sale marketable debt securities with maturities after one year through five years of $18,763 and $21,661, respectively.

6. Restructuring

In March 2009, the Company announced that it had restructured its operations during the first quarter of 2009, eliminating preclinical and drug discovery activities and refocusing its resources on the development of existing later-stage clinical programs and commercially available products. In connection with the restructuring, the Company recorded restructuring charges of $1,931 and $2,014 for the three months ended March 31, 2009 and year ended December 31, 2009, respectively. The Company recorded its restructuring activities in accordance with FASB authoritative guidance regarding the accounting for the impairment and disposal of long-lived assets and the accounting for costs associated with exit or disposal activities.

For the year ended December 31, 2009, the Company incurred the following restructuring charges:

Ÿ Employee separation costs of $1,072 consisted of one-time termination benefits, primarily severance costs, associated with the reduction in the Company’s workforce.

Ÿ Asset impairments of $484 consisted of property and equipment, primarily lab equipment, that was used for discovery and preclinical research activities at the Company’s facility. The Company performed an impairment analysis and determined that the carrying value of the idle assets exceeded their fair value and recorded an impairment charge of $484. Fair value was based on internally established estimates and the selling prices of similar assets.

Ÿ Contract charges of $203 consisted of costs associated with contractual commitments and work performed subsequent to the restructuring related to programs the Company no longer supports as part of its planned ongoing research and development activities.

Ÿ Facility related charges of $255 consisted of estimated losses associated with leased lab space at the Company’s Durham, North Carolina headquarters that the Company no longer uses in its operations. The unoccupied leased space is approximately 14,000 square feet and the lease term is through January 2011. The Company used a discounted cash-flow analysis to calculate the amount of this liability. The probability-weighted discounted cash-flow analysis is based on management’s assumptions and estimates of its ongoing lease obligations, including contractual rental commitments, build-out commitments and building operating costs, estimates of income from subleases, and market conditions for similar rental properties in its geographic area. The estimated cash flows were discounted using a credit-adjusted risk free rate of approximately 15%.

The Company expects to incur approximately $45 of accretion expense over the term of the lease. As of March 31, 2010 and December 31, 2009, the liability associated with facilities was $90 and $115, respectively, and will be reduced as monthly rental payments are made through the lease term, which ends in January 2011.

As of December 31, 2009, the activities associated with the restructuring were substantially complete and the liabilities associated with employee separation costs and contractual commitments were fully paid.

16

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

7. Fair Value Measurements

The Company’s financial assets recorded at fair value on a recurring basis have been categorized based upon a fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Specifically, Level 1 fair values are defined as observable inputs such as quoted prices in active markets; Level 2 fair values are defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment; Level 3 fair values are defined as inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following fair value hierarchy tables present information about the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009:

	Total Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
As of March 31, 2010:
Cash equivalents	$	20,416	$	20,416	$	-
Investments - Available-for-sale securities:
U.S. Treasury		5,991		5,991		-
U.S. Government agencies		18,628		-		18,628
Corporate bonds and commercial paper		46,196		-		46,196
Negotiated certificates of deposit		12,607		-		12,607
Total	$	103,838	$	26,407	$	77,431
As of December 31, 2009:
Cash equivalents	$	41,052	$	36,053	$	4,999
Investments - Available-for-sale securities:
U.S. Treasury		5,980		5,980		-
U.S. Government agencies		12,658		-		12,658
Corporate bonds and commercial paper		44,778		-		44,778
Negotiated certificates of deposit		12,612		-		12,612
Total	$	117,080	$	42,033	$	75,047

Level 1 cash equivalents consist of investments concentrated in money market funds which are primarily invested in U.S. Treasury securities. Level 2 cash equivalents consist of investments in U.S. government agency securities.

The Company’s investment policy dictates that investments in money market instruments are limited to those that have a rating of at least A-1 and P-1 according to Standard & Poor’s and Moody’s Investor Services, respectively. Likewise, for investments made in corporate obligations, the Company’s investment policy requires ratings of at least A and A-2 according to Standard & Poor’s and Moody’s Investor Services. The Company does not have any direct investments in auction-rate securities or securities that are collateralized by assets that include mortgages or subprime debt.

17

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

Non-recurring fair value amounts for assets held-for-sale at March 31, 2010 and December 31, 2009 were $379 and $402, respectively and are considered Level 3. These assets reflect the lower of the carrying value or fair value less costs to sell. As a result of its restructuring activity, the Company assessed the fair value of assets, primarily property and equipment associated with idle lab facilities, on a non-recurring basis. For the three months ended March 31, 2009, the Company recorded an impairment of $484 to reflect the estimated fair value of the idle assets, based on internally established estimates and the selling prices of similar assets. In the fourth quarter of 2009, the Company began marketing and disposing of all its laboratory equipment. Fair value of this equipment was assessed by the third-party marketer and no additional impairment charges have been recorded.

8. Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB authoritative guidance regarding share-based payments. Total stock-based compensation was allocated as follows:

	Three Months Ended March 31,
	2010		2009
Research and development	$	302	$	319
Selling and marketing		494		435
General and administrative		3,997		444
Total stock-based compensation expense	$	4,793	$	1,198

Equity Compensation Plans

The Company has two stock-based compensation plans, the Amended and Restated 1995 Stock Plan (the “1995 Plan”) and the Amended and Restated 2005 Equity Compensation Plan (the “2005 Plan”), that allow for share-based payments to be granted to directors, officers, employees and consultants. The 1995 Plan allows for the granting of non-qualified stock options and restricted stock to directors, officers, employees and consultants. The 2005 Plan allows for the granting of both incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units to directors, officers, employees and consultants. At March 31, 2010, there were 782 and 105 shares available for grant as options or other forms of share-based payments under the 1995 Plan and 2005 Plan, respectively.

CEO Transition

In February 2010, the Company’s CEO, Dr. Christy Shaffer, resigned from the Company and Mr. Adrian Adams was hired as CEO. As part of this transition, Dr. Shaffer’s existing stock options with an exercise price equal to or less than $9.42 per share were amended to provide that the exercise period for such options was extended to the earlier of the applicable award’s expiration date or February 22, 2013. To the extent unvested, such options became fully vested and exercisable. All of Dr. Shaffer’s stock options with an exercise price greater than $9.42 per share were terminated on February 22, 2010. Additionally, Dr. Shaffer’s existing unvested restricted stock units became fully vested. Dr. Shaffer was also granted 100 stock options which vested immediately and a stock award for 100 shares of our common stock. The modification of the existing options and the granting of the new awards to Dr. Shaffer resulted in stock-based compensation expense of $2,230 during the three months ended March 31, 2010.

18

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

As part of his hiring, Mr. Adams was granted 350 stock options. On the date of grant, 25% of these options vested immediately and the remaining 75% will vest ratably over the 36 months following the first anniversary of the effective date of Mr. Adams’ employment. In addition, Mr. Adams was granted an award of 650 restricted stock units. On the date of grant, 25% of these restricted stock units became non-forfeitable or vested and the remaining 75% will become non-forfeitable ratably over the 36 months following the first anniversary of the effective date of his employment. The total value of these awards to Mr. Adams is $5,199, of which $1,300 was expensed during the three months ended March 31, 2010.

Basis for Fair Value Estimate of Share-Based Payments

Stock Options

The Company uses its own historical volatility to estimate its future volatility. Actual volatility, and future changes in estimated volatility, may differ substantially from the Company’s current estimates.

The Company utilizes the simplified method of calculating the expected life of options for grants made to its employees under the 1995 Plan and 2005 Plan in accordance with authoritative guidance due to the lack of adequate historical data with regard to exercise activity on options. For options granted to directors under the 1995 Plan or the 2005 Plan, the Company uses the contractual term of seven years as the expected life of options. The Company will continue with these assumptions in determining the expected life of options under the 1995 Plan and the 2005 Plan until such time that adequate historical data is available. The Company estimates the forfeiture rate based on its historical experience. These estimates will be revised in future periods if actual forfeitures differ from the estimate. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

The table below presents the weighted average expected life in years of options granted under the two plans as described above. The risk-free rate of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds with the expected term of the option granted. The fair value of share-based payments, granted during the period indicated, was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:

	Stock Options for Three Months Ended March 31,
	2010			2009
Risk-free interest rate		1.97	%		1.24	%
Dividend yield		0	%		0	%
Expected volatility		68	%		74	%
Expected life of options (years)		4.0			3.6
Weighted average fair value of grants	$	3.23		$	2.00

19

INSPIRE PHARMACEUTICALS, INC.

Notes to Condensed Financial Statements

(Unaudited)

(in thousands, except per share amounts)

The following table summarizes the stock option activity for the three months ended March 31, 2010:

	Number of Shares	Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2009	11,001	$	7.47	3.5	$	6,503
Granted	980		6.20
Exercised	(25)		5.60
Forfeited/cancelled/expired	(482)		12.45
Outstanding at March 31, 2010	11,474		7.16	3.5	$	10,910
Vested and exercisable at March 31, 2010	8,041	$	8.15	3.0	$	6,045
Expected to vest at March 31, 2010	11,197	$	7.21	3.5	$	10,520

Total intrinsic value of stock options exercised for the three months ended March 31, 2001 was $35. Cash received from stock option exercises for the three months ended March 31, 2010 was $38. Due to the Company’s net loss position, no windfall tax benefits have been realized during the three months ended March 31, 2010. As of March 31, 2010, approximately $7,486 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock Units and Stock Awards

The following table summarizes the restricted stock unit activity for the three months ended March 31, 2010:

	Number of Shares	Weighted Average Grant Date Fair Value (per share)
Nonvested Awards at December 31, 2009	70	$	4.16
Granted	675		6.08
Vested	(183)		5.52
Forfeited	-
Nonvested Awards at March 31, 2010	562		5.91

During the three months ended March 31, 2010, approximately, 183 restricted stock units with an aggregate fair value of $1,008 became vested. Total aggregate intrinsic value of restricted stock units outstanding at March 31, 2010 was $4,289. Restricted stock units outstanding at March 31, 2010 had a weighted-average remaining contractual life of 2.2 years. Total aggregate intrinsic value of restricted stock units outstanding and expected to vest at March 31, 2010 was $3,160. Restricted stock units outstanding and expected to vest at March 31, 2010 had a weighted-average remaining contractual life of 2.2 years.

Additionally, during the three months ended March 31, 2010, 100 stock awards were issued, fully vested upon grant, with an aggregate fair value of $627.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT

The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted within the United States, as well as projections for the future. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. We are subject to risks common to biopharmaceutical companies, including risks inherent in our research, development and commercialization efforts, clinical trials, uncertainty of regulatory actions and marketing approvals, reliance on collaborative partners, enforcement of patent and proprietary rights, the need for future capital, competition associated with products, potential competition associated with our product candidates and retention of key employees. In order for any of our product candidates to be commercialized, it will be necessary for us, or our collaborative partners, to conduct clinical trials, demonstrate efficacy and safety of the product candidate to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and adequate reimbursement from government and private insurers. We cannot provide assurance that we will generate significant revenues or achieve and sustain profitability in the future. In addition, we can provide no assurance that we will have sufficient funding to meet our future capital requirements. Statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations which are not historical facts are, or may constitute, forward-looking statements. Forward-looking statements involve known and unknown risks that could cause our actual results to differ materially from expected results. The most significant known risks are discussed in the section entitled “Risk Factors.” Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Our revenues are difficult to predict and depend on numerous factors. The effectiveness of our ability and the ability of third parties on which we rely to help us manufacture, distribute and market AzaSite; physician and patient acceptance of AzaSite; competitor response to AzaSite; as well as discounts, pricing and coverage on governmental and commercial formularies; are all factors, among others, that will impact the level of revenue recorded for AzaSite in subsequent periods. Through the year ended December 31, 2008, we actively promoted both Restasis and Elestat through our commercial organization. As of January 1, 2009, we are no longer responsible for the co-promotion of Restasis, but we continue to receive royalties on Allergan’s net sales of Restasis. Our co-promotion and royalty revenues are based upon Allergan’s revenue recognition policy and other accounting policies, over which we have limited or no control, and on the underlying terms of our co-promotion agreements. Our co-promotion and royalty revenues are impacted by the number of governmental and commercial formularies upon which Restasis and Elestat are listed, the discounts and pricing under such formularies, as well as the estimated and actual amount of rebates, all of which are managed by Allergan. Other factors that are difficult to predict and that impact our co-promotion and royalty revenues are the extent and effectiveness of Allergan’s sales and marketing efforts, our sales and marketing efforts, coverage and reimbursement under Medicare Part D and Medicaid programs, and the sales and marketing activities of competitors. Additionally, our ability to receive revenues on future sales of AzaSite, Restasis and Elestat are dependent upon the duration of market exclusivity and strength of patent protection. Revenues related to development activities are dependent upon the progress toward and the achievement of developmental milestones by us or our collaborative partners.

Our operating expenses are also difficult to predict and depend on several factors. Cost of sales related to AzaSite contain variable and fixed cost components. Research and development expenses, including expenses for development milestones, drug manufacturing, and clinical research activities, depend on the ongoing requirements of

21

our development programs, completion of business development transactions, availability of capital and direction from regulatory agencies, which are difficult to predict. In addition, we have incurred and expect to continue to incur significant selling and marketing expenses to commercialize our products. Management may be able to control the timing and level of research and development, selling and marketing and general and administrative expenses, but many of these expenditures will occur irrespective of our actions due to contractually committed activities and/or payments.

As a result of these factors, we believe that period to period comparisons are not necessarily meaningful and you should not rely on them as an indication of future performance. Due to all of the foregoing factors, it is possible that our operating results will be below the expectations of market analysts and investors. In such event, the prevailing market price of our common stock could be materially adversely affected.

22

OVERVIEW

We are a biopharmaceutical company focused on researching, developing and commercializing prescription pharmaceutical products for ophthalmic and pulmonary diseases. Our goal is to build and commercialize a sustainable portfolio of innovative new products based on our technical, scientific and commercial expertise. The most advanced compounds in our clinical pipeline are denufosol tetrasodium for cystic fibrosis and Prolacria for dry eye, both of which are in Phase 3 development, and AzaSite for blepharitis, which is in Phase 2 development. We receive revenue related to the promotion of AzaSite for bacterial conjunctivitis, co-promotion of Elestat for allergic conjunctivitis and royalties on Restasis for dry eye. Our portfolio of products and product candidates include:

PRODUCTS AND PRODUCT CANDIDATES	THERAPEUTIC AREA/ INDICATION	COLLABORATIVE PARTNER (1)	CURRENT STATUS IN THE UNITED STATES
Products
AzaSite	Bacterial conjunctivitis	InSite Vision	Promoting
Elestat	Allergic conjunctivitis	Allergan	Co-promoting
Restasis	Dry eye disease	Allergan	Receiving royalty
Product Candidates in Clinical Development
Denufosol tetrasodium	Cystic fibrosis	None	Phase 3
Prolacria (diquafosol tetrasodium)	Dry eye disease	Allergan; Santen Pharmaceutical ( 3)	Phase 3 (2)
AzaSite	Blepharitis	InSite Vision	Phase 2
INS115644, INS117548	Glaucoma	Wisconsin Alumni Research Foundation	Phase 1

(1) See “Collaborative Agreements” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2009 for a detailed description of our agreements with these collaborative partners

(2) In January 2010, we announced that our Phase 3 clinical trial (Trial 03-113) did not meet its primary or secondary endpoints. See “Product Candidates in Clinical Development – Prolacria (diquafosol tetrasodium)” for additional information on this product candidate.

(3) Our partner, Santen Pharmaceutical Co., Ltd has developed a different formulation of diquafosol tetrasodium, which it refers to Diquas^™ in Japan. In April 2010, Santen announced that the Japanese Ministry of Health, Labor, and Welfare (the Japanese equivalent of the FDA) granted approval for Diquas Ophthalmic Solution 3%.

We were incorporated as a Delaware corporation in October 1993 and commenced operations in March 1995. We are located in Durham, North Carolina, adjacent to the Research Triangle Park.

23

PRODUCTS

AzaSite

AzaSite (azithromycin ophthalmic solution) 1% is a topical anti-infective, in which azithromycin is formulated into an ophthalmic solution utilizing DuraSite^®, a novel ocular drug delivery system. Azithromycin is a semi-synthetic antibiotic that is derived from erythromycin and since 1992, has been available via oral administration by Pfizer Inc. under the trade name Zithromax^®. In April 2007, AzaSite was approved by the U.S. Food and Drug Administration, or FDA, for the treatment of bacterial conjunctivitis in adults and children one year of age and older.

In February 2007, we entered into a license agreement with InSite Vision Incorporated, or InSite Vision, pursuant to which we acquired exclusive rights to commercialize AzaSite for use in the treatment of human ocular or ophthalmic indications. The license agreement grants us exclusive rights to develop, make, use, market, commercialize and sell AzaSite in the United States and Canada. We are obligated to pay InSite Vision royalties on net sales of AzaSite in the United States and Canada.

In August 2007, we launched AzaSite in the United States and are promoting it to eye care specialists. The manufacture and sale of AzaSite is protected in the United States under use and formulation patents, the latest of which expires in March 2019. In addition, the sale of AzaSite is also protected in the United States under a use patent that we sub-licensed from Pfizer that expires in November 2018.

Elestat

Elestat (epinastine HCl ophthalmic solution) 0.05% is a topical antihistamine developed by Allergan, Inc., or Allergan, for the prevention of ocular itching associated with allergic conjunctivitis. Elestat was approved by the FDA in October 2003 and is indicated for adults and children at least three years old.

We receive co-promotion revenue from Allergan on its U.S. net sales of Elestat. When a generic form of Elestat or an over-the-counter form of epinastine ophthalmic solution is introduced into the market, our agreement with Allergan to co-promote Elestat will no longer be in effect, and our revenues from sales of Elestat will be minimal.

Subject to applicable law, competitors are permitted to submit to the FDA an Abbreviated New Drug Application, or ANDA, for a generic version of Elestat, due to the expiration of the marketing exclusivity period for Elestat provided under the Hatch-Waxman Act on October 15, 2008. Notices have been received from four companies: Apotex, Inc., Cypress Pharmaceutical, Inc., Paddock Laboratories, Inc., and Sandoz Inc., advising that each company filed an ANDA for a generic version of Elestat. The date of submission of the first ANDA filing to the FDA Office of Generic Drugs was October 14, 2008, according to the FDA’s website (www.fda.gov).

We plan to continue co-promoting and receiving co-promotion revenues on Elestat sales during the FDA’s review period of these ANDAs. According to an Office of Generic Drugs Update presentation made by Gary Buehler, Director, Office of Generic Drugs, on February 16, 2010, at the GPhA Annual Meeting, the ANDA median approval time for the fiscal period ending September 30, 2009 was approximately 26.7 months. We do not know when the FDA will complete its review of the ANDAs relating to a generic version of Elestat and we do not expect to be notified by any party prior to any approval. However, based upon our assessment, we believe it is likely that a generic form of epinastine may be launched in the second half of 2010. See the risk factor entitled - “When a generic form of Elestat or an over-the-counter form of epinastine ophthalmic solution is introduced into the market, our agreement with Allergan to co-promote Elestat will no longer be in effect, and our revenues from sales of Elestat will be minimal” - for further discussion of the risk related to the ANDA filings.

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Restasis

Restasis (cyclosporine ophthalmic emulsion) 0.05% is the first approved prescription product in the United States for the treatment of dry eye disease. It is indicated to increase tear production in adults and children at least 16 years old whose tear production is presumed to be suppressed due to ocular inflammation associated with keratoconjunctivitis sicca, or dry eye disease. Restasis was approved by the FDA in December 2002, and Allergan launched the product in the United States in April 2003.

In June 2001, we entered into an agreement with Allergan to develop and commercialize our product candidate, Prolacria (diquafosol tetrasodium), for the treatment of dry eye disease. The agreement also provides that Allergan pay us royalties on net sales of Restasis.

We expect to have discussions with Allergan with respect to several points of debate regarding our agreement, including the status of the Prolacria development program, our rights to Restasis royalties including co-promotion rights, and related rights and obligations of the parties under the agreement. If Inspire and Allergan can not agree to the direction of the Prolacria development program, or Restasis promotion and royalties, the parties may choose to amend the agreement or be forced to arbitrate any dispute in accordance with the terms of the agreement. See the risk factor entitled—“If we fail to reach milestones or to make annual minimum payments or otherwise breach our obligations under our license agreements, our licensors may terminate our agreements with them and seek additional remedies.”

Following the expiration of a use patent in August 2009, the manufacture and sale of Restasis is protected in the United States by a formulation patent that expires in May 2014.

For a more detailed discussion of the risks associated with these products, please see the Risk Factors located elsewhere in this report.

PRODUCT CANDIDATES IN CLINICAL DEVELOPMENT

Denufosol tetrasodium for the treatment of cystic fibrosis

Overview. We are developing denufosol tetrasodium as an inhaled product candidate for the treatment of cystic fibrosis. Denufosol tetrasodium is a first-in-class ion channel regulator that addresses the underlying ion transport defect in the lungs of patients with cystic fibrosis. Denufosol is designed to enhance airway hydration and mucociliary clearance through receptor-mediated mechanisms that increase chloride secretion, inhibit sodium absorption and increase ciliary beat frequency. These integrated pharmacological actions and the ability to reach the small airways are key to maintaining lung function, and potentially delaying the progression of cystic fibrosis lung disease. We believe that our product candidate could be the first FDA-approved product that mitigates the underlying defect in the airways of patients with cystic fibrosis. If approved, we expect denufosol to be an early intervention therapy for cystic fibrosis. This product candidate has been granted orphan drug status and fast-track review status by the FDA, and orphan drug status by the European Medicines Agency.

The manufacture and sale of denufosol tetrasodium is protected in the United States under patents that have claims to the drug substance, the formulation, and method of use that expire in February 2017, subject to any applicable patent restoration that may extend protection up to an additional five years from the date of expiration of the applicable patent, if any, for which restoration is sought.

Development Status

TIGER 1: Our first Phase 3 clinical trial, TIGER-1 (Trial 08-108), with denufosol tetrasodium inhalation solution for the treatment of cystic fibrosis was a 24-week, double-blind, placebo-controlled, randomized clinical trial comparing 60 mg of denufosol to placebo, administered three-times daily by jet nebulizer, in 352 patients with mild cystic fibrosis lung disease (FEV₁ (Forced Expiratory Volume in One Second) (in liters) > 75% predicted normal) at clinical centers across North America. This portion of the clinical trial was followed by a 24-week denufosol-only open-label extension, or OLE.

In June 2008, we announced top-line results from the 24-week placebo-controlled portion of the clinical trial. The clinical trial demonstrated statistical significance for its primary efficacy endpoint, which was the change in FEV₁ from baseline at the clinical trial endpoint (at 24 weeks or last observation carried forward). Patients treated with denufosol had a statistically significant improvement in FEV₁ compared to placebo (45 milliliter treatment group difference in adjusted means, p = 0.047). On average, patients on denufosol improved in FEV₁ relative to baseline whereas patients on placebo remained essentially unchanged. Secondary endpoints were also evaluated during the

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placebo-controlled portion of TIGER-1. There was a trend in differences in FEF 25%-75% (Forced Expiratory Flow 25%-75%), a measure of small airway function, favoring denufosol over placebo (87.5 milliliters/second treatment group difference, p = 0.072).

In October 2008, we presented new data at the North American Cystic Fibrosis Conference which indicate that patients who continued to receive denufosol for an additional 24 weeks during the OLE experienced a progressive improvement in FEV₁. Those patients who received denufosol for 48 weeks during TIGER-1 experienced a mean change from baseline in FEV₁ of 115 ml at the end of the OLE, almost a two-and-a-half fold increase compared to the initial 48 ml increase at the end of the 24-week placebo-controlled portion of the trial.

The patients who crossed over from placebo to denufosol at Week 24 also experienced improvements in FEV₁ when receiving denufosol during the OLE. In terms of observed means, these patients had a 78 ml increase from baseline, compared to a 16 ml increase at the end of the 24-week placebo-controlled portion of the trial. This differs from the 3 ml adjusted mean for placebo at the 24-week study endpoint which also accounted for discontinuations.

A total of 315/352 (89%) patients completed the 24-week placebo-controlled phase of TIGER-1 and had the option to participate in the OLE phase in which all patients received denufosol for an additional 24 weeks. All of the patients but one (n=314) entered the OLE extension. The objective of the OLE phase was to evaluate the long-term safety of denufosol treatment among cystic fibrosis patients with FEV₁ > 75% predicted normal. In the TIGER-1 trial, there was no evidence of adverse effects on growth, clinical laboratory values or vital sign assessments with long-term denufosol treatment. Denufosol was well-tolerated over 48 weeks of dosing in the TIGER-1 trial.

The retention rate during the OLE phase was approximately 96%, with 302 patients completing the full 48 weeks. Twelve patients withdrew during the OLE phase, with only four withdrawals related to Adverse Events, or AEs. In the OLE phase, the most commonly reported AEs, which included cough, condition aggravated and productive cough, were similar to those reported during the placebo-controlled phase. The incidence of Serious Adverse Events, or SAEs, in the OLE phase was under 20% and the majority of SAEs were pulmonary exacerbations.

In TIGER-1, there were two definitions of pulmonary exacerbations in the protocol. Based on the primary protocol definition of an exacerbation as a patient experiencing at least four out of 12 defined signs and symptoms regardless of treatment, the frequency of pulmonary exacerbations was 23% in both the placebo-controlled phase and the OLE phase. Based on the secondary protocol definition of an exacerbation as a patient requiring treatment with IV antibiotics for a respiratory sign or symptom, the frequency of pulmonary exacerbations was 8% in the placebo-controlled phase and 13% in the OLE phase.

TIGER 2: In February 2008, we initiated patient enrollment in TIGER-2 (Trial 08-110), our second planned pivotal Phase 3 clinical trial, and in July 2008, we announced modifications to the clinical protocol for this ongoing clinical trial. As modified, the TIGER-2 clinical trial is a 48-week, double-blind, placebo-controlled, randomized clinical trial comparing 60 mg of denufosol to placebo, administered three-times daily by jet nebulizer, in approximately 450 patients with FEV₁ greater than or equal to 75% and less than or equal to 110% of predicted normal. The primary efficacy endpoint is the change from baseline in FEV₁ (in liters) at the 48-week trial endpoint. Secondary endpoints include other lung function parameters, pulmonary exacerbations, requirements for concomitant cystic fibrosis medications and health related quality of life. Patients aged five years and older are eligible for enrollment. The use of standard cystic fibrosis maintenance therapies is permitted during the trial. Hypertonic saline is not permitted to be used by those patients enrolled in the clinical trial.

We have approximately 100 participating clinical trial sites across the United States, Canada, Australia and New Zealand and completed patient enrollment in November 2009. Top-line results from this clinical trial are expected in the first quarter of 2011.

Additionally, any patient who has successfully completed TIGER-2 may elect to participate in a follow-on, open-label denufosol-only trial (Trial 08-114) which will enable patients to continue receiving denufosol for up to 3 additional years. The original length of this extension study was 48 weeks, but this was extended to 3 years to assess

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the potential disease-modifying effects of extended denufosol treatment on lung function over time. To date, more than 80% of the patients who have completed TIGER-2 have elected to enroll in this long-term study.

Assuming the results of TIGER-2 are positive, that we subsequently file a New Drug Application, or NDA, for denufosol with the FDA and that the FDA approves such NDA, we are targeting a potential U.S. commercial launch for denufosol in the 2012 timeframe.

Other: In 2006, we completed a 52-week inhalation toxicology study in one animal species, and have submitted the final study report to the FDA. There were no signs of pulmonary or systemic toxicity at doses well above the Phase 3 clinical dose. In 2009, we completed the required two-year inhalation carcinogenicity study in rats and the final study report confirms that there was no evidence of a carcinogenic effect with denufosol.

Estimated subsequent costs necessary to submit an NDA for denufosol for the treatment of cystic fibrosis are projected to be in the range of $19 million to $25 million. This estimate includes completing TIGER-2 as well as conducting any additionally required toxicology studies and other ancillary studies, manufacturing denufosol for clinical trials, producing qualification lots consistent with current Good Manufacturing Practices, or cGMP, standards, salaries for development personnel, other unallocated development costs and regulatory preparation and filing costs. These costs do not include the costs of pre-launch inventory and any product approval milestones payable to Cystic Fibrosis Foundation Therapeutics, Inc. These costs are difficult to project and actual costs could be materially different from our estimate. For example, clinical trials and any other required studies may not proceed as planned, results from ongoing or future clinical trials may change our planned development program, additional Phase 3 clinical trials may be necessary and an anticipated NDA filing could be delayed.

In addition to the activities and costs necessary to submit an NDA for denufosol, we are initiating commercial planning and franchise development activities, including conducting market research, developing manufacturing plans, and expanding our clinical and scientific database on denufosol beyond the TIGER-1 and TIGER-2 pivotal trials. More specifically, these activities would include the extension study (Trial 08-114) discussed above, development of a secondary supplier of denufosol, evaluating options for a second generation delivery device and designing potential clinical trials to study a broader patient population, including patients less than 5 years old and/or patients with more impaired lung function (less than 75% predicted normal). We expect the costs of these activities to be significant and will include approximately $8 million in remaining milestone payments due under our technology license agreement with Yamasa Corporation.

We currently plan to retain commercial rights for denufosol for the treatment of cystic fibrosis in North America. We continue to assess the best strategy for developing and commercializing this product candidate outside of North America.

Prolacria (diquafosol tetrasodium) for the treatment of dry eye disease

Overview. Diquafosol tetrasodium is a dinucleotide which functions as an agonist at the P2Y ₂ receptor and is being developed for the treatment of dry eye disease. Prolacria, the proposed U.S. tradename for diquafosol tetrasodium ophthalmic solution 2%, is designed to stimulate the release of three components of natural tears – mucin, lipids and fluid. The manufacture and sale of Prolacria is protected in the United States under drug substance and formulation patents that expire in July 2016, as well as under use patents that expire in February 2017, subject to any applicable patent restoration that may extend protection up to an additional five years from the date of expiration of the applicable patent, if any, for which restoration is sought.

Under our agreement with Allergan, we are responsible for the development of Prolacria in the United States, and Allergan is responsible for the commercialization of Prolacria in the United States. If we receive FDA approval and Prolacria is launched, we expect to co-promote this product. Pursuant to this agreement, Allergan is responsible for obtaining regulatory approval and for commercializing diquafosol tetrasodium in Europe and elsewhere globally with the exception of Asia.

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Development Status. In June 2003, we filed an NDA with the FDA for Prolacria for the treatment of dry eye disease. We received approvable letters from the FDA in December 2003 and December 2005. In September 2008, we submitted a clinical protocol and request for Special Protocol Assessment to the FDA for a pivotal Phase 3 environmental trial with Prolacria. During 2009, we reached agreement with the FDA on the design of a Phase 3 clinical trial for Prolacria, and completed the trial.

In January 2010, we announced that this Phase 3 clinical trial (Trial 03-113) did not meet its primary endpoint (p = 0.526) or its secondary endpoint (p = 0.368). Given the complexity of this program and the large database of information we have, we are continuing to review the data to determine potential next steps for the program.

Due to the uncertainty of the future of this program, we are currently unable to reasonably project the future dates and costs associated with additional clinical trials or other work which would be necessary to amend our NDA submission for Prolacria and resubmit the application for commercial approval in the United States.

We expect to have discussions with Allergan with respect to several points of debate regarding the License, Development and Marketing Agreement, dated June 22, 2001, as amended, between Inspire and Allergan, including the status of the Prolacria development program, Inspire’s rights to Restasis royalties including co-promotion rights, and related rights and obligations of the parties under the agreement. If Inspire and Allergan can not agree to the direction of the Prolacria development program, or Restasis promotion and royalties, the parties may choose to amend the agreement or be forced to arbitrate any dispute in accordance with the terms of the agreement. See the risk factor entitled—“If we fail to reach milestones or to make annual minimum payments or otherwise breach our obligations under our license agreements, our licensors may terminate our agreements with them and seek additional remedies.”

Our partner, Santen Pharmaceutical Co., Ltd., or Santen, has developed a different formulation of diquafosol tetrasodium, which it refers to Diquas^™, in Japan. Our agreement with Santen allows Santen to develop diquafosol tetrasodium for the therapeutic treatment of ocular surface diseases, such as dry eye disease, in Japan and nine other Asian countries, and provides for certain milestone payments to be paid to us upon achievement of development milestones by Santen. In April 2010, Santen announced that the Japanese Ministry of Health, Labor, and Welfare (the Japanese equivalent of the FDA) granted approval for Diquas Ophthalmic Solution 3%.

AzaSite for the treatment of blepharitis

Overview. Blepharitis is an ocular disease characterized by inflammation of the lid margin that is common, complex, and has a multi-factorial etiology. Blepharitis coexists with other common ocular surface conditions and is often under-diagnosed and misdiagnosed in general clinical practice. Blepharitis can be subdivided into two categories: anterior and posterior blepharitis. Although they are distinct diseases, they can overlap. Anterior blepharitis is generally associated with the presence of bacteria, lid debris and/or sebaceous gland activity and is most often an acute disease. Posterior blepharitis is almost always associated with dysfunctional meibomian glands or altered meibomian gland secretions and is generally considered a chronic disease.

Our market research and input from eye care specialists suggests that blepharitis is an under-diagnosed and under-treated disease. Survey data published in The Ocular Surface and funded by Inspire indicated that 15% of adults reported having at least one of the three symptoms that clinicians associate with anterior blepharitis at least half of the time in the previous 12 months. Based on the overall U.S. adult population of 232 million, this implies potentially as many as 34 million adults might have suffered from some form of blepharitis over such time frame. Currently, there are no FDA-approved prescription pharmaceutical products indicated for the treatment of this disease. Patients currently manage the acute and often chronic effects of blepharitis with the use of warm compresses, lid hygiene, topical antibiotic ointments and, when exacerbated, with topical steroids or oral antibiotics.

Development Status. During 2008, we conducted a series of Phase 4 clinical trials with AzaSite evaluating the safety and efficacy of AzaSite in ocular conditions, such as blepharitis. In late 2008, we sought input from numerous medical experts and evaluated our Phase 4 data along with market research on the prevalence and awareness of the disease to evaluate AzaSite’s potential opportunity as it relates to the treatment of blepharitis. In addition, we had preliminary discussions with the FDA on potential regulatory pathways. Based on preliminary information gathered, we decided to pursue a Phase 2 program to study AzaSite for the treatment of blepharitis.

In May 2009, we initiated Phase 2 work which consisted of two randomized, vehicle-controlled clinical trials that enrolled approximately 600 patients with anterior blepharitis. Trial 044-101 included a two-week treatment period with a two-week follow-up period and Trial 044-102 included a four-week treatment period with a four-week follow-up period. Patients were randomized to AzaSite or the DuraSite vehicle and received one drop in each eye twice-a-day for

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the first two days, then one drop in each eye daily for the remainder of the treatment period. All patients in the trials performed lid hygiene using commercially available lid scrubs once daily for the duration of the trials.

In March 2010, we announced the results of these two trials. In the four-week trial, improvements for AzaSite compared to vehicle were achieved for a number of blepharitis signs and symptoms at various time points with p-values < 0.05, but statistical significance was not achieved for the primary endpoint of mean lid margin hyperemia. In the two-week trial, there were no statistically significant improvements for AzaSite compared to vehicle, including for the primary endpoint of clearing of lid debris. In both trials, the AzaSite treatment group and the vehicle treatment group showed statistically significant improvements relative to baseline for all measured signs and symptoms of blepharitis. Additionally, AzaSite was well-tolerated in both trials.

We will conduct additional clinical work to continue pursuing a potential indication for treatment of blepharitis. Our primary focus over the next three to six months will be towards refining clinical trail design for subsequent studies. We are targeting beginning further Phase 2 clinical trials in late 2010.

Given the limited data available and the early stage of development of this program, we are currently unable to reasonably project the future dates and costs associated with clinical trials or a prospective NDA filing for this program.

Glaucoma product candidates

Overview. In November 2004, we licensed technology for use in developing and commercializing new treatments for glaucoma from Wisconsin Alumni Research Foundation. In relation to this technology, we are evaluating new and existing compounds that are active in disrupting the acto-cytoskeleton of the trabecular meshwork as potential treatments for glaucoma. Our scientific hypothesis is that the mechanism of action may result in reduction of intraocular pressure, or IOP, by affecting the primary outflow pathway for aqueous humor.

Development Status. In the first quarter of 2007, we initiated a Phase 1 proof-of-concept placebo-controlled, dose-ranging clinical trial (Trial 032-101) for INS115644, the first compound in a series of compounds, in glaucoma patients to evaluate the safety and tolerability of INS115644, as well as changes in IOP. In September 2008, we initiated a Phase 1 proof-of-concept placebo-controlled, dose-ranging clinical trial (Trial 037-101) for a second compound, referred to as INS117548, to evaluate the safety, tolerability and IOP-lowering effects of INS117548 in approximately 80 subjects with early stage glaucoma or ocular hypertension.

In September 2009, we announced top-line results of these trials. In Trial 032-101 with INS115644, a Latrunculin B formulation, we observed dose-dependent IOP-lowering effects and the compound was well-tolerated. Trial 037-101 with INS117548, which is one of a series of Rho kinase molecules we have developed, showed mild IOP-lowering effects but had some dose-related tolerability issues, specifically with ocular discomfort such as burning and stinging. We are in the process of evaluating next steps for the overall glaucoma program, based on our clinical and preclinical data, expert opinions and resource availability.

Due to the uncertainty of the future of this program, and given the limited data available and the early stage of development of this program, we are currently unable to reasonably project the future dates and costs associated with clinical trials or a prospective NDA filing for either of these product candidates.

For a discussion of the risks associated with our development programs, please see the Risk Factors located elsewhere in this report.

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RESULTS OF OPERATIONS

Three Months Ended March 31, 2010 and 2009

Revenues

Total revenues were approximately $22.1 million for the three months ended March 31, 2010, as compared to approximately $14.3 million for the same period in 2009. The increase in 2010 revenue of approximately $7.8 million, or 54%, as compared to the same period in 2009, was due to the full recognition of all co-promotion revenue from net sales of Elestat and an increase in product revenue from net sales of AzaSite.

Product Sales, net

Product sales of AzaSite, net of rebates and discounts, for the three months ended March 31, 2010 were approximately $8.7 million, as compared to approximately $6.2 million for the same period in 2009. The increase in revenue for AzaSite of approximately $2.5 million, or 41%, for the three months ended March 31, 2010, as compared to the same period in 2009, was primarily due to increased patient and physician usage of AzaSite, evidenced by an increase of prescriptions year-over-year, as well as price increases for the product between the periods. Approximately $1.0 million of revenue from sales of AzaSite for the three months ended March 31, 2010 was associated with hospital usage of AzaSite as a substitute during a temporary supply shortage of erythromycin ophthalmic ointment (0.5%), as discussed below.

In September 2009, erythromycin ophthalmic ointment was placed on the FDA Drug Shortages website. Erythromycin ophthalmic ointment is a macrolide antibiotic routinely used in neonates for prophylaxis of ophthalmia neonatorum, a form of bacterial conjunctivitis that may be contracted by newborns during delivery. Due to this shortage, the Centers for Disease Control and Prevention (CDC) asked healthcare professionals to reserve erythromycin supplies for neonatal use and also recommended the use of AzaSite as an acceptable substitute for neonatal prophylaxis use when erythromycin was not available. The erythromycin supply shortage had contributed to our AzaSite sales since September 2009, but the shortage was resolved in the first quarter of 2010. Accordingly, future use of AzaSite for neonatal use is expected to be insignificant.

The increase in AzaSite revenues for the three months ended March 31, 2010, as compared the same period in 2009, was partially offset by an increase in gross-to-net sales deductions. Total sales deductions as a percentage of gross revenues increased approximately 7%. The increase was primarily attributable to an approximate 4% increase in rebates and discounts due to (1) an increase in the number of formularies that now list AzaSite and (2) the price concessions required to secure this coverage under Medicare and commercial managed care organizations. Additionally, we incurred an increase in IMA fee rates to wholesalers, as well as an increase in accrual rates for product returns and coupon redemptions allowances. Collectively, the impact of these rate increases as a percentage of gross revenues was approximately $858,000 in additional provisions in 2010.

Our reserves related to rebates and discounts for the three months ended March 31, 2010 were not impacted by the new U.S. healthcare reform legislation passed in March 2010 and those provisions of the legislation that became effective during the first quarter of 2010. We do not expect our 2010 AzaSite revenues to be significantly impacted by the new legislation.

For the three months ended March 31, 2010, based on prescription data from IMS Health, there were approximately 164,000 prescriptions written for AzaSite, excluding hospital usage, representing approximately 4% of all prescriptions in the single agent ocular anti-infective market, defined as both branded and generic single-entity ocular antibiotics. In comparison, approximately 118,000 prescriptions were written for AzaSite for the three months ended March 31, 2009, representing approximately 3% of all prescriptions in the single agent ocular anti-infective market. In addition, our market share in our target call audience of eye care specialists, mainly ophthalmologists and optometrists, was approximately 11% as of March 31, 2010, as compared to approximately 8% as of March 31, 2009. Since launch, actual units of AzaSite dispensed have been slightly higher than the number of prescriptions as reported

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by IMS Health due to the issuance of multiple unit prescriptions by some physicians. For the three months ended March 31, 2010, the single agent ocular anti-infective market, in terms of prescriptions, increased approximately 1% compared to the same period in the previous year.

Product Co-Promotion and Royalty

Total co-promotion and royalty revenue for the three months ended March 31, 2010 was approximately $13.4 million, as compared to approximately $8.1 million for the same period in 2009, representing an increase of approximately $5.3 million, or 64%. Total co-promotion and royalty revenue of $8.1 million for the three months ended March 31, 2009 was comprised solely of royalty revenue from net sales of Restasis.

Our royalty revenue from net sales of Restasis for the three months ended March 31, 2010 was approximately $9.8 million, as compared to approximately $8.1 million for the same period in 2009. The increase in royalty revenue for Restasis for the three months ended March 31, 2010, as compared to the same period in 2009, was primarily due to increased patient usage of Restasis and an increase in prescribers of Restasis, as evidenced by an increase in prescriptions year-over-year, as well as a price increase effective in January 2010. For the three months ended March 31, 2010, Allergan recorded approximately $133 million of revenue from net sales of Restasis, as compared to approximately $110 million for the same period in 2009.

Co-promotion revenue from net sales of Elestat for the three months ended March 31, 2010 was approximately $3.6 million, as compared to none for the same period in 2009. For the three months ended March 31, 2009, we deferred all $3.7 million of co-promotion revenue associated with net sales of Elestat as the minimum annual target level had not been achieved.

Under our agreement with Allergan related to our co-promotion of Elestat, prior to 2010, we were obligated to meet predetermined minimum calendar year net sales target levels, which increased annually through 2009. We were entitled to an escalating percentage of net sales of Elestat based upon predetermined calendar year net sales target levels. Prior to January 1, 2010, we recognized product co-promotion revenue associated with targeted net sales levels for Elestat achieved during that time period and deferred revenue in excess of the sales level achieved. Under the co-promotion agreement with Allergan, calendar year 2009 was the last year that our co-promotion revenues of Elestat were subject to annual minimum target levels. Accordingly, beginning January 1, 2010, all co-promotion revenue from net sales of Elestat is recognized in the same period in which the sales occur.

When comparing recognized co-promotion revenue of $3.6 million for the three months ended March 31, 2010 to the deferred revenue of $3.7 million for the same period in 2009, the slight decrease was the result of a decrease in the U.S. allergic conjunctivitis market, partially offset by an annual price increase that became effective in the first quarter of 2010.

Elestat is a seasonal product with product demand mirroring seasonal trends for topical allergic conjunctivitis products. Typically, demand is highest during the Spring months followed by moderate demand in the Summer and Fall months. The lowest demand is during the Winter months. Based upon national prescription data from IMS Health, for the three months ended March 31, 2010 and 2009, Elestat prescriptions, as a percentage of the total U.S. allergic conjunctivitis market, represented approximately 7% of the total U.S. allergic conjunctivitis market. Based upon monthly data from IMS Health, the total U.S. allergic conjunctivitis market, in terms of prescriptions as compared to the same period in the previous year, decreased approximately 3% for the three months ended March 31, 2010.

During the third quarter of 2009, ISTA Pharmaceuticals, Inc. received FDA approval for Bepreve^™ (bepotastine besilate ophthalmic solution) 1.5% as a twice-daily prescription eye drop treatment for ocular itching associated with allergic conjunctivitis, and began marketing this product in October 2009.

Subject to applicable law, competitors are permitted to submit to the FDA an ANDA for a generic version of Elestat, due to the expiration of the marketing exclusivity period for Elestat provided under the Hatch-Waxman Act on October 15, 2008. Notices have been received from four companies: Apotex, Inc., Cypress Pharmaceutical, Inc.,

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Paddock Laboratories, Inc., and Sandoz Inc., advising that each company filed an ANDA for a generic version of Elestat. The date of submission of the first filing to the FDA Office of Generic Drugs was October 14, 2008, according to the FDA’s website (www.fda.gov).

The Elestat co-promotion agreement provides that unless earlier terminated, the term of such agreement will be in effect until the earlier of (i) the approval and launch of the first generic epinastine product after expiration of the FDA exclusivity period covering Elestat in the United States, or (ii) the approval and launch of the first over-the-counter epinastine product after expiration of the listing of Elestat in the FDA’s Orange Book. Following the termination of such co-promotion agreement, we will no longer have rights to co-promote Elestat. We will be entitled to receive post-termination payments from Allergan, based on any remaining net sales of Elestat for a period of 36 months. During the three successive 12-month periods immediately following the termination of the agreement, Allergan will be obligated to pay to us 20%, 15% and 10%, respectively, on any net sales of Elestat in the United States. We expect any revenue from net sales of Elestat received during this 36-month post-termination period to be minimal. We plan to continue co-promoting and receiving co-promotion revenues on Elestat sales during the FDA’s review period of these ANDAs. We do not know when the FDA will complete its review but we expect that a generic form of epinastine could be launched in the second half of 2010. Loss of our co-promotion revenue from Elestat will significantly impact our results of operations and cash flows.

Our future revenue will depend on various factors including the effectiveness of our commercialization of AzaSite and continued commercial success and duration of commercial exclusivity of Restasis and Elestat. In addition to the foregoing, pricing, rebates, discounts and returns for all products; the effect of competing products; coverage and reimbursement under commercial or government plans; and seasonality of sales of Elestat will impact future revenues. If Allergan significantly under-estimates or over-estimates rebate amounts, there could be a material effect on our revenue. In addition to the continuing sales of AzaSite, Restasis and Elestat, our future revenue will also depend on our ability to enter into additional collaboration agreements, and to achieve milestones under existing or future collaboration agreements, as well as whether we obtain regulatory approvals for our product candidates.

Cost of Sales

Cost of sales related to the sales of AzaSite were approximately $3.0 million for the three months ended March 31, 2010, as compared to approximately $2.0 million for the same period in 2009. The increase in cost of sales of $1.0 million, or 54%, as compared to the same period in 2009, was primarily due to increased sales volume of AzaSite, which has resulted in increased royalties, as well as an increase in the royalty rate paid to InSite Vision. In July 2009, our royalty rate to InSite Vision on net sales of AzaSite increased from 20% to 25% in accordance with the terms of our licensing agreement, and will remain at 25% for the remaining term of the licensing agreement.

Cost of sales expense consists of variable and fixed cost components. Variable cost components include royalties to InSite Vision on net sales of AzaSite, the cost of AzaSite inventory sold, distribution, shipping and logistic service charges from our third-party logistics provider, and changes to our inventory reserve for overstocking or short-dated material. Fixed cost components are primarily the amortization of the $19.0 million approval milestone that we paid InSite Vision as part of our licensing agreement. This approval milestone is being amortized ratably on a straight-line basis through the term of the underlying patent coverage for AzaSite, which expires in March 2019.

Certain costs included in cost of sales are subject to annual increases for which we have limited control. We expect that cost of sales will increase in relation to, but not proportionately to, the increases in revenue from sales of AzaSite.

Research and Development Expenses

Research and development expenses were approximately $9.6 million for the three months ended March 31, 2010, as compared to approximately $12.3 million for the same period in 2009.

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The decrease in research and development expenses of approximately $2.7 million, or 22%, for the three months ended March 31, 2010, as compared to the same period in 2009, was primarily due the substantial completion of our Phase 3 trial activities associated with our product candidate, Prolacria, for the treatment of dry eye in the first quarter of 2010 and Phase 1 trial activities related to our glaucoma program in the third quarter of 2009. Additionally, we experienced cost savings due to our elimination of preclinical and drug discovery activities as a result of the restructuring that occurring in the first quarter of 2009. These decreases in expenses were partially offset by increased costs associated with our cystic fibrosis development program, including pre-launch development activities with Novasep associated with developing a secondary commercial supplier of denufosol.

Research and development expenses include all direct and indirect costs, including salaries for our research and development personnel, consulting fees, clinical trial costs, including the development and manufacture of drug product for clinical trials, sponsored research costs, clinical trial insurance, upfront license fees, milestone and royalty payments relating to research and development, and other fees and costs related to the development of product candidates. Research and development expenses vary according to the number of programs in clinical development and the stage of development of our clinical programs. Later stage clinical programs tend to cost more than earlier stage programs due to the length of the clinical trials and the number of patients enrolled in later stage clinical trials.

Our future research and development expenses will depend on the results and magnitude or scope of our clinical activities and requirements imposed by regulatory agencies. Year over year spending on active development programs can vary due to the differing levels and stages of development activity, the timing of certain expenses and other factors. Accordingly, our research and development expenses may fluctuate significantly from period to period. In addition, if we in-license or out-license rights to product candidates, our research and development expenses may fluctuate significantly from prior periods.

Our research and development expenses for the three months ended March 31, 2010 and 2009, and from the respective project’s inception are shown below and includes the percentage of overall research and development expenditures for the periods listed.

	(In thousands)
	Three Months Ended March 31,						Cumulative from Inception to March 31, 2010
	2010		%	2009		%			%
Denufosol tetrasodium for cystic fibrosis	$	7,241	75	$	6,780	55	$	101,611	27
AzaSite		795	8		252	2		19,325	5
AzaSite for blepharitis		641	7		884	7		7,021	2
Prolacria (diquafosol tetrasodium) for dry eye disease		548	6		1,973	16		58,120	16
INS115644 and INS117548 for glaucoma and related research and development		43	1		756	6		16,490	4
Other research, preclinical and development costs (1)		325	3		1,622	14		171,001	46
Total	$	9,593	100	$	12,267	100	$	373,568	100

(1) Prior to February 2009, other research, preclinical and development costs represent all unallocated research and development costs or those costs allocated to preclinical programs as well as costs of discontinued and/or inactive programs. These unallocated costs included personnel costs of our research, preclinical programs, internal and external general research costs and other internal and external costs of other research, preclinical and development programs. In February 2009, we restructured our operations eliminating our preclinical and molecule discovery activities.

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Selling and Marketing Expenses

Selling and marketing expenses were approximately $13.7 million for the three months ended March 31, 2010, as compared to approximately $13.0 million for the same period in 2009.

The slight increase in selling and marketing expenses of approximately $674,000, or 5%, for the three months ended March 31, 2010, as compared to the same period in 2008, was primarily due to a general increase in personnel related expenses as well as the timing of certain marketing activities.

Our commercial organization currently focuses its promotional efforts on approximately 9,000 eye care specialists. Our selling and marketing expenses include all direct costs associated with the commercial organization, which include our sales force and marketing programs. Our sales force expenses include salaries, training and educational program costs, product sample costs, fleet management and travel. Our marketing and promotion expenses include product management, promotion, advertising, public relations, Phase 4 clinical trial costs, physician training and continuing medical education and administrative expenses. We adjust the timing, magnitude and targeting of our advertising, promotional, Phase 4 clinical trials and other commercial activities for our products based on seasonal trends and other factors, and accordingly, these costs can fluctuate from period to period.

Future selling and marketing expenses will depend on the level of our future commercialization activities. We expect selling and marketing expenses will increase in periods that immediately precede and follow product launches. In addition, if we in-license or out-license rights to products, our selling and marketing expenses may fluctuate significantly from prior periods.

General and Administrative Expenses

General and administrative costs were approximately $10.2 million for the three months ended March 31, 2010, as compared to approximately $3.8 million for the same period in 2009.

The increase in general and administrative expenses of approximately $6.4 million, or 168%, for the three months ended March 31, 2010, as compared to the same period in 2008, was primarily due an increase in personnel related expenses associated with our Chief Executive Officer (CEO) transition of approximately $5.0 million. The majority of expenses associated with the CEO transition were non-cash stock based compensation costs of approximately $3.5 million. Additionally, we incurred one-time fees associated with the recruitment of our new CEO.

Our general and administrative expenses consist primarily of personnel, facility and related costs for general corporate functions, including business development, finance, accounting, legal, human resources, quality/compliance, facilities and information systems.

Future general and administrative expenses will depend on the level and extent of support required to conduct our future research and development, commercialization, business development, and corporate activities.

Restructuring

In March 2009, we announced that we had restructured our operations, eliminating preclinical and drug discovery activities and refocusing our resources on the development of existing later-stage clinical programs and commercially available products. Significant components of the restructuring charge were one-time termination benefits for employees impacted by the restructuring, estimated costs to write-down idle lab equipment to net realizable value, losses associated with leased lab space that is now vacant, and costs to satisfy contract commitments related to activities and programs no longer associated with our supported programs and on-going operations. In connection with the restructuring, we recorded restructuring charges of approximately $1.9 million for the three months ended March 31, 2009 and a total of approximately $2.0 million for the full year ended December 31, 2009. As of December 31, 2009, all activities associated with the restructuring were substantially completed. There were no restructuring charges for the three months ended March 31, 2010.

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Other Income/(Expense)

For the three months ended March 31, 2010, we incurred other expense, net of approximately $317,000, as compared to approximately $739,000 in other expense, net for the same period in 2009.

The decrease in other expense, net of approximately $422,000 for the three months ended March 31, 2010, as compared to the same period in 2009, was due to a decrease in interest expense. The decrease in interest expense is the result of a lower average outstanding principal balance of our term loan facility during the three months ended March 31, 2010, as compared to the same period in 2009.

Other income/(expense) fluctuates from year to year depending on the level of interest income earned on variable cash and investment balances, realized gains and losses on investments due to changes in fair market value and interest expense on debt and capital lease obligations. Future other income/(expense) will depend on our future cash and investment balances, the return and change in fair market value on these investments, as well as levels of debt and the associated interest rates.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through the sale of equity securities, including private sales of preferred stock and public offerings of common stock and, to a lesser extent, through our term loan facility. We also currently receive co-promotion revenue from net sales of Elestat, royalty revenue from net sales of Restasis, and product revenue from net sales of AzaSite. We do not expect our revenue to exceed our operating expenses in 2010.

As of March 31, 2010, we had net working capital of approximately $71.8 million, a decrease of approximately $13.6 million from approximately $85.4 million at December 31, 2009. The decrease in working capital was principally due to the funding of normal operating expenses associated with commercialization activities and the development of our product candidates, as well as principal and interest payments on our term loan facility. Our principal sources of liquidity at March 31, 2010 were approximately $30.9 million in cash and cash equivalents, approximately $83.4 million in investments, which are considered available-for-sale, and approximately $16.8 million in trade receivables.

In August 2009, we completed a public offering of 25,555,555 shares of our common stock at a price of $4.50 per share, which included an additional 3,333,332 shares underwriter over-allotment option, for gross proceeds of $115 million. Net proceeds were $109 million, after deducting underwriting discounts and offering expenses.

In December 2006, we entered into a loan and security agreement in order to obtain debt financing of up to $40.0 million to fund in-licensing opportunities and related development. In June 2007, we amended the loan and security agreement to enable us to draw upon a new supplemental term loan facility in the amount of $20.0 million. We have borrowed the full $60.0 million under the term loan facility of which $20.3 million remained outstanding as of March 31, 2010. We make scheduled principal and interest payments on a monthly basis and all loan advances made under the agreement have a final maturity date in March 2011. Additionally, we are subject to a final payment of $1.2 million, equal to 2% of the principal amount being repaid.

In March 2009, we announced that we had restructured our operations during the first quarter of 2009, eliminating preclinical and drug discovery activities and refocusing our resources on the development of existing later-stage clinical programs and commercially available products. As a result of this restructuring, we expect to reduce future cash expenditures by approximately $6 million, annually.

Our working capital requirements may fluctuate in future periods depending on many factors, including: the number, magnitude, scope and timing of our development programs; the commercial potential and success of our products; the potential loss of commercial exclusivity of any of our products; the loss of revenue from our products due to competition or loss of market share; the level of ongoing costs related to the commercialization of AzaSite and

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Elestat; the costs related to the potential FDA approval of our other product candidates; the cost, timing and outcome of regulatory reviews, regulatory investigations, and changes in regulatory requirements; the costs of obtaining patent protection for our product candidates; the timing and terms of business development activities; the rate of technological advances relevant to our operations; the timing, method and cost of the commercialization of our product candidates; the efficiency of manufacturing processes developed on our behalf by third parties; the level of required administrative support for our daily operations; the availability of capital to support product candidate development programs we pursue; and the commercial potential of our product candidates.

2010 Financial Guidance

Based upon current trends and assumptions, we expect to record 2010 aggregate revenue in the range of $100-$111 million. Co-promotion revenue from net sales of Elestat will be dependent upon the timing of a launch of a generic form of epinastine which we expect may occur in the second half of 2010. Total 2010 operating expenses are expected to be in the range of $145-$169 million based on our planned activities. Cost of sales, which includes the amortization of the AzaSite approval milestone and royalty obligations to InSite Vision, is expected to be in the range of $13-$18 million. Total estimated selling and marketing and general and administrative expenses are estimated to be in the range of $48-$53 million and $27-$32 million, respectively. Research and development expenses are estimated to be in the range of $60-$70 million. Included within this operating expense guidance are projected stock-based compensation costs of approximately $8-$12 million. Due to expense associated with our CEO transition, primarily stock-based compensation expense, we expect the first quarter 2010 general and administrative expenses to be the largest as compared to the remaining quarters of 2010. In addition, a significant portion of our promotional activities usually occur during the first quarter of each year. As a result, we expect that the first quarter commercial expenses will be the largest of 2010.

Our ability to remain within our operating expense target range is subject to multiple factors, including unanticipated cost overruns, the need to expand or reduce the magnitude or scope of existing development programs, the need to change the number or timing of clinical trials, unanticipated regulatory requirements, unanticipated costs to successfully commercialize our products and product candidates, the commercial success of our current products and other factors described under the Risk Factors located elsewhere in this report.

Operating cash utilization in 2010 is expected to be in the range of $58-$73 million, which incorporates $20 million of principal repayment on our outstanding debt. Our need for additional working capital will largely be determined by the commercial success of our products and the successful and timely completion of our development programs. In order for us to continue operations substantially beyond 2010 we will need to: (1) successfully increase revenues, (2) obtain additional product candidate approvals, (3) out-license rights to certain of our product candidates, (4) raise additional capital through equity or debt financings or from other sources, (5) reduce spending on one or more research and development programs and/or (6) further restructure our operations. Additionally, after deducting the $115 million of common stock sold in August 2009, we retain the ability to offer for sale $15 million of securities, including common stock, preferred stock, debt securities, depositary shares and securities warrants from an effective shelf registration statement which we filed with the SEC on March 9, 2007. The loan and security agreement that we entered into in December 2006, as amended in June 2007, contains a financial covenant that requires us to maintain certain levels of liquidity based on our cash, investment and account receivables balances, as well as negative covenants that may limit us from assuming additional indebtedness and entering into other transactions as defined in the agreement. The agreement also includes a subjective acceleration clause which provides our lenders with the ability to accelerate repayment, even if we are in compliance with all conditions of the agreement, upon a material adverse change to our business, properties, assets, financial condition or results of operations. At March 31, 2010, we were in compliance with all of the covenants under our loan and security agreement and project that we will be throughout 2010.

Off Balance Sheet Arrangements

As of March 31, 2010, we were not a party to any off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements and the related disclosures, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, judgments and the policies underlying these estimates on a periodic basis, as situations change and regularly discuss financial events, policies, and issues with members of our audit committee and our independent registered public accounting firm. In addition, recognition of revenue from product co-promotion and earned royalties is affected by certain estimates and judgments made by Allergan on which we rely when recording this revenue. We routinely evaluate our estimates and policies regarding revenue recognition, product returns, rebates and incentives, inventory and manufacturing, taxes, stock-based compensation, research and development, marketing and other expenses and any associated liabilities.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates and judgments about matters that are inherently uncertain.

Revenue Recognition

We record all of our revenue from: (1) sales of AzaSite; (2) product co-promotion activities and earned royalties; and (3) collaborative research agreements when realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the seller’s price to the buyer is fixed or determinable; and 4) collectibility is reasonably assured.

Product Revenues

We recognize revenue for sales of AzaSite when title and substantially all the risks and rewards of ownership have transferred to the customer, which generally occurs on the date of shipment. In the United States, we sell AzaSite to wholesalers and distributors, who, in turn, sell to pharmacies and federal, state and commercial health care organizations.

Sales deductions consist of statutory rebates to state Medicaid, Medicare and other government agencies, contractual rebates with commercial managed care organizations, wholesaler chargebacks, sales discounts (including trade discounts and distribution service fees), allowances for coupon and voucher programs and product returns. These deductions are recorded as reductions to revenue from AzaSite in the same period as the related sales with estimates of future utilization derived from historical experience adjusted to reflect known changes in the factors that impact such reserves.

We utilize data from external sources to help us estimate our gross-to-net sales adjustments as they relate to the recognition of revenue for AzaSite sold. External sourced data includes, but is not limited to, information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers, targeted surveys as well as data from IMS Health, a third-party supplier of market research data to the pharmaceutical industry. We also utilize this data to help estimate and identify prescription trends and patient demand, as well as product levels in the supply chain.

We account for these sales deductions in accordance with the Financial Accounting Standards Board, or FASB, authoritative guidance on revenue recognition when consideration is given by a vendor to a customer as well as when the right of return exists.

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We have categorized and described more fully, the following significant sales deductions, all of which involve estimates and judgments which we consider to be critical accounting estimates, and require us to use information from external sources.

Rebates and Chargebacks

Statutory rebates to state Medicaid agencies and Medicare and contractual rebates to commercial managed care organizations are based on statutory or negotiated discounts to the selling price. As it can take up to nine months or more for information to be received on actual usage of AzaSite in managed care and Medicaid and other governmental programs as well as on the total discounts to be reimbursed, we maintain reserves for amounts payable under these programs relating to AzaSite sales.

Chargebacks claimed by wholesalers are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs.

The amount of the reserve for rebates and chargebacks is based on multiple qualitative and quantitative factors, including the historical and projected utilization levels, historical payment experience, changes in statutory laws and interpretations as well as contractual terms, product pricing (both normal selling prices and statutory or negotiated prices), changes in prescription demand patterns and utilization of our product through private or public benefit plans, and the levels of AzaSite inventory in both the wholesale and retail distribution channel. Other factors that we may consider, if determined relevant would include price changes from competitors and introductions of generics and/or competitive new products. We acquire prescription utilization data from IMS Health, a third-party supplier of market research data to the pharmaceutical industry. We apply these multiple factors, the quantitative historical data along with other qualitative aspects, such as management’s judgment regarding future utilization trends, to the respective period’s sales of AzaSite to determine the rebate accrual and related expense. We update our estimates and assumptions each period and record any necessary adjustments to our reserves. Settlements of rebates and chargebacks typically occur within nine months from point of sale. To the extent actual rebates and chargebacks differ from our estimates, additional reserves may be required or reserves may need to be reversed, either of which would impact current period product revenue. As of March 31, 2010 and December 31, 2009, reserves for rebates and chargebacks were $4.6 million and $3.5 million, respectively.

Discounts and Other Sales Incentives

Discounts and other sales incentives consist of the following:

Ÿ Prompt pay discounts —Prompt payment discounts are offered to all wholesalers in return for payment within 30 days following the invoice date. We record sales of AzaSite net of the discount amount based on historical experience. We adjust the reserve at the end of each reporting period to approximate the percentage discount applicable to the outstanding gross accounts receivable balances.

Ÿ Inventory Management Agreement (“IMA”) Fees —Per contractual agreements with our largest wholesalers, we provide an IMA fee based on a percentage of their purchases of AzaSite. The IMA fee rates are set forth in the individual contracts. We track sales to these wholesalers each period and accrue a liability relating to the unpaid portion of these fees by applying the contractual rates to such sales.

Ÿ Product coupons and vouchers —Product coupons and vouchers, made available by us online or through pharmacies and prescribing physicians, offer patients the ability to receive free or discounted product. We use a third-party administrator to coordinate program activities and who invoices us on a periodic basis for the cost of coupons and vouchers redeemed in the period. We base our estimates on the historical coupon and voucher redemption rate of similar programs.

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As of March 31, 2010 and December 31, 2009, reserves for discounts and other sales incentives were $731,000 and $889,000, respectively.

Product Returns

At the time of sale of AzaSite, we record product returns allowances based on our estimate of the portion of sales that will be returned by our customers in the future. The return allowances are established in accordance with our return policy. Our return goods policy generally allows for returns of AzaSite within an 18-month period, from six months prior to the expiration date and up to 12 months following the expiration date, but may differ from customer to customer, depending on certain factors. Future estimated returns of AzaSite are based primarily on the return data for comparative products and our own historical experience with AzaSite. Historical returns data on AzaSite is analyzed on a specific production lot basis. In determining our return allowance we also consider other relevant factors, including:

Ÿ Levels of inventory in the distribution channel and any significant changes to these levels

Ÿ Estimated expiration date or remaining shelf life of inventory in the distribution channel

Ÿ Current and projected demand of AzaSite that could be impacted by introductions of generic products and/or introductions of competitive new products; and

Ÿ Competitive product shortages, recalls and/or discontinuances

Our estimates of the level of AzaSite inventory in the distribution channel is based on inventory data provided by wholesalers and third-party prescription data. As of March 31, 2010 and December 31, 2009, reserves for returns of AzaSite were $1.6 million and $1.5 million, respectively.

Product Co-promotion and Royalty Revenues

We recognize co-promotion revenue based on net sales of Elestat and royalty revenue based on net sales of Restasis, as defined in the co-promotion agreements, and as reported to us by Allergan. Through the year ended December 31, 2008, we actively promoted both Restasis and Elestat through our commercial organization. As of January 1, 2009, we are no longer responsible for the co-promotion of Restasis, but we continue to receive royalties on Allergan’s net sales of Restasis. Our co-promotion and royalty revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control and on the underlying terms of our co-promotion agreements. Allergan recognizes revenue from product sales when goods are shipped and title and risk of loss transfers to the customer. The co-promotion agreements provide for gross sales to be reduced by estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs as defined in the agreements, all of which are determined by Allergan and are outside our control. We record a percentage of Allergan’s reported net sales to us for Elestat and Restasis, as co-promotion revenue and royalty revenue, respectively. We receive monthly net sales information from Allergan and perform analytical reviews and trend analyses using prescription information that we receive from IMS Health. In addition, we exercise our audit rights under the contractual agreements with Allergan to annually perform an examination of Allergan’s sales records of both Restasis and Elestat. We make no adjustments to the amounts reported to us by Allergan other than reductions in net sales to reflect the incentive programs managed by us. We offer and manage certain incentive programs associated with Elestat, which are utilized by us in addition to those programs managed by Allergan. We reduce co-promotion revenue from net sales of Elestat by estimating the portion of sales that are subject to these incentive programs based on information reported to us by our third-party administrator of the incentive programs. The rebates associated with the programs we manage represent an insignificant amount, as compared to the rebate and discount programs administered by Allergan and as compared to our aggregate co-promotion and royalty revenue. Prior to January 1, 2010, under the co-promotion agreement for Elestat, we were obligated to meet predetermined minimum calendar year net sales target levels. If the annual minimum was not achieved, we recorded revenues using a reduced percentage of net sales based upon our level of achievement of the predetermined calendar year net sales target levels. Amounts receivable from Allergan in excess of recorded co-promotion revenue were recorded as deferred revenue. Calendar

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year 2009 was the last year in which there was a minimum annual net sales target level for Elestat under the co-promotion agreement. Accordingly, effective January 1, 2010, all co-promotion revenue from net sales of Elestat is recognized in the same period in which the sales occur.

Collaborative Research and Development Revenues

We recognize revenue under our collaborative research and development agreements when we have performed services under such agreements or when we or our collaborative partner have met a contractual milestone triggering a payment to us. We recognize revenue from our research and development service agreements ratably over the estimated service period as related research and development costs are incurred and the services are substantially performed. Upfront non-refundable fees and milestone payments received at the initiation of collaborative agreements for which we have an ongoing research and development commitment are deferred and recognized ratably over the period in which the services are substantially performed. This period, if not defined in the collaborative agreement, is based on estimates by management and the progress towards agreed upon development events as set forth in our collaborative agreements. These estimates are subject to revision as our development efforts progress and we gain knowledge regarding required additional development. Revisions in the commitment period are made in the period that the facts related to the change first become known. If the estimated service period is subsequently modified, the period over which the upfront fee or revenue related to ongoing research and development services is modified on a prospective basis. We are also entitled to receive milestone payments under our collaborative research and development agreements based upon the achievement of agreed upon development events that are substantively at-risk by our collaborative partners or us. This collaborative research and development revenue is recognized upon the achievement and acknowledgement of our collaborative partner of a development event, which is generally at the date payment is received from the collaborative partner or is reasonably assured. Accordingly, our revenue recognized under our collaborative research and development agreements may fluctuate significantly from period to period. No collaborative research and development revenue was recognized for the three months ended March 31, 2010 and 2009.

Inventories

Our inventories are related to AzaSite and are valued at the lower of cost or market using the first-in, first-out (i.e., FIFO) method. Cost includes materials, labor, overhead, shipping and handling costs. Our inventories are subject to expiration dating. We regularly evaluate the carrying value of our inventories and provide valuation reserves for any estimated obsolete, short-dated or unmarketable inventories. Our determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. We base our analysis, in part, on the level of inventories on hand in relation to our estimated forecast of product demand, production requirements for forecasted product demand, expected market conditions and the expiration dates or remaining shelf life of inventories. As of both March 31, 2010 and December 31, 2009, we had net reserves of $25,000 for potential overstocking.

Taxes

We account for uncertain tax positions in accordance with FASB authoritative guidance regarding the accounting for taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a valuation allowance against all potential tax assets due to uncertainties in our ability to utilize deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable.

Liabilities

We generally enter into contractual agreements with third-party vendors to provide research and development, manufacturing, and other services in the ordinary course of business. Many of these contracts are subject to milestone-based invoicing and services are completed over an extended period of time. We record liabilities under these

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contractual commitments when we determine an obligation has been incurred, regardless of the timing of the invoice. We monitor all significant research and development, manufacturing, sales and marketing and other service activities and the progression of work related to these activities. We estimate the underlying obligation for each activity based upon our estimate of the amount of work performed and compare the estimated obligation against the amount that has been invoiced. Because of the nature of certain contracts and related delay in the contract’s invoicing, the obligation to these vendors may be based upon management’s estimate of the underlying obligation. We record the larger of our estimated obligation or invoiced amounts for completed service. In all cases, actual results may differ from our estimate.

Stock-Based Compensation Expense

We recognize stock-based compensation expense in accordance with FASB authoritative guidance regarding the accounting for share-based payments, which requires us to measure compensation cost for share-based payment awards at fair value and recognize compensation expense over the service period for awards expected to vest. We utilize the Black-Scholes option-pricing model to value our awards and recognize compensation expense on a straight-line basis over the vesting periods of our awards. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Our expected volatility is determined based on our own historical volatility. The estimation of share-based payment awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Significant management judgment is also required in determining estimates of future stock price volatility, forfeitures and expected life to be used in the valuation of the options. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Impact of Inflation

We do not believe that our operating results have been materially impacted by inflation during the past three years. However, we cannot assure that our operating results will not be adversely affected by inflation in the future. We will continually seek to mitigate the adverse effects of inflation on the costs of goods and services that we use through improved operating efficiencies and cost containment and periodic price increases for our product.

Impact of Recently Issued Accounting Pronouncements

In January 2010, the FASB issued authoritative guidance for improving disclosures about fair value measurements. This guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. The new disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Since the new guidance only impacts financial statement disclosures, there will be no impact to our financial position or results of operations upon adoption.

In October 2009, the FASB issued authoritative guidance regarding revenue arrangements with multiple deliverables. The guidance requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The guidance further eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. The new guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently assessing the impact of adopting this new guidance.

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Healthcare Reform

In March 2010, Congress passed significant health reform legislation, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “PPACA”). The legislation is designed to expand access to affordable health insurance through subsidies, Medicaid expansion, insurance market reforms (including the development of new health benefit exchanges), financed in part through reduced federal health care spending. Among many other things, the PPACA makes a number of significant changes affecting pharmaceutical manufacturers.

Although many provisions of the PPACA do not take effect immediately, several provisions became effective in the first quarter of 2010. For instance, the PPACA provides for increases to the minimum Medicaid rebate percentages from 15.1% to 23.1%, increased “additional rebates” for new formulations of brand name drugs, the establishment of a maximum rebate amount, and the extension of Medicaid rebates to Medicaid managed care organization utilization. In addition, the PPACA broadens the definition of “average manufacturer price,” which in turn may have the effect of increasing Medicaid rebate and Public Health Service section 340B drug discount program payment obligations.

Beginning in 2011, the PPACA requires that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap. Also, beginning in 2011, we will be assessed our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and VA and PHS discount programs) made during the previous year.

Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated. For example, the determinations as to how the Medicare Part D coverage gap will operate and how the annual fee on branded prescription drugs will be calculated and allocated remain to be clarified, though, as noted above, these programs will not be effective until 2011. We do not expect the provisions that became effective in the first quarter of 2010 to have a significant financial impact on 2010 revenues from AzaSite sales. However, we are unable to adequately assess the impact of programs that become effective beginning in 2011 due to the lack of availability of specific information and a complete understanding of how the process of applying the legislation will be implemented.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to interest rate risk on our investment portfolio and borrowings under our term loan facility.

We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy are to preserve capital, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our investment portfolio may consist of a variety of securities, including U.S. government and agency obligations, money market and mutual fund investments, municipal and corporate notes and bonds and asset or mortgage-backed securities. As of March 31, 2010, cash equivalents consisted of $6.9 million in a money market account and $20.4 million in money market funds. Our investment portfolio as of March 31, 2010 consisted of corporate notes and bonds, commercial paper, U.S. Government and agency securities, and negotiated certificates of deposit and had an average maturity of less than 12 months, using the stated maturity. All of our cash, cash equivalents and investments are maintained at two banking institutions.

Our investment exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our portfolio, changes in the market value due to changes in interest rates and other market factors as well as the increase or decrease in any realized gains and losses. Our investment portfolio includes only marketable securities and instruments with active secondary or resale markets to help ensure portfolio liquidity and we have implemented guidelines limiting the duration of investments. At March 31, 2010, our portfolio of available-for-sale investments consisted of approximately $64.6 million of investments maturing within one year and approximately $18.8 million of investments maturing after one year but within 24 months. In general, securities with longer maturities are subject to greater interest-rate risk than those with shorter maturities. A hypothetical 100 basis point drop in interest rates along the entire interest rate yield curve would not significantly affect the fair value of our interest sensitive financial instruments. We generally have the ability to hold our fixed-income investments to maturity and therefore do not expect that our operating results, financial position or cash flows will be materially impacted due to a sudden change in interest rates. However, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates or other factors, such as changes in credit risk related to the securities’ issuers.

We do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of invested principal funds by limiting default risk, market risk and reinvestment risk. We reduce default risk by investing in investment grade securities.

Our risk associated with fluctuating interest expense is limited to future capital leases and other short-term debt obligations we may incur in our normal operations. The interest rates on our long-term debt borrowings under the term loan facility are fixed and as a result, interest due on borrowings are not impacted by changes in market-based interest rates.

Investment Risk

In addition to our normal investment portfolio, we have an investment in Parion Sciences, Inc. of $200,000 as of March 31, 2010. This investment is in the form of unregistered common stock and is subject to higher investment risk than our normal investment portfolio due to the lack of an active resale market for the Parion Sciences, Inc. securities.

Foreign Currency Exchange Risk

The majority of our transactions occur in U.S. dollars and we do not have subsidiaries or investments in foreign countries. Therefore, we are not subject to significant foreign currency exchange risk. We do, however, have foreign currency exposure with regard to the purchase of active pharmaceutical ingredients as they relate to AzaSite, which is

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manufactured by a foreign-based company, future milestone payments due under the technology license agreement with Yamasa Corporation, as well as development activities currently ongoing in Europe. We have established policies and procedures for assessing market and foreign exchange risk. As of March 31, 2010, we did not have any material foreign currency hedges.

Item 4. Controls and Procedures

Our management is responsible for establishing and maintaining an adequate system of internal control over our financial reporting. The design, monitoring and revision of the system of internal accounting controls involves, among other items, management’s judgments with respect to the relative cost and expected benefits of specific control measures. The effectiveness of the control system is supported by the selection, retention and training of qualified personnel and an organizational structure that provides an appropriate division of responsibility and formalized procedures. The system of internal accounting controls is periodically reviewed and modified in response to changing conditions. Internal audit consultants regularly monitor the adequacy and effectiveness of internal accounting controls. In addition to the system of internal accounting controls, management maintains corporate policy guidelines that help monitor proper overall business conduct, possible conflicts of interest, compliance with laws and confidentiality of proprietary information. Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective.

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PART II: OTHER INFORMATION

Item 1A. Risk Factors.

RISK FACTORS

An investment in our common stock involves a substantial risk of loss. You should carefully read this entire report and should give particular attention to the following risk factors. You should recognize that other significant risks may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. There are a number of important factors that could cause our actual results to differ materially from those indicated by any forward-looking statements in this report. These factors include, without limitation, the risk factors listed below and other factors presented throughout this report and any other reports filed by us with the SEC.

Risks Related to Product Commercialization

Failure to adequately market and commercialize AzaSite will negatively impact our revenues.

The commercial success of AzaSite will depend on a number of factors, including:

Ÿ Acceptance by patients and physicians;

Ÿ Effectiveness of our sales and marketing efforts;

Ÿ Ability to differentiate AzaSite relative to our competitors’ products;

Ÿ Ability to further develop clinical information to support AzaSite;

Ÿ Market satisfaction with existing alternative therapies;

Ÿ Perceived efficacy relative to other available therapies;

Ÿ Disease prevalence;

Ÿ Cost of treatment;

Ÿ Pricing and availability of alternative products, including generic or over-the-counter products;

Ÿ Marketing and sales activities of competitors;

Ÿ Shifts in the medical community to new treatment paradigms or standards of care;

Ÿ Relative convenience and ease of administration;

Ÿ The manufacturer’s successful sustaining of manufacturing capability; and

Ÿ Our ability to enter into managed care and governmental agreements on favorable terms.

We are responsible for all aspects of the commercialization of this product, including the determination of formularies upon which AzaSite is listed, manufacturing, distribution, marketing and sales. The determination of formularies upon which AzaSite is listed, the discounts and pricing under such formularies, as well as the amount of time it takes for us to obtain favorable formulary status under various plans will impact our commercialization efforts. Additionally, inclusion on certain formularies requires significant price concessions through rebate programs that impact the level of revenue that we receive. The need to give price concessions can be particularly acute where competing products are listed on the same formulary, such as the area of bacterial conjunctivitis. If AzaSite is not successfully commercialized, our revenues will be limited.

Under our agreement with InSite Vision, we are obligated to make pre-determined minimum annual royalty payments to InSite Vision. To the extent annual royalty payments actually paid to InSite Vision on our sales of AzaSite are less than the minimum annual royalty amounts established under our agreement with InSite Vision, we are obligated to pay the difference. In the event we are required to make annual minimum royalty payments, our profits with respect to AzaSite, if any, will be decreased or any losses with respect to the product will be increased. Such circumstances may result in us ceasing our commercialization of AzaSite and terminating our agreement with InSite Vision.

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If Restasis is not successfully commercialized by Allergan, our revenues will be negatively impacted.

Allergan is responsible for commercializing Restasis. Accordingly, our revenues on the net sales of Restasis are dependent on the actions and success of Allergan, over whom we have no control.

Following the expiration of a use patent in August 2009, the manufacture and sale of Restasis is protected in the United States by a formulation patent that expires in May 2014. While a formulation patent may afford certain limited protection, a competitor may attempt to gain FDA approval for a cyclosporine product using a different formulation. Furthermore, following the expiration of the formulation patent in 2014, a generic form of Restasis could be introduced into the market. If and when Restasis experiences competition from a cyclosporine product, including generics, our revenues attributable to Restasis may be significantly impacted.

Other factors that could affect the commercialization of Restasis include:

Ÿ Extent and effectiveness of Allergan’s sales and marketing efforts;

Ÿ Satisfaction with existing alternative therapies, including generic or over-the-counter products;

Ÿ Perceived efficacy relative to other available therapies;

Ÿ Changes in, or the levels of, third-party reimbursement of product costs;

Ÿ Coverage and reimbursement under Medicare Part D, state government sponsored plans and commercial plans;

Ÿ Cost of treatment;

Ÿ Development and FDA approval of competing dry eye products; and

Ÿ Shifts in the medical community to new treatment paradigms or standards of care.

When a generic form of Elestat or an over-the-counter form of epinastine ophthalmic solution is introduced into the market, our agreement with Allergan to co-promote Elestat will no longer be in effect, and our revenues from sales of Elestat will be minimal.

Our Elestat co-promotion agreement with Allergan provides that unless earlier terminated, the term of such agreement will be in effect until the earlier of (i) the approval and launch of the first generic epinastine product after expiration of the FDA exclusivity period covering Elestat in the United States, or (ii) the approval and launch of the first over-the-counter epinastine product after expiration of the listing of Elestat in the FDA publication Approved Drug Products with Therapeutic Equivalence (commonly called the “Orange Book”). Following the termination of the co-promotion agreement, we will no longer have rights to co-promote Elestat. We will be entitled to receive post-termination payments from Allergan, based on any remaining net sales of Elestat for a period of 36 months. During the three successive 12-month periods immediately following the termination of the agreement, Allergan will be obligated to pay to us 20%, 15% and 10%, respectively, on any net sales of Elestat in the United States.

Subject to applicable law, competitors are permitted to submit to the FDA an ANDA for a generic version of Elestat, due to the expiration of the marketing exclusivity period for Elestat provided under the Hatch-Waxman Act on October 15, 2008.

We have been notified that Boehringer Ingelheim and Allergan received notices of Paragraph IV certifications from Apotex, Inc., Cypress Pharmaceutical, Inc., Paddock Laboratories, Inc. and Sandoz Inc. advising that each company filed an ANDA for a generic version of Elestat. Each ANDA notice alleges that the method of treatment patent related to Elestat is invalid, unenforceable and/or will not be infringed by the respective ANDA applicant’s manufacture, use, sale, or offer for sale of the drug for which the ANDA was submitted. The date of submission of the first filing to the FDA Office of Generic Drugs was October 14, 2008, according to the FDA’s website (www.fda.gov). In response thereto, Boehringer Ingelheim has filed a statutory disclaimer of all the claims contained in such patent, and accordingly, such patent is unenforceable.

The FDA’s review of an ANDA is a confidential process between the FDA and the applicable ANDA filer. We do not expect to be informed by the FDA, any ANDA filer or any other party regarding the status or timing of the

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review relating to any of the ANDA filings pertaining to a generic form of Elestat. The FDA may complete its review of the filed ANDAs at any time. As a result, we expect to be required to stop the co-promotion of Elestat with little, if any, advance notice. We believe it is likely that a generic form of epinastine may be launched in the second half of 2010. The loss of co-promotion revenue from Elestat will significantly impact our results of operations and cash flows.

If we do not successfully market and promote Elestat, our revenues will be negatively impacted.

Notwithstanding the expected termination of the Elestat agreement upon the launch of a generic form of Elestat, our present revenues depend, in part, upon the continued acceptance of Elestat by eye care professionals, allergists and patients. Other factors that could affect the commercialization of Elestat include:

Ÿ Satisfaction with existing alternative therapies, including therapies requiring only one dose per day;

Ÿ Decreases in the size of the market for topical allergic conjunctivitis products;

Ÿ Extent and effectiveness of our sales and marketing efforts;

Ÿ Changes in, or the levels of, third-party reimbursement of product costs;

Ÿ Coverage and reimbursement under Medicare Part D, state government sponsored plans and commercial plans;

Ÿ Pricing and availability of alternative products, including generic or over-the-counter products; and

Ÿ Marketing and sales activities of competitors.

We rely on third parties to distribute and sell our products and those third parties may not perform.

We are dependent on third parties to perform or assist us in the distribution or sale of AzaSite, and are dependent on third parties, primarily Allergan, to perform or assist us in the distribution and sale of Elestat. We rely on the services of a single source, third-party distributor to deliver AzaSite to our customers. In addition to the physical storage and distribution of AzaSite, this third-party distributor maintains and provides us with information and data with regard to our inventory, AzaSite orders, billings and receivables, chargebacks and returns, among others, on which our accounting estimates are based. If third parties do not successfully carry out their contractual duties in maximizing the commercial potential of our products, we may be required to hire or expand our own staff and sales force to compete successfully, which may not be possible. If third parties or Allergan do not perform, or assist us in performing these functions, or if there is a delay or interruption in the distribution of our products, it could have an adverse effect on product revenue, accounting estimates and our overall operations.

We depend on three pharmaceutical wholesalers for the vast majority of our AzaSite sales in the United States, and the loss of any of these wholesalers would negatively impact our revenues.

The prescription drug wholesaling industry in the United States is highly concentrated, with a vast majority of all sales made by three major full-line companies: Cardinal Health, McKesson Corporation and AmerisourceBergen. Greater than 85% of our AzaSite revenues come from sales to these three companies. The loss of any of these wholesalers could have a negative impact on our commercialization of AzaSite.

It is also possible that these wholesalers, or others, could decide to change their policies and fees in the future. This could result in or cause us to incur higher product distribution costs, lower margins or the need to find alternative methods of distributing our products. Such alternative methods may not be economically or administratively feasible.

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Risks Related to Manufacture and Supply

If we are unable to contract with third parties for the manufacture of active pharmaceutical ingredients required for preclinical testing, for the manufacture of drug products for clinical trials, for the large-scale manufacture of any approved products, or for the manufacture of related devices, we may be unable to develop or commercialize our drug products.

The manufacturing of sufficient quantities of new products or product candidates is a time-consuming and complex process. We have no experience or capabilities to conduct the manufacture of any of our product candidates. In order to successfully commercialize AzaSite and continue to develop our product candidates, we need to contract or otherwise arrange for the necessary manufacturing services. There are a limited number of manufacturers that operate under the FDA’s cGMP regulations capable of manufacturing for us or our collaborators. We depend upon third parties for the manufacture of active pharmaceutical ingredients, finished drug products for clinical trials, and for the manufacture of AzaSite. We expect to depend upon third parties for the large-scale manufacture of commercial quantities of any other approved product. This dependence may adversely affect our ability to develop and deliver such products on a timely and competitive basis. Similarly, our dependence on our partners to arrange for their own supplies of finished drug products may adversely affect our operations and revenues. If we, or our partners, are unable to engage or retain third-party manufacturers on a long-term basis or on commercially acceptable terms, our products may not be commercialized as planned, and the development of our product candidates could be delayed.

Under our agreement with the manufacturer of AzaSite, we are required to purchase a minimum number of units of AzaSite annually, regardless of our ability to sell AzaSite. If we are unable to sell the AzaSite that we are required to purchase, our inventory of the product will increase and the shelf life of the inventory will be adversely impacted. In such circumstances, we may be required to make price concessions to sell short-dated product or write-off and dispose of expired product, which may have an adverse affect on our AzaSite profitability.

The manufacturing processes for our product candidates have not been validated at the scale required for commercial sales. Delays in scale-up to commercial quantities and any change at the site of manufacture could delay clinical trials, regulatory submissions and ultimately the commercialization of our products. In addition, manufacturing facilities are subject to an FDA inspection to confirm cGMP compliance prior to a product candidate’s potential NDA approval as well as ongoing post-approval FDA inspections to ensure continued compliance with cGMP regulations, over which we have no control.

We depend upon a third-party vendor to manufacture the nebulizer used with denufosol with whom we have no supply agreement. This vendor is responsible for managing the manufacturing process of the nebulizer in accordance with all applicable regulatory requirements. Any manufacture or regulatory compliance problems related to the manufacture of this device or any failure on the part of the manufacturer to supply the device (including discontinuation of the nebulizer) could delay product development or adversely affect regulatory approvals of denufosol.

Reliance on a single party to manufacture and supply either finished product or the bulk active pharmaceutical ingredients for a product or product candidates could adversely affect us.

Under our agreements with Allergan, Allergan is responsible for the manufacture and supply of Restasis and Elestat. Allergan relies upon an arrangement with a single third party for the manufacture and supply of active pharmaceutical ingredients, or APIs, for each of Restasis and Elestat. Allergan then completes the manufacturing process to yield finished product.

Under our supply agreement with InSite Vision, InSite Vision is responsible for supplying us with azithromycin, the API used in AzaSite. InSite Vision, in turn, relies upon an arrangement with a single third party for the manufacture and supply of such API. We are responsible for producing the finished product form of AzaSite, which is currently manufactured by a single party. There can be no assurance that such manufacturer will be able to continue to produce sufficient quantities of finished product in a timely manner to support the commercialization of AzaSite.

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In the event a third-party manufacturer is unable to supply Allergan or InSite Vision (as the case may be), if such supply is unreasonably delayed, or if Allergan or our finished product contract partner are unable to complete the manufacturing cycle, sales of the applicable product could be adversely impacted, which would result in a reduction in any applicable product revenue. In addition, if Allergan or the third-party manufacturers do not maintain cGMP compliance, the FDA could require corrective actions or take enforcement actions that could affect production and availability of the applicable product, thus adversely affecting sales.

In addition, we rely upon supply agreements with third parties for the manufacture and supply of the bulk APIs for our product candidates for purposes of preclinical testing and clinical trials. We presently depend upon one vendor as the sole manufacturer of our supply of APIs for both Prolacria and denufosol. We have entered into an agreement with such manufacturer to facilitate the transfer of the current denufosol manufacturing technology, including intellectual property, to an additional manufacturer and thus enable a two-supplier strategy for denufosol. However, we have not yet entered into an agreement with a secondary supplier for denufosol. Delays in any aspect of implementing the manufacturing process could cause significant development delays and increased costs.

It would be time consuming and costly to identify and qualify new sources for manufacture of APIs or finished products. If our vendors were to terminate our arrangement or fail to meet our supply needs we might be forced to delay our development programs and/or be unable to supply products to the market, which could delay or reduce revenues and result in loss of market share.

The third-party vendor that manufactures denufosol and the API related to both Prolacria and Santen’s Diquas does not presently have the capacity to manufacture the projected commercial quantities of API for these products.

Yamasa Corporation manufacturers the clinical supplies of denufosol, and the API (i.e. diquafosol) for Prolacria and Santen’s Diquas. We do not believe that Yamasa presently has the capacity to manufacture the projected commercial quantities of denufosol, or the API for Prolacria and Santen’s Diquas. Although we have agreements with Yamasa for the manufacture of clinical quantities, we do not have agreements with Yamasa for commercial supplies of denufosol or diquafosol and we are in the process of working to establish those agreements. We may not be able to enter into such agreements on commercially acceptable terms, if at all.

We are in discussions with another manufacturer for the purpose of establishing a secondary source of commercial supply for denufosol. To facilitate this second manufacturer, we entered into an agreement with Yamasa to acquire access to its manufacturing know-how and processes related to denufosol. Technical transfer of manufacturing capabilities, however, can be difficult. Also, we may not be able to enter into secondary supply arrangements on commercially acceptable terms, if at all. A failure to achieve sufficient commercial supply of denufosol could result in a delay in the launch of the candidate. Furthermore, if the candidate is approved, and depending on market acceptance and other competitive factors, a failure to achieve sufficient commercial supply potentially could adversely affect product sales.

On April 16, 2010, the Japanese Ministry of Health, Labor and Welfare granted approval of Santen’s application for marketing of Diquas. Subject to the terms and conditions of our agreement with Santen, we are required to supply Santen with its API requirements for Diquas for commercial use subject to receiving a forecast and firm order in compliance with the terms of the agreement. We do not have manufacturing expertise, capabilities or facilities, and rely on Yamasa to manufacture this API. We are currently in discussions with Yamasa to further assess its ability to increase capacity for the production of the API for Diquas. If Yamasa is unable to produce sufficient commercial quantities of the API for Diquas , the launch of such product could be delayed. Furthermore, depending on market acceptance and other competitive factors, an insufficient supply of the API for Diquas following its launch potentially could adversely affect product sales. Similarly, if Yamasa is unable to produce sufficient commercial quantities of the API for Prolacria, the launch of such product candidate following approval, if any, could be delayed, and insufficient supply after launch could adversely affect sales. A reduction in sales likely would reduce royalty income to us associated with each of Diquas and

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Prolacria. If we are unable to supply Santen with its API requirements for Diquas pursuant to the terms and conditions of our agreement, Santen may seek to pursue claims against us.

Risks Related to Product Development

If we fail to reach milestones or to make annual minimum payments or otherwise breach our obligations under our license agreements, our licensors may terminate our agreements with them and seek additional remedies.

If we fail to meet payment obligations, performance milestones relating to the timing of regulatory filings, development and commercial diligence obligations, fail to make milestone payments in accordance with applicable provisions, or fail to pay the minimum annual payments under our respective licenses, our licensors may terminate the applicable license. As a result, our development of the respective product candidate or commercialization of the product would cease.

We expect to have discussions with Allergan with respect to several points of debate regarding the License, Development and Marketing Agreement, dated June 22, 2001, as amended, between Inspire and Allergan, including the status of the Prolacria development program, Inspire’s rights to Restasis royalties including co-promotion rights, and related rights and obligations of the parties under the agreement. If Inspire and Allergan can not agree to the direction of the Prolacria development program, or Restasis promotion and royalties, the parties may choose to amend the agreement or be forced to arbitrate any dispute in accordance with the terms of the agreement. Among other possible results, any resolution of the disagreements could: (i) impact our Restasis royalties; (ii) impact our Restasis co-promotion rights; (iii) impact our rights to Prolacria; or (iv) result in a termination of the agreement. As a result, the outcome of arbitration or other resolution could have a material adverse effect on our business, results of operations, cash flows and liquidity.

If the FDA does not conclude that our product candidates meet statutory requirements for safety and efficacy, we will be unable to obtain regulatory approval for marketing in the United States.

We have to conduct significant development activities, non-clinical and clinical tests and obtain regulatory approval before our product candidates can be commercialized. Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results of preclinical and clinical testing of our product candidates under development may not necessarily indicate the results that will be obtained from later or more extensive testing. Additionally, companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials. Our ongoing clinical trials might be delayed or halted for various reasons, including:

Ÿ The measure of efficacy of the drug is not statistically significant compared to placebo;

Ÿ Patients experience severe side effects or serious adverse events during treatment;

Ÿ Patients die during the clinical trial because their disease is too advanced or because they experience medical problems that may or may not relate to the drug being studied;

Ÿ Patients do not enroll in the clinical trials at the rate we expect;

Ÿ We decide to modify the drug or the clinical trial protocol during testing;

Ÿ Our commercial partners, or future commercial partners, delay, amend or change our development plan or strategy; and

Ÿ We allocate our limited financial and other resources to other clinical and preclinical programs.

Changes in regulatory policy or new regulations as well as clinical investigator misconduct could also result in delays or rejection of our applications for approval of our product candidates. Clinical investigator misconduct that raises questions about the integrity of data in one or more applications (e.g., fraud, bribery, omission of a material fact, gross negligence) could be used by the FDA as grounds to suspend substantive scientific review of all pending marketing applications until the data in question have successfully undergone a validity assessment. Product candidates that fail validity assessments must be withdrawn from FDA review or, if the drug is an approved, marketed product, such product must be removed from the market.

Additionally, the introduction of our products in foreign markets will subject us to foreign regulatory clearances, the receipt of which may be unpredictable, uncertain and may impose substantial additional costs and burdens which we or our partners in such foreign markets may be unwilling or unable to fund. As with the FDA, foreign regulatory authorities must be satisfied that adequate evidence of safety and efficacy of the product has been presented before marketing authorization is granted. The foreign regulatory approval process includes all of the risks associated with obtaining FDA marketing approval. Approval by the FDA does not ensure approval by other regulatory authorities, nor does approval by any foreign regulatory authority ensure approval by the FDA.

Since some of our clinical candidates utilize new or different mechanisms of action and in some cases there may be no regulatory precedents, conducting clinical trials and obtaining regulatory approval may be difficult, expensive and prolonged, which would delay any commercialization of our products.

                To complete successful clinical trials, our product candidates must demonstrate safety and provide substantial evidence of efficacy. The FDA generally evaluates efficacy based on the statistical significance of a product candidate meeting predetermined clinical endpoints. The design of clinical trials to establish meaningful endpoints is done in collaboration with the FDA prior to the commencement of clinical trials. We establish these endpoints based on guidance from the FDA, including FDA guidance documents applicable to establishing the efficacy, safety and tolerability measures required for approval of products. However, since some of our product candidates utilize new or

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different mechanisms of action, the FDA may not have established guidelines for the design of our clinical trials and may take longer than average to consider our product candidates for approval. The FDA could change its view on clinical trial design and establishment of appropriate standards for efficacy, safety and tolerability and require a change in clinical trial design, additional data or even further clinical trials before granting approval of our product candidates. We could encounter delays and increased expenses in our clinical trials if the FDA concludes that the endpoints established for a clinical trial do not adequately predict a clinical benefit.

We are developing denufosol as an inhaled product candidate for the treatment of cystic fibrosis. Denufosol tetrasodium is a first-in-class ion channel regulator that addresses the underlying ion transport defect in the lungs of patients with cystic fibrosis. The FDA has not published guidance on the drug approval process associated with such a product candidate. Furthermore, we are not aware of any FDA-approved product that addresses the underlying ion transport defect in the lungs of patients with cystic fibrosis. We cannot predict or guarantee the outcome or timing of our Phase 3 program for denufosol for cystic fibrosis. A significant amount of work will be required to advance denufosol through clinical testing, including satisfactory completion of additional clinical trials and other studies. We may later decide to change the focus or timing of our Phase 3 program. Our TIGER-2 clinical trial for denufosol for cystic fibrosis may not be successful or unexpected safety concerns may emerge that would negatively change the risk/benefit profile for this product candidate.

We have initiated a Phase 2 development program to evaluate the use of AzaSite for the treatment of blepharitis. The FDA has not published guidelines on the approval of a product for the treatment of blepharitis. Furthermore, to date, no prescription product has been approved by the FDA for the treatment of blepharitis. The FDA may require that we evaluate the product in relation to different primary and/or secondary clinical endpoints than those being used presently. This may require us to undertake additional Phase 2 clinical trials, which could lead to increased costs and program delays.

The FDA has not published guidelines on the approval of a product for the treatment of dry eye disease. In order to gain approval, it will be necessary to undertake at least one additional Phase 3 clinical trial in support of our NDA for Prolacria. There can be no guarantee that any such additional clinical trial would be successful or that the FDA would approve Prolacria even if such additional clinical trial was successful.

We may need to develop alternate dosing regimens for our product candidates.

In order to achieve broad market acceptance of our product candidates, we may need to develop, alone or with others, alternate dosing regimens and methods for administering our products. For example, in our current clinical trials, denufosol for the treatment of cystic fibrosis is administered by a standard nebulizer three times per day, but clinical data from our TIGER-1 clinical trial indicated that patients in that study administered the drug only 2.7 times per day, on average. Patients may prefer a smaller, more portable device or less frequent dose administration. In addition, we intend that Prolacria will be applied from a vial containing a single day’s dosage of non-preserved medication. Patients may prefer to purchase preserved medication for multiple doses. Neither we nor Allergan have established a plan to develop a multi-dose formulation.

Similar challenges may exist in identifying and developing appropriate and convenient dosing and methods of administration for our other product candidates. If the number of doses, or the method of dosing, is not convenient, patients may not use our product. Furthermore, if patients use our products at a dosing level that is less than the dosing level tested in our clinical trials, the drug may not be efficacious or may be less efficacious. In such cases, the patient may look for alternative therapies.

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Estimated development costs are difficult to project and may change frequently prior to regulatory approval.

The number and type of studies that may be required by the FDA, or other regulatory authorities, for a particular compound are based on the compound’s clinical profile compared to existing therapies for the targeted patient population. While all new compounds require standard regulated phases of testing, the actual type and scope of testing can vary significantly among different product candidates and as a result, creates additional complexity when estimating program costs. Factors that affect the costs of a clinical trial include:

Ÿ The number of patients required to participate in clinical trials to demonstrate statistical significance for a drug’s safety and efficacy and the number and geographical location of clinical trial sites necessary to enroll such patients;

Ÿ The time required to enroll the targeted number of patients in clinical trials, which may vary depending on the size and availability of the targeted patient population and the perceived benefit to the clinical trial participants; and

Ÿ The number and type of required laboratory tests supporting clinical trials.

Additionally, ongoing development programs and associated costs are subject to frequent, significant and unpredictable changes due to a number of factors, including:

Ÿ Data collected in preclinical or clinical trials may prompt significant changes, delays or enhancements to an ongoing development program;

Ÿ Commercial partners and the underlying contractual agreements may require additional or more involved clinical or preclinical activities;

Ÿ The FDA or other regulatory authorities may direct the sponsor to change or enhance its ongoing development program based on developments in the testing of similar compounds or related compounds;

Ÿ Unexpected regulatory requirements, changes in regulatory policy or review standards, or interim reviews by regulatory agencies may cause delays or changes to development programs; and

Ÿ Anticipated manufacturing costs may change significantly due to necessary changes in manufacturing processes, variances from anticipated manufacturing process yields or changes in the cost and/or availability of starting materials, and other costs to ensure the manufacturing facility is in compliance with cGMP requirements and is capable of consistently producing the product candidate in accordance with established specifications submitted to the FDA.

The occurrence of any of these factors may result in significant disparities in total costs required to complete the respective development programs.

Clinical trials may take longer to complete and cost more than we expect, which would adversely affect our ability to commercialize product candidates and achieve profitability.

Clinical trials are expensive and are often lengthy. They require appropriate identification of optimal treatment regimens and relevant patient population, adequate supplies of drug product, and sufficient patient enrollment. Patient enrollment is a function of many factors, including:

Ÿ The size and availability of the relevant patient population;

Ÿ The nature of the protocol;

Ÿ The proximity of patients to clinical sites;

Ÿ The eligibility criteria for the clinical trial; and

Ÿ The perceived benefit of participating in a clinical trial.

Delays in patient enrollment can result in increased costs and longer development times. Even if we successfully complete clinical trials, we may not receive regulatory approval for the product candidate. In addition, if

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the FDA or foreign regulatory authorities require additional clinical trials, we could face increased costs and significant development delays.

We are conducting portions of our TIGER-2 clinical trial in Canada, Australia and New Zealand and are therefore subject to the risks and uncertainties of doing business internationally. Disruptions in communication and transportation, changes in governmental policies, and currency exchange rates, among other factors, may affect the time and costs required to complete these clinical trials.

Risks Related to Governmental Regulation

Failure to comply with all applicable regulations, including those that require us to obtain and maintain governmental approvals for our product candidates, may result in fines, corrective actions, administrative sanctions and restrictions, including the withdrawal of a product from the market.

Pharmaceutical companies are subject to significant regulation by a number of local, state, and federal governmental agencies, including the FDA. Such regulations and their authorizing statutes are amended from time to time. There are laws and regulations that govern areas including financial controls, clinical trials, testing, manufacturing, labeling, safety, packaging, shipping, distribution, post-approval safety surveillance, marketing, and promotion of pharmaceuticals, including those governing interactions with prescribers and health care professionals in a position to prescribe, recommend, or arrange for the provision of our products. Failure to comply with applicable regulatory requirements could, among other things, result in warning letters, fines, corrective actions, administrative sanctions, suspensions or delays of product manufacture or distribution or both, product recalls, delays in marketing activities and sales, withdrawal of marketing approvals, and civil or criminal sanctions including seizure of product, court-ordered injunction, and possible exclusion from eligibility for federal government contracts payment of our products by Medicare, Medicaid, and other third-party payors.

After initial regulatory approval, the manufacturing and marketing of drugs, including our products, are subject to continuing FDA and foreign regulatory review. The FDA requires drug manufacturers and distributors to monitor the safety of a drug after it is approved and marketed. We are required to document and investigate reports of adverse events and report serious adverse events to the FDA. Additionally, the FDA encourages health professionals to report significant adverse events associated with products. The FDA may require additional clinical studies, known as Phase 4 studies, to evaluate product safety effects. In addition to studies required by the FDA after approval, we may conduct our own Phase 4 studies to explore the use of the approved drug product for treatment of new indications or to broaden our knowledge of the product. The subsequent discovery of previously unknown problems with a product’s safety or efficacy as a result of these studies or as reported in their prescribed use may result in the implementation of an FDA-required risk evaluation and mitigation strategy known as REMS, restrictions through labeling changes, or withdrawal of the product from the market.

The FDA periodically inspects drug manufacturing facilities to ensure compliance with applicable cGMP regulations. Failure to comply with statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or court-ordered injunction, which could include mandatory recall of a product. Before taking such actions, the FDA may first issue one or more notices of compliance deficiencies. Such notices include inspectional observations on Form FDA-483, warning letters, and other untitled written correspondence; however, the FDA may also take action without such notice in situations of egregious noncompliance or where public safety is at risk. The FDA may also request us to take actions voluntarily or we may initiate actions ourselves such as recalls or suspension of manufacturing to ensure compliance with cGMP regulations.

Additional authority to take post-approval actions was given to the FDA under the FDA Amendments Act of 2007. The FDA is authorized to revisit and change its prior determinations if new information raises questions about our product’s safety profile. The FDA is authorized to impose additional post-marketing requirements which could result in actions such as requiring additional studies, corrective actions, fines, withdrawal of marketing approval, or any combination of such actions.

In its regulation of advertising, the FDA may issue correspondence to pharmaceutical companies alleging that its advertising, promotional materials or activities are false or misleading. Pharmaceutical advertising and promotional

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activity must be true, fairly balanced between benefits and risks, provide adequate risk information, and be within the labeled indications. Drug manufacturers are prohibited from promoting a product for any use that is not on the approved labeling; however, healthcare professionals are free to use the product for any use that, in the judgment of the healthcare professional, may be appropriate for any individual patient. The FDA and the Office of the Inspector General (“OIG”) in the Department of Health and Human Services (“HHS”) have the power to impose a wide array of sanctions on companies for advertising practices that are found to be false or misleading, do not include adequate risk information, or promote an off-label use and, if we were to receive correspondence from the FDA or the OIG alleging such practices, it may be necessary for us to:

Ÿ Incur substantial expenses, including fines, penalties, legal fees and costs to conform to the FDA’s limits on such promotion;

Ÿ Change our methods of marketing, promoting and selling products;

Ÿ Take corrective action, which could include placing advertisements or sending letters to physicians correcting statements made in previous advertisements or promotions; or

Ÿ Disrupt the distribution of products and stop sales until we are in compliance with the FDA’s interpretation of applicable laws and regulations.

Medicare prescription drug coverage legislation and legislative or regulatory reform of the health care system may affect our or our partners’ ability to sell products profitably.

In both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a voluntary Medicare outpatient prescription drug benefit under Part D of the Social Security Act. The program, which went into effect January 1, 2006, is administered by the Centers for Medicare & Medicaid Services within HHS and is implemented and operated by private sector Part D plan sponsors. Each participating drug plan is permitted by regulation to develop and establish its own unique drug formulary that may exclude certain drugs from coverage and impose prior authorization and other coverage restrictions, and negotiate payment levels with drug manufacturers that may be lower than reimbursement levels available through private health plans or other payers. Moreover, beneficiary co-insurance requirements can vary, which could influence which products are recommended by physicians and selected by patients. The federal government can be expected to continue to issue guidance and regulations regarding the obligations of Part D sponsors under the program, and as discussed below, Congress recently enacted specific Part D changes to be implemented in the future

Allergan is responsible for the implementation of the Medicare Part D program as it relates to Restasis and Elestat and has contracted with Part D plan sponsors to cover such drugs under the Part D benefit. We are responsible for contracting with Part D plan sponsors with respect to AzaSite. There is no assurance that any drug that we co-promote or sell will be covered by drug plans participating under the Medicare Part D program or, if covered, what the terms of any such coverage will be, or that the drugs will be reimbursed at amounts that reflect current or historical payment levels. Our results of operations could be materially adversely affected by the reimbursement changes associated with Medicare prescription drug program or from changes in the formularies or price negotiations with Part D drug plans. To the extent that private insurers or managed care programs follow Medicare coverage and payment developments, the adverse effects of lower Medicare payment may be magnified by private insurers adopting similar lower payment.

Our products also can be impacted by state and federal legislative and regulatory changes in Medicaid reimbursement policy and in mandated levels of Medicaid drug rebates paid by pharmaceutical manufacturers. In March 2010, Congress passed significant health reform legislation, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “PPACA”). The legislation is designed to expand access to affordable health insurance through subsidies, Medicaid expansion, insurance market reforms (including the development of new health benefit exchanges), financed in part through reduced federal health care spending.

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Among many other things, the PPACA makes a number of significant changes affecting pharmaceutical manufacturers. For instance, the PPACA provides for increases to the minimum Medicaid rebate percentages from 15.1% to 23.1%, increased “additional rebates” for new formulations of brand name drugs, the establishment of a maximum rebate amount, and the extension of Medicaid rebates to Medicaid managed care organization utilization. In addition, the PPACA broadens the definition of “average manufacturer price,” which in turn may have the effect of increasing Medicaid rebate and Public Health Service section 340B drug discount program payment obligations. Likewise, many states are facing serious budgetary pressures that could lead to adoption of additional cost-containment measures, including provisions aimed at reducing Medicaid drug prices. There can be no assurances that new state policies will not lower Medicaid reimbursement levels for our products.

The PPACA also requires drug manufacturers to provide a 50% discount on brand-name prescriptions filled in the Medicare Part D “coverage gap.” The legislation also provides a $250 payment to Part D beneficiaries who reach the coverage gap during 2010, and mandates the gradual elimination of the coverage gap, beginning in 2011 and finishing in 2020. Moreover, the PPACA reduces Part D premium subsidies for higher-income beneficiaries, expands medication therapy management requirements, and makes a number of other revisions to Part D program requirements. In addition, the PPACA: extends the 340B program to additional entities, expands oversight of the 340B program, and increases manufacturer reporting requirements; creates an Independent Payment Advisory Board to develop recommendations to reduce Medicare spending under certain circumstances that will go into effect automatically unless Congress adopts alternative savings; expands disclosure requirements regarding drug manufacturer financial arrangements with referring physicians; and establishes a licensure pathway for generic versions of biologics. Further, beginning in 2011, manufacturers and importers of branded prescription drugs and biologics will be assessed an annual “fee” totaling $2.3 billion annually, with individual company allocation to be determined by the Secretary of the Treasury, based generally on market share. There can be no assurances that implementation of the new health reform legislation will not have an adverse impact on reimbursement and/or coverage of our products. Likewise, the potential for adoption of health care reform or other cost-control proposals on a state-by-state basis could impact our reimbursement levels and require us to develop state-specific marketing and sales approaches.

Congress also has enacted the American Recovery and Reinvestment Act, which included a major expansion of federal efforts to compare the effectiveness of different medical treatments, including pharmaceuticals, which eventually could impact Medicare and private payer coverage and payment policies. This comparative effectiveness initiative was expanded by the PPACA, and can include studies regarding the comparative clinical effectiveness of drugs. The federal government may consider additional proposals that could lead to reimbursement constraints and restrictions on access to certain products. We cannot predict the outcome of such initiatives, and it is difficult to predict the impact on our business of future legislative and regulatory changes.

We are subject to “fraud and abuse” and similar government laws and regulations, and a failure to comply with such laws and regulations, or an investigation into our compliance with such laws and regulations, or a failure to prevail in any litigation related to noncompliance, could harm our business.

We are subject to multiple state and federal laws pertaining to health care fraud and abuse. Pharmaceutical pricing, sales, and marketing programs and arrangements, and related business practices in the health care industry generally are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial, and administrative entities. Many health care laws, including the federal and state anti-kickback laws and federal and state statutory and common law false claims laws, have been construed broadly by the courts and permit government entities to exercise considerable discretion. Further, PPACA contains a number of provisions strengthening the scope of the federal laws, including making a violation the federal anti-kickback law a predicate action for violation of the federal False Claims Act. Further, PPACA provides that a person need not have actual knowledge of the anti-kickback law, among others, or a specific intent to commit a violation of the law, to be found in violation of it. The PPACA also applies the False Claims Act to payments made through new health benefits exchanges if the payments include any federal funds. In the event that government entities believed that wrongdoing had occurred, one or more of them could institute civil, administrative, or criminal proceedings which, if instituted and resolved unfavorably, could subject us to substantial fines, penalties, and injunctive and administrative remedies, including exclusion from government reimbursement programs. We cannot predict whether investigations or enforcement actions would affect our marketing or sales practices. Any such result could have a material adverse impact on our results of operations, cash flows,

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financial condition, and our business. Such investigations and enforcement actions could be costly, divert management’s attention from our business, and result in damage to our reputation. We cannot guarantee that measures that we have taken to prevent violations, including our corporate compliance program, will protect us from future violations, lawsuits or investigations by governmental entities or private whistleblowers. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant negative impact on our business, including the imposition of significant fines or other sanctions.

Failure to adequately ensure compliance with applicable laws and regulations may subject us to whistleblower and government actions.

In recent years, pharmaceutical companies have been the targets of extensive whistleblower actions in which the person bringing the action alleges violations of the federal civil False Claims Act or its state equivalent, including allegations that manufacturers aided and abetted in the submission of false claims. These actions have focused on such areas as pricing practices, off-label product promotion, sales and marketing practices, and improper relationships with physicians and other health care professionals, among others. The PPACA eliminates a number of jurisdictional bars to bringing a false claims action, and therefore may make it easier for whistleblowers to bring successful actions. If our relationships with health care professionals and/or our promotional or other activities fail to comply with applicable laws, regulations or guidelines, we may be subject to warnings from, or enforcement action by, regulatory and other federal or state governmental authorities. The potential ramifications are far-reaching if there are areas identified as out of compliance by regulatory agencies and governmental authorities including, but not limited to, significant financial penalties, manufacturing and clinical trial consent decrees, commercialization restrictions, exclusion from government programs, product recalls or seizures, the imposition of corporate integrity agreements and deferred prosecution agreements, or other restrictions and litigation. Furthermore, there can be no assurance that we will not be subject to a whistleblower or other state or federal investigative or enforcement action at some time in the future. Even an unsuccessful challenge to our operations or activities could prove costly and divert management’s attention.

Risks Associated with Our Business and Industry

If we do not receive timely regulatory approvals of our product candidates and successfully launch such products, we may need substantial additional funds to support our expanding capital requirements.

We have used substantial amounts of cash to fund our research and development and commercial activities. Our operating expenses were approximately $36.5 million for the three months ended March 31, 2010 and approximately $129.8 million for the year ended December 31, 2009, respectively. Our cash, cash equivalents and investments totaled approximately $115.2 million on March 31, 2010. Based on current operating plans, we expect our cash and investments to provide liquidity beyond 2010.

We expect that our capital and operating expenditures will continue to exceed our revenue over the next several years as we conduct our research and development and commercial activities. Many factors will influence our future capital requirements, including:

Ÿ The number, breadth and progress of our research and development programs;

Ÿ The level of activities relating to commercialization of our products;

Ÿ The ability to attract collaborators for our products and establish and maintain those relationships;

Ÿ Achievement of milestones under our existing or future collaborations and licensing agreements;

Ÿ Progress by our collaborators with respect to the development of product candidates;

Ÿ Competing technological and market developments;

Ÿ The timing and terms of any business development activities;

Ÿ The timing and amount of debt repayment requirements;

Ÿ The costs involved in defending any litigation claims against us;

Ÿ The costs involved in responding to government, the Financial Industry Regulatory Authority, Inc., or other applicable investigations against us; and

Ÿ The costs involved in enforcing patent claims and other intellectual property rights.

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In addition, our capital requirements will depend upon:

Ÿ The level of sales generated for AzaSite, Restasis and Elestat;

Ÿ The receipt of revenue from Allergan on net sales of Restasis and Elestat;

Ÿ The receipt of revenue from wholesalers and other customers on net sales of AzaSite;

Ÿ The receipt or payment of milestone payments under our current collaborative agreements and any future collaborations;

Ÿ The ability to obtain approval from the FDA for our product candidates; and

Ÿ Payments from existing and future collaborators.

In the event that we do not receive timely regulatory approvals, we may need substantial additional funds to fully develop, manufacture, market and sell all of our other potential products and support our on-going product commercialization and co-promotion efforts. We may seek such additional funding through public or private equity offerings and debt financings. Additional financing may not be available when needed. If available, such financing may not be on terms favorable to us or our stockholders. Our stockholders’ ownership will be diluted if we raise additional capital by issuing equity securities. If we are required to raise funds through future collaborations and licensing arrangements, we may have to give up rights to our technologies or product candidates or grant licenses on unfavorable terms. If adequate funds are not available, we would have to scale back or terminate research programs and product development and we may not be able to successfully commercialize any product candidate.

Our co-promotion and royalty revenues are based, in part, upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control.

We recognize co-promotion revenue based on Allergan’s net sales of Elestat and royalty revenue based on Allergan’s net sales of Restasis, as defined in the co-promotion agreements and as reported to us by Allergan. Accordingly, our co-promotion and royalty revenues are based upon Allergan’s revenue recognition policy and other accounting policies over which we have limited or no control and the underlying terms of our co-promotion agreements. Allergan’s filings with the SEC indicate that Allergan maintains disclosure controls and procedures in accordance with applicable laws, which are designed to provide reasonable assurance that the information required to be reported by Allergan in its Exchange Act filings is reported timely and in accordance with applicable laws, rules and regulations. We are not entitled to review Allergan’s disclosure controls and procedures. All of our co-promotion and royalty revenues are currently derived from Allergan’s net sales of Restasis and Elestat as reported to us by Allergan. We are unable to provide complete assurance that Allergan will not revise reported revenue amounts in the future. If Allergan’s reported revenue amounts were inaccurate, it could have a material impact on our financial statements, including financial statements for previous periods.

Revenues in future periods could vary significantly and may not cover our operating expenses.

Our revenues may fluctuate from period to period due in part to:

Ÿ The timing of the introduction of a generic form of Elestat;

Ÿ Fluctuations in future sales of AzaSite, Restasis and Elestat due to competition, the intensity of an allergy season, disease prevalence, manufacturing difficulties, reimbursement and pricing under commercial or government plans, seasonality, or other factors that affect the sales of a product;

Ÿ Deductions from gross sales relating to estimates of sales returns, credits and allowances, normal trade and cash discounts, managed care sales rebates and other allocated costs;

Ÿ The duration of market exclusivity of AzaSite and Restasis;

Ÿ The timing of approvals, if any, for other possible future products;

Ÿ The progress toward and the achievement of developmental milestones by us or our partners;

Ÿ The initiation of new contractual arrangements with other companies; and

Ÿ The failure or refusal of a collaborative partner to pay royalties or milestone payments.

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Inventory levels of AzaSite held by wholesalers can also cause our operating results to fluctuate unexpectedly. Although we attempt to monitor wholesaler inventory of our products, we rely upon information provided by third parties to quantify the inventory levels maintained by wholesalers. In addition, we and the wholesalers may not be effective in matching inventory levels to end-user demand. Significant differences between actual and estimated inventory levels and product demand may result in inadequate or excessive (1) inventory production, (2) product supply in distribution channels, (3) product availability at the retail level, and (4) unexpected increases or decreases in orders from our major customers. Any of these events may cause our revenues to fluctuate significantly from quarter to quarter, and in some cases may cause our operating results for a particular quarter to be below expectations.

If we are unable to make the scheduled principal and interest payments on our term loan facility or maintain minimum liquidity levels or compliance with other debt covenants as defined in the loan and security agreement, we may default on our debt.

As of March 31, 2010, we had net borrowings under our term loan facility of approximately $20.3 million. Our term loan facility is collateralized by substantially all of our assets, except for our intellectual property, but including all accounts, license and royalty fees and other revenues and proceeds arising from our intellectual property. Under the agreement, we are required to maintain minimum liquidity levels based on the balance of the outstanding advances. The agreement also includes a subjective acceleration clause that provides our lenders with the ability to accelerate repayment, even if we are in compliance with all conditions of the agreement, upon a material adverse change to our business, properties, assets, financial condition or results of operations. The agreement may affect our operations in several ways, including the following:

Ÿ A portion of our cash flow from operations will be dedicated to the payment of the principal and interest on our indebtedness;

Ÿ Our future cash flow may be insufficient to meet our required principal and interest payments;

Ÿ We may need to raise additional capital in order to remain in compliance with the loan covenants;

Ÿ Our ability to enter into certain transactions (including incurrences of indebtedness) may be limited; and

Ÿ We may need to delay or reduce planned expenditures for clinical trials as well as other development and commercial activities if our current operations are not sufficient enough to service our debt.

Events of default under the loan and security agreement are not limited to, but include the following:

Ÿ Payment default;

Ÿ Covenant default;

Ÿ A material adverse change in our business operations;

Ÿ Breach of our agreements with Allergan; and

Ÿ Judgments against us over a specified dollar amount.

In case of an uncured default, the following actions may be taken against us by the lending institutions:

Ÿ All outstanding obligations associated with the term loan facility would be immediately due and payable;

Ÿ Any of our balances and deposits held by the lending institutions would be applied to the obligation;

Ÿ Balances and accounts at other financial institutions could be “held” or exclusive control could be transferred to the lending institutions; and

Ÿ All collateral, as defined in the agreement, could be seized and disposed of.

If we continue to incur operating losses for a period longer than anticipated, or in an amount greater than anticipated, we may be unable to continue our operations.

We have experienced significant losses since inception. We incurred net losses of approximately $14.8 million for the three months ended March 31, 2010 and approximately $40.0 million for the year ended December 31,

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2009, respectively. As of March 31, 2010, our accumulated deficit was approximately $415.2 million. We currently expect to incur operating losses over the next several years. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Such fluctuations will be affected by the timing and level of the following:

Ÿ Commercialization activities to support AzaSite and Elestat;

Ÿ Revenues from Restasis;

Ÿ Regulatory approvals of our product candidates;

Ÿ Patient demand for our products and any licensed products;

Ÿ Payments to and from licensors and corporate partners;

Ÿ Research and development activities;

Ÿ Investments in new technologies and product candidates; and

Ÿ The costs involved in defending any litigation claims against, or government investigations of, us.

To achieve and sustain profitable operations, we must, alone or with others, develop successfully, obtain regulatory approval for, manufacture, introduce, market and sell our products. The time frame necessary to achieve market success is long and uncertain. We may not generate sufficient product revenues to become profitable or to sustain profitability. If the time required to achieve profitability is longer than we anticipate, we may not be able to continue our operations.

The current stock market and credit market conditions are extremely volatile and unpredictable. It is difficult to predict whether these conditions will continue or worsen, and, if so, whether the conditions would impact us and whether such impact could be material.

We have exposure to many different industries and counterparties, including commercial banks, investment banks and customers (which include wholesalers, managed care organizations and governments) that may be unstable or may become unstable in the current economic environment. Any such instability may impact these parties’ ability to fulfill contractual obligations to us or they might limit or place burdensome conditions upon future transactions with us. Customers may also reduce spending during times of economic uncertainty. Also, it is possible that suppliers may be negatively impacted. If such events were to occur, there could be a resulting material and adverse impact on our operations and results of operations.

We may decide to access the equity or debt markets to meet capital or liquidity needs. However, the constriction and volatility in these markets may restrict our future flexibility to do so when such needs arise. Further, recent economic conditions have resulted in severe downward pressure on the stock and credit markets, which could reduce the return available on invested corporate cash, which if severe and sustained could have a material and adverse impact on our results of operations and cash flows.

Our dependence on collaborative relationships may lead to delays in product development, lost revenues and disputes over rights to technology.

Our business strategy depends to some extent upon the formation of research collaborations, licensing and/or marketing arrangements. We currently have collaboration agreements with several collaborators, including Allergan, InSite Vision and Santen. The termination of any collaboration will result in the loss of any unmet development or commercial milestone payments, may lead to delays in product development and disputes over technology rights, and may reduce our ability to enter into collaborations with other potential partners. In the event we breach an agreement with a collaborator, the collaborator is entitled to terminate our agreement with them in the event we do not cure the breach within a specified period of time, which is typically 60 or 90 days from the notice date. With respect to the Allergan collaboration, in the event we become an affiliate of a third party that manufactures, markets or sells any then currently promoted prescription ophthalmic product, Allergan will have the right to terminate our Elestat co-promotion agreement, which right must be exercised within 3 months of the occurrence of such event. If we do not maintain our current collaborations, or establish additional research and development collaborations or licensing arrangements, it will be difficult to develop and commercialize potential products. Any future collaborations or licensing arrangements

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may not be on terms favorable to us.

Our current or any future collaborations or licensing arrangements ultimately may not be successful. Under our current strategy, and for the foreseeable future, we do not expect to develop or market products outside North America without a collaborative partner or outside our therapeutic areas of focus. We are currently pursuing the out-licensing of certain rights related to our cystic fibrosis program. We may be unsuccessful in out-licensing this program or we may be forced to out-license this program on terms that are not favorable to us.

It may be necessary in the future for us to obtain additional licenses to avoid infringement of third-party patents. Additionally, we may enter into license arrangements with other third parties as we build our product portfolio. We do not know the terms on which such licenses may be available, if at all.

We will continue to depend on collaborators and contractors for the preclinical study and clinical development of therapeutic products and for manufacturing and marketing of potential products. Our agreements with collaborators typically allow them some discretion in electing whether to pursue such activities. If any collaborator were to breach or terminate its agreement with us or otherwise fail to conduct collaborative activities in a timely and successful manner, the clinical development or commercialization of product candidates or research programs would be delayed or terminated. Any delay or termination in clinical development or commercialization would delay or eliminate potential product revenues relating to our product candidates.

Disputes may arise in the future over the ownership of rights to any technology developed with collaborators. These and other possible disagreements between us and our collaborators could lead to delays in the collaborative development or commercialization of products. Such disagreements could also result in litigation or require arbitration to resolve.

Failure to hire and retain key personnel may hinder our product development programs and our business efforts.

We depend on the principal members of management and scientific staff, including Adrian Adams, our President and Chief Executive Officer and a director, and Thomas R. Staab, II, our Chief Financial Officer and Treasurer. If these people leave us, we may have difficulty conducting our operations. Other than Mr. Adams, with whom we have an employment agreement, we have not entered into agreements with any current officers or any other members of our management and scientific staff that bind them to a specific period of employment. Our future success will depend in part on our ability to attract, hire or appoint, and retain additional personnel skilled or experienced in the pharmaceutical industry. There is significant competition for such qualified personnel and we may not be able to attract and retain such personnel.

We may not be able to successfully compete with other biotechnology companies and established pharmaceutical companies.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. There are many companies seeking to develop products for the same indications that we are working on. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies and specialized biotechnology firms.

Most of these competitors have greater resources than we do, including greater financial resources, larger research and development staffs and more experienced marketing and manufacturing organizations. In addition, most of our competitors have greater experience than we do in conducting clinical trials and obtaining FDA and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory approvals, and commence commercial sale of their drugs before we do may achieve a significant competitive advantage, including patent and FDA marketing exclusivity rights that would delay our ability to market products. Drugs resulting from our research and development efforts, or from our joint efforts with our collaborative partners,

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may not compete successfully with competitors’ existing products or products under development.

Our competitors may also develop technologies and drugs that are safer, more effective, or less costly than any we are developing or which would render our technology and future drugs obsolete and non-competitive. In addition, alternative approaches, such as gene therapy, in treating diseases that we have targeted, such as cystic fibrosis, may make our product candidates obsolete.

If our intellectual property protection is inadequate, the development and any possible sales of our product candidates could suffer or competitors could force our products completely out of the market.

Our business and competitive position depends on our ability to continue to develop and protect our products and processes, proprietary methods and technology and to prevent others from infringing on our patents, trademarks and other intellectual property rights. Upon the expiration or loss of patent protection for a product, we or our applicable collaborative partners may lose a significant portion of sales of that product in a short period of time as other companies manufacture generic forms of the previously protected product or manufacture similar products at lower cost, without having had to incur significant research and development costs in formulating the product. Therefore, our future financial success may depend in part on our and our partners obtaining patent protection for technologies incorporated into our products. We cannot assure that such patents will be issued, or that any existing or future patents will be of commercial benefit. In addition, it is impossible to anticipate the breadth or degree of protection that any such patents will afford, and we cannot assure that any such patents will not be successfully challenged in the future. If we are unsuccessful in obtaining or preserving patent protection, or if any of our products rely on unpatented proprietary technology, we cannot assure that others will not commercialize products substantially identical to those products. We also believe that the protection of our trademarks is an important factor in product recognition and in our ability to maintain or increase market share. If we do not adequately protect our rights in our various trademarks from infringement, their value to us could be lost or diminished, seriously impairing our competitive position. Moreover, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States.

Certain of our patents are use patents containing claims covering methods of treating disorders and diseases by administering therapeutic chemical compounds. Use patents may provide limited protection for commercial efforts in the United States, but may afford a lesser degree of protection, if any, in other countries due to their patent laws. Besides our use patents, we have patents and patent applications covering compositions (new chemical compounds), pharmaceutical formulations and processes for manufacturing our new chemical compounds. Many of the chemical compounds included in the claims of our use patents and process applications were known in the scientific community prior to our patent applications. None of our composition patents or patent applications covers these previously known chemical compounds, which are in the public domain. As a result, competitors may be able to commercialize products that use the same previously known chemical compounds used by us for the treatment of disorders and diseases not covered by our use patents. Such competitors’ activities may reduce our revenues.

Third parties may challenge, invalidate or circumvent our patents and patent applications relating to our products, product candidates or technologies at any time. If we must defend a patent suit, or if we choose to initiate a suit to have a third-party patent declared invalid, we may need to make considerable expenditures of money and management time in litigation. We believe that there is significant litigation in the pharmaceutical and biotechnology industry regarding patent and other intellectual property rights. A patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. We may be accused of patent infringement at any time. A judgment against us in a patent infringement action could cause us to pay monetary damages, require us to obtain licenses, or prevent us from manufacturing or marketing the affected products. In addition, we may need to initiate litigation to enforce our proprietary rights against others. Initiation of litigation may result in considerable expenditures of money and management time and may result in our patents being declared invalid. Further, we may need to participate in interference proceedings in the U.S. Patent and Trademark Office, or USPTO, to determine the priority of invention of any of our technologies.

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Our ability to develop sufficient patent rights in our pharmaceutical, biopharmaceutical and biotechnology products to support commercialization efforts is uncertain and involves complex legal and factual questions. For instance, the USPTO examiners may not allow our claims in examining our patent applications. If we have to appeal a decision to the USPTO’s Appeals Board for a final determination of patentability, we could incur significant legal fees. Lengthy and uncertain patent prosecutions, including the utilization of the appeals process, can add uncertainty, delay and expense to the process of obtaining intellectual property rights for our products, and as such may add delay and uncertainty to the development program for any such product.

Use of our products may result in product liability claims for which we may not have adequate insurance coverage.

Manufacturing, marketing and sale of our products or conducting clinical trials of our product candidates may expose us to liability claims from the use of those products and product candidates. Product liability claims could result in the imposition of substantial liability on us, a recall of products, or a change in the indications for which they may be used. Although we carry product liability insurance and clinical trial liability insurance, we, or our collaborators, may not maintain sufficient insurance to cover these potential claims. We do not have the financial resources to self-insure and it is unlikely that we will have these financial resources in the foreseeable future. If we are unable to protect against potential product liability claims adequately, we may find it difficult or impossible to continue to commercialize our products or the product candidates we develop. If claims or losses exceed our liability insurance coverage, we may go out of business.

Insurance coverage is increasingly more costly and difficult to obtain or maintain.

While we currently have insurance for our business, property, directors and officers, and our products, insurance is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to share that risk in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant uninsured costs associated with loss or damage that could have an adverse effect on our operations and financial position. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all.

Risks Related to Our Stock

Our common stock price has been volatile and your investment in our stock may decline in value.

The market price of our common stock has been volatile. These fluctuations create a greater risk of capital losses for our stockholders as compared to less volatile stocks. Factors that have caused volatility and could cause additional volatility in the market price of our common stock include among others:

Ÿ Announcements made by us concerning results of clinical trials with our product candidates;

Ÿ Announcements regarding the commercialization of AzaSite;

Ÿ Announcements regarding FDA approval of Prolacria, denufosol or any of our product candidates;

Ÿ Market acceptance and market share of AzaSite, Restasis and Elestat;

Ÿ The timing of the introduction of a generic form of Elestat;

Ÿ Duration of market exclusivity of AzaSite and Restasis;

Ÿ Volatility in other securities including pharmaceutical and biotechnology securities;

Ÿ Changes in government regulations;

Ÿ Regulatory actions and/or investigations;

Ÿ Changes in the development priorities of our collaborators that result in changes to, or termination of, our agreements with such collaborators;

Ÿ Developments concerning proprietary rights including patents by us or our competitors;

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Ÿ Variations in our operating results;

Ÿ FDA approval of other treatments for the same indication as any one of our product candidates;

Ÿ Business development activities; and

Ÿ Litigation.

Extreme price and volume fluctuations occur in the stock market from time to time that can particularly affect the prices of biotechnology companies. These extreme fluctuations are sometimes unrelated to the actual performance of the affected companies.

Warburg is able to exercise substantial control over our business.

Warburg Pincus Private Equity IX, L.P., or Warburg, holds 22,907,488 shares of our common stock, which represented approximately 28% of our outstanding common stock as of March 31, 2010. Warburg and its affiliates may acquire the lesser of: (x) 32.5% of our voting securities on a fully diluted basis and (y) 34.9% of our then outstanding voting securities, without triggering the provisions of our stockholder rights plan. Warburg has the right to designate one person for election to our Board of Directors for so long as Warburg owns a significant percentage of our securities. Pursuant to this right, Jonathan S. Leff serves as a Class C member of the Board of Directors. Pursuant to a Securities Purchase Agreement, dated July 17, 2007, for so long as Warburg owns at least 10% of the shares of common stock issued upon the exchange of Exchangeable Preferred Stock it acquired in July 2007, it will have subscription rights to acquire a pro rata amount of future issuances of equity securities by us, subject to certain exceptions. As a result of the foregoing, Warburg is able to exercise substantial influence over our business, policies and practices.

Our existing principal stockholders hold a substantial amount of our common stock and may be able to influence significant corporate decisions, which may conflict with the interest of other stockholders.

As of March 31, 2010, our current 5% and greater stockholders (which includes Warburg) and their affiliates beneficially owned approximately 42% of our outstanding common stock. These stockholders, if they act together, may be able to influence the outcome of matters requiring approval of the stockholders, including the election of our directors and other corporate actions such as:

Ÿ a merger or corporate combination with or into another company;

Ÿ a sale of substantially all of our assets; and

Ÿ amendments to our certificate of incorporation.

The decisions of these individual stockholders may conflict with our interests or those of our other stockholders.

Future sales and issuances of securities may dilute the ownership interests of our current stockholders and cause our stock price to decline.

Future sales of our common stock by current stockholders into the public market could cause the market price of our stock to fall. As of March 31, 2010, there were 82,600,235 shares of our common stock outstanding. In addition, after deducting the $115 million of common stock sold in August 2009, we retain the ability to issue and may in the future issue, up to an additional $15 million of securities, including common stock, preferred stock, debt securities, depositary shares and securities warrants, from time to time at prices and on terms to be determined at the time of sale remaining under an active shelf registration statement, which we filed with the SEC on March 9, 2007. Furthermore, we may from time to time issue securities in relation to a license arrangement, collaboration, merger or acquisition.

Up to 16,178,571 shares of our common stock are issuable upon the release of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock units that may be, issued pursuant to our Amended and Restated 1995 Stock Plan, or 1995 Plan, our Amended and Restated 2005 Equity Compensation Plan, or 2005 Plan, and the Executive Employment Agreement, dated February 18, 2010, between Inspire and

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Mr. Adams. The shares underlying existing stock options and restricted stock units and possible future stock options, stock appreciation rights and stock awards have been registered pursuant to registration statements on Form S-8.

On April 8, 2010, our Board of Directors adopted resolutions approving and authorizing amendments to our 1995 Plan and 2005 Plan, subject to the approval of the stockholders, to (i) merge the 1995 Plan into the 2005 Plan, (ii) increase the number of shares of common stock issuable under the merged plan by 8,250,000 shares, (iii) increase the maximum number of shares issuable to one person on an annual basis from 300,000 to 500,000 shares and (iv) rename the 2005 Plan the “Inspire Pharmaceuticals, Inc. Amended and Restated 2010 Equity Compensation Plan”. If approved by our stockholders at our 2010 Annual Meeting on June 3, 2010, the number of shares of our common stock reserved for issuance under any form of stock award under the amended plan will be increased by 8,250,000 shares.

If some or all of such shares are sold or otherwise issue into the public market over a short period of time, our current stockholders’ ownership interests may be diluted and the value of all publicly traded shares is likely to decline, as the market may not be able to absorb those shares at then-current market prices. Additionally, such sales and issuances may make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all.

Our Rights Agreement, the provisions of our Change in Control Severance Benefit Plans, the anti-takeover provisions in our Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, standstill agreements, and our right to issue preferred stock, may discourage a third party from making a take-over offer that could be beneficial to us and our stockholders and may make it difficult for stockholders to replace our Board of Directors and effect a change in our management if they desire to do so.

In October 2002, we entered into a Rights Agreement with Computershare Trust Company. The Rights Agreement could discourage, delay or prevent a person or group from acquiring 15% or more of our common stock. The Rights Agreement provides that if a person acquires 15% or more of our common stock without the approval of our Board of Directors, all other stockholders will have the right to purchase securities from us at a price that is less than its fair market value, which would substantially reduce the value of our common stock owned by the acquiring person. As a result, our Board of Directors has significant discretion to approve or disapprove a person’s efforts to acquire 15% or more of our common stock. In connection with the transaction with Warburg, we and Computershare entered into a First Amendment to Rights Agreement which provides that Warburg and its affiliates will be exempt from the definition of an “Acquiring Person” under the Rights Agreement, unless Warburg or certain of its affiliates becomes the beneficial owner of the lesser of: (x) 32.5% of our voting securities on a fully diluted basis and (y) 34.9% of our then outstanding voting securities. In addition to Warburg’s ability to exercise substantial control over our business, the First Amendment to Rights Agreement could further discourage, delay or prevent a person or group from acquiring 15% or more of our common stock. As part of the same transaction with Warburg, we entered into a standstill agreement, dated July 20, 2007, pursuant to which Warburg and certain of its affiliates agreed for three years not to increase their holdings of our common stock beyond the levels described above in the First Amendment to Rights Agreement. On August 4, 2009, we amended the standstill agreement to extend its term until August 4, 2012.

Our employees are covered under Change in Control Severance Benefit Plans which provide severance benefits in the event of a change of control that occurs prior to July 8, 2010, and in the event they are terminated after a change in control occurring on or after July 8, 2010. In addition, Mr. Adams’ Executive Employment Agreement provides for severance benefits in the event of a change of control. These arrangements would increase the acquisition costs to a purchasing company that triggers the change in control provisions and as a result, may discourage, delay or prevent a change in control.

Our Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws contain provisions which could discourage, delay or prevent a third party from acquiring shares of our common stock or replacing members of our Board of Directors. Our Amended and Restated Certificate of Incorporation, as amended, allows our Board of Directors to issue shares of preferred stock. Our Board of Directors can determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. As a result, our Board of Directors could make it difficult for a third party to acquire a majority of our outstanding voting stock.

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Since management is appointed by the Board of Directors, any inability to effect a change in the Board of Directors may result in the entrenchment of management.

Our Amended and Restated Certificate of Incorporation, as amended, also provides that the members of the Board will be divided into three classes. Each year, the terms of approximately one-third of the directors will expire. Our Amended and Restated Bylaws include director nomination procedures and do not permit our stockholders to call a special meeting of stockholders. The staggering of directors’ terms of office, the director nomination procedures and the inability of stockholders to call a special meeting may make it difficult for stockholders to remove or replace the Board of Directors should they desire to do so. The director nomination requirements include a provision that requires stockholders give advance notice to our Secretary of any nominations for director or other business to be brought by stockholders at any stockholders’ meeting. Our directors may be removed from our Board of Directors only for cause. These provisions may discourage, delay or prevent changes of control or management, either by third parties or by stockholders seeking to change control or management.

In the ordinary course of our business, from time to time we discuss possible collaborations, licenses and other transactions with various third parties, including pharmaceutical companies and biotechnology companies. When we deem it appropriate, we enter into standstill agreements with such third parties in relation to the discussions. These standstill agreements, several of which are currently in force, typically prohibit such parties from acquiring our securities for a period of time.

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter a “business combination” with that person for three years without special approval, which could discourage a third party from making a take-over offer and could delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203. In connection with our prior sale of stock to Warburg, we agreed to waive Warburg’s acquisition of securities from the provisions of Section 203 of the Delaware General Corporation Law.

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Item 6. Exhibits

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2006).
3.2	Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 18, 2007).
3.3	Certificate of Designations of Series H Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed March 7, 2003).
3.4	Certificate of Amendment to Certificate of Designations of Series H Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 23, 2007).
3.5	Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Exchangeable Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on July 23, 2007).
3.6	Certificate of Retirement of Series A Exchangeable Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 21, 2007).
10.1	Form of Restricted Stock Unit Grant Agreement (for Directors).
10.2	Form of Restricted Stock Unit Grant Agreement (for Officers).
10.3*	Technical Transfer & Development Services Agreement, between Inspire Pharmaceuticals, Inc. and Finorga S.A.S., acting in its own name and on behalf of Novasep Process, dated as of March 26, 2010.
10.4	Executive Employment Agreement, between Inspire Pharmaceuticals, Inc. and Andrew I. Koven, made as of April 2, 2010.
10.5	Form of Restricted Stock Unit Agreement by and between Inspire Pharmaceuticals, Inc. and Adrian Adams, effective as of March 18, 2010 (Incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form S-8 filed on March 18, 2010).
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer & Treasurer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer & Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment has been requested with respect to a portion of this Exhibit.

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Inspire Pharmaceuticals, Inc.
Date: May 4, 2010	By:	/s/ Adrian Adams
		Adrian Adams
		President & Chief Executive Officer
		(principal executive officer)
Date: May 4, 2010	By:	/s/ Thomas R. Staab, II
		Thomas R. Staab, II
		Chief Financial Officer & Treasurer
		(principal financial and chief accounting officer)

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2006).
3.2	Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 18, 2007).
3.3	Certificate of Designations of Series H Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed March 7, 2003).
3.4	Certificate of Amendment to Certificate of Designations of Series H Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 23, 2007).
3.5	Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Exchangeable Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on July 23, 2007).
3.6	Certificate of Retirement of Series A Exchangeable Preferred Stock of Inspire Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 21, 2007).
10.1	Form of Restricted Stock Unit Grant Agreement (for Directors).
10.2	Form of Restricted Stock Unit Grant Agreement (for Officers).
10.3*	Technical Transfer & Development Services Agreement, between Inspire Pharmaceuticals, Inc. and Finorga S.A.S., acting in its own name and on behalf of Novasep Process, dated as of March 26, 2010.
10.4	Executive Employment Agreement, between Inspire Pharmaceuticals, Inc. and Andrew I. Koven, made as of April 2, 2010.
10.5	Form of Restricted Stock Unit Agreement by and between Inspire Pharmaceuticals, Inc. and Adrian Adams, effective as of March 18, 2010 (Incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form S-8 filed on March 18, 2010).
31.1	Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer & Treasurer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer & Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment has been requested with respect to a portion of this Exhibit.

EX-10.1

EXHIBIT 10.1

INSPIRE PHARMACEUTICALS, INC.

2005 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNITS

(FOR DIRECTORS)

Inspire Pharmaceuticals, Inc. (the “Company”) has granted to you Restricted Stock Units (the “Grant”) under the Inspire Pharmaceuticals, Inc. 2005 Equity Compensation Plan, as amended (the “Plan”). The terms of the grant are set forth in the Restricted Stock Unit Grant Agreement provided to you (the “Agreement”). The following provides a summary of the key terms of the Grant; however, you should read the entire Agreement, along with the terms of the Plan, to fully understand the Grant.

SUMMARY OF RESTRICTED STOCK UNIT GRANT

Grant Number:	[___________]
Grantee:	[___________]
Date of Grant:	[___________]
Vesting Schedule:	FOR ANNUAL GRANTS [_____] Units cliff vest on June 1, 2011* *(or on the date of the 2011 Annual Meeting, if earlier.) OR, FOR INITIAL GRANTS [_____] Units cliff vest on June 1, 2011 [_____] Units cliff vest on June 1, 2012 [_____] Units cliff vest on June 1, 2013* *(or on the date of the 2013 Annual Meeting, if earlier.)
Total Number of Units Granted:	[___________]

Inspire 2005 Equity Comp Plan – Directors RSU Grant

INSPIRE PHARMACEUTICALS, INC.

2005 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNIT GRANT AGREEMENT

This RESTRICTED STOCK UNIT GRANT AGREEMENT (the “Agreement”), dated as of                          (the “Date of Grant”), is delivered by Inspire Pharmaceuticals, Inc. (the “Company”) to                          (the “Grantee”).

RECITALS

A. The Inspire Pharmaceuticals, Inc. 2005 Equity Compensation Plan, as amended (the “Plan”) provides for the grant of Restricted Stock Units representing shares of common stock of the Company (each a “Share”). The Company has decided to make a Unit grant (the “Grant”) as an inducement for the Grantee to promote the best interests of the Company and its stockholders.

B. The Plan is administered by the Compensation Committee of the Board of Directors of the Company (the “Committee”).

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Restricted Stock Units. Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee                          Units (the “Grant”). Each Unit is equivalent in value to one Share, and shall entitle the Grantee to receive from the Company, subject to Section 2 of this Agreement, one Share.

2. Vesting of Units. The Units are subject to forfeiture to the Company until such time as they vest as set forth below in this Section 2.

(a) Units shall vest in the manner provided below. For this purpose, the term “Shares” refers to the number of shares underling that portion of the Grant that vests on the applicable “Full Vest Date.” The term “Vest Type” describes how the Units covering those shares will vest before the Full Vest Date. For example, if Vest Type is “Cliff,” the Units in that row will vest as to all of the Shares in that row on the Full Vest Date and not before.

Shares	Vest Type	Full Vest Date
[_____]	Cliff	June 1, ______
[_____]	Cliff	June 1, ______
[_____]	Cliff	June 1, ______*

* or the date of the Annual Meeting of the Company’s Shareholders for that year, if earlier.

(b) Upon the Grantee’s Separation from Service (as defined in Section 11 herein) with the Company for Death, all Units shall immediately vest. If the Grantee experiences a Separation from Service for any other reason, any Units which have not vested as of such date shall immediately and automatically be forfeited, unless the Committee determines otherwise.

3. Delivery of Company Stock. As soon as administratively feasible following the end of the scheduled vesting date of such Units per Section 2(a) or sixty (60) days following an earlier vesting date that occurs as a result of the Grantee’s Separation from Service (the “Delivery Date”), the Shares shall be delivered electronically to the Grantee’s designated brokerage account evidencing the conversion of the vested Units into Shares or in such other reasonable manner as the Company shall provide. Such stock certificates shall be issued to the Grantee as of the Delivery Date and registered in the Grantee’s name. Notwithstanding anything herein to the contrary, the Units shall be construed in a manner that would not result in an excise tax under Section 409A of the Code. If the Grantee elects to have shares withheld in order to pay his or her estimated tax liability as soon as practicable following the Date of Grant and the Company agrees to accommodate this request, then such estimated tax liability shall be satisfied by a reduction of the number of Shares deliverable to the Grantee in an amount sufficient to satisfy such estimated tax payment such that the amount of Shares issued to the Grantee would reflect the net amount of Shares remaining after the reduction of the Shares to pay the Grantee’s estimated taxes.

4. Rights as Unit Holder. The Grantee shall not have any rights and privileges (including voting rights) of a holder of Shares with respect to the Units. Grantee shall have all of the rights and privileges (including voting rights) of a holder of shares of Company common stock with respect to the Shares that Grantee receives in satisfaction of his Units pursuant to this Agreement.

5. Stock Splits, etc. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin-off, recapitalization, stock split, or combination or exchange of shares; (ii) by reason of a merger, reorganization, or consolidation; (iii) by reason of a reclassification or change in par value; or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company’s receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin-off or the Company’s payment of an extraordinary dividend or distribution, the number of shares covered by this Grant, the kind of shares issued under this Grant shall be appropriately adjusted by the Company to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under this Grant; provided, however, that any fractional shares resulting from such adjustment shall be rounded down to the nearest whole share. Any adjustments determined by the Company shall be final, binding, and conclusive.

6. Tax Consequences. The Grantee understands and agrees that the Company has not advised the Grantee regarding the Grantee’s income tax liability in connection with the vesting of the Units. The Grantee has had the opportunity to review with the Grantee’s own tax advisors the federal, state, local and foreign tax consequences of this Grant and the transactions contemplated by this Agreement. The Grantee understands that the Grantee (and not the Company) shall be

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responsible for the Grantee’s own tax liability that may arise as a result of this Grant or the transactions contemplated by this Agreement.

7. Restriction on Transfer. None of the Units or any beneficial interest therein shall be transferred, encumbered, pledged or otherwise alienated or disposed of in any way except in the event of death of the Grantee by will or by the laws of descent and distribution.

8. Restrictive Legends. Stock certificates provided to the Grantee evidencing the Shares received hereunder shall bear such legends as the Company deems necessary or desirable under the Securities Act of 1933, as amended (the “Securities Act”), or the rules or regulations promulgated thereunder.

9. Requirements for Issuance or Transfer of Shares. No Shares shall be issued or transferred in connection with the Grant under this Agreement unless and until all legal requirements applicable to the issuance or transfer of such Shares have been complied with. This Grant shall be conditioned on the Grantee’s undertaking in writing to comply with such restrictions on his subsequent disposition of such Shares. Shares issued or transferred under this Agreement will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations.

10. Change in Control. The provisions of the Plan applicable to a Change in Control (as defined in the Plan) shall apply to the Grant.

11. Definitions. “Separation from Service” shall mean the date on which the Grantee experiences a separation from service with the Company as defined in Section 409A of the Code and the regulations promulgated thereunder.

12. Amendment of Agreement. This Agreement may only be modified or amended in a writing signed by both parties.

13. Waiver. Either party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party’s right to assert all other legal remedies available to it under the circumstances.

14. Further Assurances. The Grantee agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement.

15. Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

16. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Compensation Committee at 4222 Emperor Boulevard, Suite 200, Durham, North Carolina, 27703-8466, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll of the Company, or to such other address as

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the Grantee may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has executed this Agreement, on the Date of Grant.

INSPIRE PHARMACEUTICALS, INC.

By:

Name:

Title:

I hereby accept the Units described in this Agreement, and I agree to be bound by the terms of this Agreement. I hereby further agree that all the decisions and determinations of the Committee shall be final and binding.

Grantee:

Date:

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EX-10.2

EXHIBIT 10.2

INSPIRE PHARMACEUTICALS, INC.

2005 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNITS

(FOR EMPLOYEES)

Inspire Pharmaceuticals, Inc. (the “Company”) has granted to you Restricted Stock Units (the “Grant”) under the Inspire Pharmaceuticals, Inc. 2005 Equity Compensation Plan, as amended (the “Plan”). The terms of the grant are set forth in the Restricted Stock Unit Grant Agreement provided to you (the “Agreement”). The following provides a summary of the key terms of the Grant; however, you should read the entire Agreement, along with the terms of the Plan, to fully understand the grant.

SUMMARY OF RESTRICTED STOCK UNIT GRANT

Grant Number:	[___________]
Grantee:	[___________]
Date of Grant:	[___________]
Vesting Schedule:	[_____] Units cliff vest on June 1, 2011 [_____] Units cliff vest on June 1, 2012 [_____] Units cliff vest on June 1, 2013 [_____] Units cliff vest on June 1, 2014
Total Number of Units Granted:	[___________]

Inspire 2005 Equity Comp Plan – Employees RSU Grant

INSPIRE PHARMACEUTICALS, INC.

2005 EQUITY COMPENSATION PLAN

RESTRICTED STOCK UNIT GRANT AGREEMENT FOR EMPLOYEES

This RESTRICTED STOCK UNIT GRANT AGREEMENT FOR EMPLOYEES (the “Agreement”), dated as of                          (the “Date of Grant”), is delivered by Inspire Pharmaceuticals, Inc. (the “Company”) to                          (the “Grantee”).

RECITALS

A. The Inspire Pharmaceuticals, Inc. 2005 Equity Compensation Plan, as amended (the “Plan”) provides for the grant of Restricted Stock Units representing shares of common stock of the Company (each a “Share”). The Company has decided to make a Unit grant (the “Grant”) as an inducement for the Grantee to promote the best interests of the Company and its stockholders.

B. The Plan is administered by the Compensation Committee of the Board of Directors of the Company (the “Committee”).

NOW, THEREFORE, the parties to this Agreement, intending to be legally bound hereby, agree as follows:

1. Grant of Restricted Stock Units. Subject to the terms and conditions set forth in this Agreement and in the Plan, the Company hereby grants to the Grantee                          Units (the “Grant”). Each Unit is equivalent in value to one Share, and shall entitle the Grantee to receive from the Company, subject to Section 2 of this Agreement, one Share.

2. Vesting of Units. The Units are subject to forfeiture to the Company until such time as they vest as set forth below in this Section 2.

(a) Units shall vest in the manner provided below. For this purpose, the term “Shares” refers to the number of shares underling that portion of the Grant that vests on the applicable “Full Vest Date.” The term “Vest Type” describes how the Units covering those shares will vest before the Full Vest Date. For example, if Vest Type is “Cliff,” the Units in that row will vest as to all of the Shares in that row on the Full Vest Date and not before.

Shares	Vest Type	Full Vest Date
[_____]	Cliff	June 1, ______
[_____]	Cliff	June 1, ______
[_____]	Cliff	June 1, ______

  [_____]     Cliff     June 1, ______  

(b) Upon the Grantee’s Separation from Service (as defined in Section 11 herein) with the Employer for Death or Disability, all Units shall immediately vest. If the Grantee experiences a Separation from Service for any other reason, any Units which have not vested as of such date shall immediately and automatically be forfeited. By way of clarification, if the Grantee transfers from employment status to status as an independent contractor, he or she shall not forfeit his or her Units under this Agreement unless his or her transfer to independent contractor status amounts to a Separation from Service under Section 409A of the Code.

(c) The issuance of company stock certificates evidencing the Shares underlying the Units that have become vested and nonforfeitable is subject to the satisfaction of any withholding obligations (including federal and state income, and FICA taxes), as described in Section 3 below.

3. Delivery of Company Stock. Subject to Grantee’s satisfaction of any withholding obligations (including federal and state income, and FICA taxes), as soon as administratively feasible following the scheduled vesting date of such Units per Section 2(a) or sixty (60) days following an earlier vesting date that occurs as a result of the Grantee’s Separation from Service (the “Delivery Date”), the Shares shall be delivered electronically to the Grantee’s designated brokerage account thereby evidencing the conversion of the vested Units into Shares or in such other reasonable manner as the Company shall provide. The Grantee’s minimum withholding obligations, if any, shall be satisfied by making a payment to the Company by a reduction of the number of Shares deliverable to the Grantee in an amount sufficient to satisfy such withholding obligations such that the amount of Shares issued to the Grantee would reflect the net amount after payment of such taxes. Such stock certificates shall be issued to the Grantee as of the Delivery Date and registered in the Grantee’s name. Notwithstanding anything herein to the contrary, the Units shall be construed in a manner that would not result in an excise tax under Section 409A of the Code.

4. Rights as Unit Holder. The Grantee shall not have any rights and privileges (including voting rights) of a holder of Shares with respect to the Units. Grantee shall have all of the rights and privileges (including voting rights) of a holder of shares of Company common stock with respect to the Shares that Grantee receives in satisfaction of his Units pursuant to this Agreement.

5. Stock Splits, etc. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin-off, recapitalization, stock split, or combination or exchange of shares; (ii) by reason of a merger, reorganization, or consolidation; (iii) by reason of a reclassification or change in par value; or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company’s receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin-off or the Company’s payment of an extraordinary dividend or distribution, the number of shares covered by this Grant, the kind of shares issued under this Grant shall be appropriately adjusted by the Company to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to

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preclude, to the extent practicable, the enlargement or dilution of rights and benefits under this Grant; provided, however, that any fractional shares resulting from such adjustment shall be rounded down to the nearest whole share. Any adjustments determined by the Company shall be final, binding, and conclusive.

6. Tax Consequences. The Grantee understands and agrees that the Company has not advised the Grantee regarding the Grantee’s income tax liability in connection with the vesting of the Units. The Grantee has had the opportunity to review with the Grantee’s own tax advisors the federal, state, local and foreign tax consequences of this Grant and the transactions contemplated by this Agreement. The Grantee understands that the Grantee (and not the Company) shall be responsible for the Grantee’s own tax liability that may arise as a result of this Grant or the transactions contemplated by this Agreement.

7. Restriction on Transfer. None of the Units or any beneficial interest therein shall be transferred, encumbered, pledged or otherwise alienated or disposed of in any way except in the event of death of the Grantee by will or by the laws of descent and distribution.

8. Restrictive Legends. Stock certificates provided to the Grantee evidencing the Shares received hereunder shall bear such legends as the Company deems necessary or desirable under the Securities Act of 1933, as amended (the “Securities Act”), or the rules or regulations promulgated thereunder.

9. Requirements for Issuance or Transfer of Shares. No Shares shall be issued or transferred in connection with the Grant under this Agreement unless and until all legal requirements applicable to the issuance or transfer of such Shares have been complied with. This Grant shall be conditioned on the Grantee’s undertaking in writing to comply with such restrictions on his subsequent disposition of such Shares. Shares issued or transferred under this Agreement will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations.

10. Change in Control. The provisions of the Plan applicable to a Change in Control (as defined in the Plan) shall apply to the Grant.

11. Definitions.

(a) “Employer” shall mean the Company and its parent and subsidiary corporations, as determined by the Committee.

(b) “Separation from Service” shall mean the date on which the Grantee experiences a separation from service with the Company as defined in Section 409A of the Code and the regulations promulgated thereunder.

12. Amendment of Agreement. This Agreement may only be modified or amended in a writing signed by both parties.

13. Waiver. Either party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that

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party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party’s right to assert all other legal remedies available to it under the circumstances.

14. Further Assurances. The Grantee agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement.

15. No Employment or Other Rights. This Grant hereunder shall not confer upon the Grantee any right to be retained by, or to continue in, the employ of the Employer.

16. Applicable Law. The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

17. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Compensation Committee at 4222 Emperor Boulevard, Suite 200, Durham, North Carolina, 27703-8466, and any notice to the Grantee shall be addressed to such Grantee at the current address shown on the payroll of the Employer, or to such other address as the Grantee may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

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IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Agreement, and the Grantee has executed this Agreement, on the Date of Grant.

INSPIRE PHARMACEUTICALS, INC.

By:

Name:

Title:

I hereby accept the Units described in this Agreement, and I agree to be bound by the terms of this Agreement. I hereby further agree that all the decisions and determinations of the Committee shall be final and binding.

Grantee:

Date:

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EX-10.3

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

EXHIBIT 10.3

Execution Copy

TECHNICAL TRANSFER & DEVELOPMENT SERVICES AGREEMENT

by and between

INSPIRE PHARMACEUTICALS, INC.

and

FINORGA S.A.S.

Dated as of March 26, 2010

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

TABLE OF CONTENTS

		Page No.
ARTICLE I    DEFINITIONS		2
ARTICLE II    TECHNICAL TRANSFER PROGRAM		6
2.1	General	6
2.2	Inspire Materials	6
2.3	Technical Transfer Program; Project Plan	7
2.4	Changes	8
2.5	Personnel and Resources	8
2.6	Meetings	8
2.7	Specifications	9
ARTICLE III    NOVASEP’S SERVICES AND OBLIGATIONS		9
3.1	Facility and Equipment	9
3.2	Quality Agreement	10
3.3	Third Party Materials	10
3.4	Batches	11
3.5	Release and Shipment of Batches	11
3.6	Sale of API	12
3.7	Batch Samples	12
3.8	Novasep’s Site and Company Registrations	12
3.9	Compliance with Laws	13
3.10	Taxes	13
3.11	Access to and Retention of Information	13
ARTICLE IV    INSPIRE OBLIGATIONS		14
4.1	Technology Transfer	14
4.2	API Registrations	14
4.3	Payments	14
ARTICLE V    REPRESENTATIONS AND WARRANTIES		15
5.1	Novasep Representations and Warranties	15
5.2	Inspire Representations and Warranties	17
5.3	Warranties	17
ARTICLE VI    INTELLECTUAL PROPERTY		17
6.1	Ownership	17
6.2	New Developments and Modifications	18
6.3	Grant of Licenses	19
6.4	Infringement	19

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

6.5	Data	19
ARTICLE VII    CONFIDENTIALITY		20
7.1	Definition of “Inspire Confidential Information”	20
7.2	Definition of “Novasep Confidential Information”	20
7.3	Treatment of Confidential Information	20
7.4	Excluded Information	21
7.5	Return of Confidential Information	22
ARTICLE VIII    INDEMNIFICATION		22
8.1	Indemnity by Novasep	22
8.2	Indemnity by Inspire	23
8.3	Liability limitations	23
8.4	Procedures	23
ARTICLE IX    TERM; TERMINATION; REMEDIES		23
9.1	General	24
9.2	Termination for Bankruptcy; Insolvency	24
9.3	Termination for Default After Notice	24
9.4	Termination by Inspire for Change in Control of Novasep	24
9.5	Termination by Inspire for Convenience	24
9.6	No Suspension of Obligations	24
9.7	Effect of Termination	25
ARTICLE X    MISCELLANEOUS		25
10.1	Notices	25
10.2	Independent Contractors	26
10.3	Entire Understanding	26
10.4	Force Majeure Event	26
10.5	Assignment	27
10.6	Dispute Resolution	27
10.7	Use of Affiliates	28
10.8	Subcontractors	28
10.9	Amendment	28
10.10	Severability	28
10.11	Waiver	28
10.12	Survival	28
10.13	Drafting Ambiguities	29
10.14	Headings; Schedules and Exhibits; Counterparts	29
10.15	Governing Law	29
10.16	Remedies	29
10.17	Injunctive Relief	29
10.18	Further Assurances	30
10.19	Counterparts	30

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

10.20 English Language 30

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

SCHEDULES TO AGREEMENT:

Schedule A:	Project Plan
Schedule B:	Project Fees
Schedule C:	Equipment

Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

TECHNICAL TRANSFER & DEVELOPMENT SERVICES AGREEMENT

THIS TECHNICAL TRANSFER & DEVELOPMENT SERVICES AGREEMENT (this “Agreement”) is made and entered into as of the 26th day of March, 2010 (the “Effective Date”) by and between Inspire Pharmaceuticals, Inc., a Delaware corporation having a place of business at 4222 Emperor Blvd., Suite 200, Durham, NC 27703, USA (“Inspire”), and Finorga S.A.S., a corporation organized and existing under the laws of France, having a place of business at Route de Givors, 38670 Chasse sur Rhône, France, acting in its own name and in the name and on behalf of Novasep Process, a corporation organized and existing under the laws of France, having a place of business at Site Eiffel, Boulevard de la Moselle, 54340 Pompey, France (collectively “Novasep”). Inspire and Novasep are sometimes referred to herein individually as a “Party” and collectively as “Parties.”

RECITALS

WHEREAS, Inspire is engaged in the research, development and commercialization of proprietary pharmaceutical products;

WHEREAS, Novasep is a company that has developed substantial expertise in manufacturing active pharmaceutical ingredients for use in pharmaceutical products; and

WHEREAS, Groupe Novasep SAS (an Affiliate of Novasep) and Inspire have signed a Mutual Confidential Disclosure Agreement dated February, 6^th 2008, in order to exchange certain Confidential Information in connection with certain services and the manufacturing of the API (as defined below); and

WHEREAS, Novasep and Inspire are working together since February 2009 on certain services relating to the API and have signed a Material Transfer Agreement dated March, 31^st 2009, following which Inspire transferred to Novasep certain quantities and samples of materials; and

WHEREAS, Finorga / Novasep Synthesis France (an Affiliate of Novasep) and Inspire have signed a Letter of Intent dated July 31^st, 2009 (the “Letter of Intent”) by which Inspire confirmed its commitment with respect to certain capital equipment expenses of Novasep; and

WHEREAS, the Parties desire to provide in this Agreement for the transfer by Inspire of technologies required by Novasep to begin production of a certain active pharmaceutical ingredient for Inspire; and

WHEREAS, Inspire, by the following purchase orders, has ordered from Novasep certain development services and deliverables in relation to the API, including laboratory familiarization, process & analytical transfer, process optimization, testing and selection of the best process: Purchase Order #005605 dated March 24, 2009; Purchase Order

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

#005721 dated June 26, 2009; Purchase Order #005771 dated August 11, 2009; Purchase Order #005772 dated August 11, 2009; Purchase Order #005773 dated August 11, 2009; Purchase Order #005824 dated September 21, 2009; Purchase Order #005851 dated October 15, 2009; Purchase Order #005900 dated November 16, 2009; Purchase Order #005931 dated December 21, 2009; and Purchase Order #005932 dated December 21, 2009 (collectively, the “Purchase Orders”); and

WHEREAS, Finorga SAS and Novasep Process are wholly-owned subsidiaries of Groupe Novasep S.A.S., and contemporaneously with this Agreement Groupe Novasep S.A.S. is entering into and delivering to Inspire the Parent Guarantee between such parties;

NOW, THEREFORE, in consideration of the foregoing recitals, mutual covenants, agreements, representations and warranties contained herein, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

“Affiliate” means a corporation or non-corporate business entity that, directly or indirectly, controls, is controlled by, or is under common control with the Person specified, for so long as such control continues. An entity will be regarded as in control of another entity if: (a) it owns, directly or indirectly, at least 50% of the voting securities or capital stock of such entity, or has other comparable ownership interest with respect to any entity other than a corporation; or (b) it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership or control of voting securities, by contract or otherwise.

“API” means denufosol tetrasodium (P¹-(2’-deoxycytidine 5’-)P⁴-(uridine 5’)tetraphosphate tetrasodium).

“API Developments” has the meaning provided in Section 6.2(a) of this Agreement.

“Batch” means Demonstration Batch, Development Batch or Validation Batch.

“Change Control Operating Procedure” has the meaning provided in Section 2.4 of this Agreement.

“Change in Control” has the meaning provided in Section 9.4 of this Agreement.

“Claim” has the meaning provided in Section 8.1 of this Agreement.

“Confidential Information” has the meaning provided in Section 7.3 of this Agreement.

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

“Consent” means any consent, authorization, permit, certificate, license or approval of, exemption by, or filing or registration with, any Governmental Body or other Person.

“Current Good Manufacturing Practices” or “cGMPs” means all applicable standards relating to manufacturing practices for intermediates, active pharmaceutical ingredients or finished pharmaceutical products, including without limitation: (i) the principles detailed in the U.S. Current Good Manufacturing Practices, 21 C.F.R. Parts 210 and 211, The Rules Governing Medicinal Products in the European Community, Volume IV Good Manufacturing Practice for Medicinal Products, and Q7A Good Manufacturing Practice Guidance For Active Pharmaceutical Ingredients (ICH Q7A), (ii) the principles promulgated by any applicable Governmental Body having jurisdiction over the manufacture of the API, in the form of laws, rules or regulations, and (iii) the principles promulgated by any applicable Governmental Body having jurisdiction over the manufacture of the API, in the form of guidance documents (including but not limited to advisory opinions, compliance policy guides and guidelines), which guidance documents are being implemented within the pharmaceutical manufacturing industry for such products; in each case as in effect at the Effective Date and as amended, promulgated or accepted by any applicable Governmental Body from time to time during the Term.

“Data” has the meaning provided in Section 6.5 of this Agreement.

“Demonstration Batch” has the meaning provided in Section 3.4 of this Agreement.

“Development Batch” has the meaning provided in Section 3.4 of this Agreement.

“Equipment” has the meaning provided in Section 3.1(b) of this Agreement.

“Facility” means Novasep’s manufacturing facilities located at (i) Route de Givors, 38670 Chasse-sur-Rhône, France (Finorga), (ii) Site Eiffel, Boulevard de la Moselle, 54340 Pompey, France (Novasep Process), (iii) 5 Chemin du Pilon, 01703 Saint Maurice de Beynost, France (Novasep Process) and any other facility approved in advance in writing by Inspire.

“Force Majeure Event” has the meaning provided in Section 10.4 of this Agreement.

“Governmental Body” means any nation or government, any state, province or other political subdivision thereof, or any entity with legal authority to exercise executive, legislative, judicial, regulatory or administrative functions, or any division of the United States Food and Drug Administration (as applicable) and any other applicable counterpart agency that administers the Legal Requirements.

“Indemnified Party” has the meaning provided in Section 8.4 of this Agreement.

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

“Indemnifying Party” has the meaning provided in Section 8.4 of this Agreement.

“Initial Materials” means dCMP (2’-deoxycytidine 5’-monophosphate).

“Inspire Confidential Information” has the meaning provided in Section 7.1 of this Agreement.

“Inspire Intellectual Property” means any and all Intellectual Property relating to the API or the development or manufacture thereof that was (i) owned, licensed or controlled by Inspire or Inspire Affiliates at the Effective Date or (ii) developed or acquired by Inspire or Inspire Affiliates after the Effective Date.

“Inspire License” has the meaning provided in Section 6.3 of this Agreement.

“Inspire Materials” has the meaning provided in Section 2.2 of this Agreement.

“Inspire Rights” has the meaning provided in Section 6.3 of this Agreement.

“Intellectual Property” means (i) patents, patent rights, provisional patent applications, patent applications, designs, registered designs, registered design applications, industrial designs, industrial design applications and industrial design registrations, including any and all divisions, continuations, continuations-in-part, extensions, restorations, substitutions, renewals, registrations, revalidations, reexaminations, reissues or additions, including supplementary certificates of protection, of or to any of the foregoing items; (ii) copyrights, copyright registrations, copyright applications, original works of authorship fixed in any tangible medium of expression, including literary works (including all forms and types of computer software, including all source code, object code, firmware, development tools, files, records and data, and all documentation related to any of the foregoing), musical, dramatic, pictorial, graphic and sculptured works; (iii) trade secrets, technology, developments, discoveries and improvements, know-how, proprietary rights, formulae, confidential and proprietary information, technical information, techniques, inventions, designs, drawings, procedures, processes, models, formulations, manuals and systems, whether or not patentable or copyrightable, including all biological, chemical, biochemical, toxicological, pharmacological and metabolic material and information and data relating thereto and formulation, clinical, analytical and stability information and data which have actual or potential commercial value and are not available in the public domain; (iv) trademarks, trademark registrations, trademark applications, service marks, service mark registrations, service mark applications, business marks, brand names, trade names, trade dress, names, logos and slogans, internet domain names, and all goodwill associated therewith; and (v) all other intellectual property or proprietary rights worldwide, in each case whether or not subject to statutory registration or protection.

“Legal Requirements” means any and all local, municipal, state, provincial, federal and international laws, statutes, ordinances, rules or regulations now or hereafter enacted or promulgated by any Governmental Body applicable to the development, approval, manufacture, sale or licensing of any pharmaceutical products, ingredients for

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

inclusion therein, or any aspect thereof and the obligations of Novasep or Inspire, as the context requires, under this Agreement, including, without limitation, the United States Federal Food, Drug and Cosmetic Act, as amended, and the rules and regulations promulgated thereunder.

“Losses” means, collectively, any and all claims, liabilities, damages, costs, expenses, including reasonable fees and disbursements of counsel and any consultants or experts and expenses of investigation, obligations, liens, assessments, judgments, fines and penalties imposed upon or incurred by an Indemnified Party.

“Novasep Confidential Information” has the meaning provided in Section 7.2 of this Agreement.

“Novasep Intellectual Property” means (i) all Intellectual Property owned, licensed or controlled by Novasep prior to the Effective Date and (ii) all Intellectual Property developed or acquired by Novasep after the Effective Date that does not relate to the API or the development or manufacture of the API, and does not utilize and is not based on any Inspire Rights or Inspire Confidential Information.

“Person” means any individual, corporation, company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind.

“Project Plan” has the meaning provided in Section 2.3 of this Agreement.

“Project Team” has the meaning provided in Section 2.5 of this Agreement.

“Quality Agreement” means the agreement identified in Section 3.2 of this Agreement.

“Specifications” means, with respect to the API, all specifications for materials, approved suppliers, formula, manufacturing, analytical and testing procedures, release, packaging, labeling and other processes relating to the manufacture of the API, all as set forth in the Request for Proposal (RFP) – INS37217 Technology Transfer and Commercial Manufacture dated and provided by Inspire to Novasep via email on February 10, 2009, as such specifications may be updated by Inspire or revised from time to time in accordance with this Agreement.

“Subcontractor” means any Third Party that performs any of Novasep’s obligations under this Agreement on Novasep’s behalf.

“Supply Agreement” has the meaning provided in Section 2.1 of this Agreement.

“Technical Transfer Program” has the meaning provided in Section 2.1 of this Agreement.

“Term” has the meaning provided in Section 9.1 of this Agreement.

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

“Third Party” means any Person other than the Parties or their respective Affiliates.

“Third Party Materials” means (i) all raw materials, components, work-in-process and other ingredients required to manufacture the API and (ii) all packaging materials used in the manufacture, storage and shipment of the API, in each case, other than Inspire Materials.

“Validation Batch” has the meaning provided in Section 3.4 of this Agreement.

ARTICLE II

TECHNICAL TRANSFER PROGRAM

2.1 General. Subject to the terms and conditions of this Agreement, Inspire agrees to transfer to Novasep technology and technical information in Inspire’s possession necessary for the manufacture of the API at the Facility, and Novasep agrees to (i) develop and confirm the manufacturing process for the API; (ii) assist in establishing final Specifications; (iii) manufacture Batches of the API; and (iv) conduct all other activities specified in the Project Plan, including without limitation technology transfer, scale-up, method transfer, method development and validation, process development, process optimization and process validation (collectively, the “Technical Transfer Program”), all as more specifically provided in this Agreement. The Parties contemplate entering into an additional agreement relating to Novasep’s manufacture of the API for Inspire following the successful completion of the Technical Transfer Program (the “Supply Agreement”). The Parties hereby agree to negotiate the terms of such Supply Agreement in good faith. Notwithstanding the foregoing, the Parties shall not be obligated to enter into the Supply Agreement.

2.2 Inspire Materials. Inspire or its designee shall supply Initial Materials to Novasep on a reasonably prompt basis for use in the Technical Transfer Program in quantities reasonably sufficient to carry out the Technical Transfer Program in accordance with this Agreement. Prior to the delivery of any of such Initial Materials to Novasep, Inspire or its designee shall, if available, provide to Novasep a copy of the Material Safety Data Sheet for the Initial Materials, as currently in effect, and thereafter shall promptly provide any subsequent revisions thereto. Novasep acknowledges that the Material Safety Data Sheet has been generated by the Third Party supplier of the Initial Materials and that the accuracy thereof has not been independently confirmed by Inspire. Novasep accordingly agrees to exercise due care and judgment in handling and using the Initial Materials. Without limiting the foregoing, Novasep shall be responsible for inspecting, testing and releasing Initial Materials as necessary to perform the Technical Transfer Program. All materials, including but not limited to, Initial Materials, samples and specimens, supplied by or on behalf of Inspire or its designees to Novasep, including derivatives thereof (collectively “Inspire Materials”), are and shall at all times remain the sole property of Inspire, whether such Inspire Materials remain unused or are contained in any work-in-process or finished product. Novasep shall handle, store, use and dispose

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

of Inspire Materials in accordance with the Specifications, cGMPs, all applicable Legal Requirements and the terms and conditions of this Agreement. Novasep shall have responsibility for and bear the risk of loss of any Inspire Materials after receipt thereof by Novasep. Inspire Materials may only be used by Novasep for the API set forth herein and may not be provided to any Third Party other than a Subcontractor approved by Inspire pursuant to Section 10.8 solely for purposes of testing and releasing Inspire Materials as necessary to perform the Technical Transfer Program. Any and all Inspire Materials shall be returned to Inspire or its designees upon the earlier of (a) Inspire’s request or (b) the termination or expiration of this Agreement. In the alternative, if Inspire requests that remaining Inspire Materials be destroyed, Novasep shall destroy such Inspire Materials and certify in writing that such Inspire Materials have been destroyed in accordance with all Legal Requirements. In the event that Novasep loses, destroys or damages any Inspire Materials such that they cannot be used in connection with any API, Novasep shall reimburse Inspire for Inspire’s expenses incurred in connection with procuring and shipping Inspire Materials to replace such lost, destroyed or damaged Inspire Materials.

2.3 Technical Transfer Program; Project Plan. Schedule A attached hereto (the “Project Plan”) details the specific tasks and functions to be performed by the Parties in the Technical Transfer Program, including, but not limited to, the time schedule, documentation, reports, Equipment and technical assistance. The Project Team members periodically shall review the Project Plan, consult as to its continuing suitability and implement any revisions thereto that are mutually agreed in writing by the Parties in accordance with the provisions of Section 10.9 below. In addition, Inspire may, in its sole discretion, upon providing written notice to Novasep, revise the Project Plan to reflect changes in Legal Requirements, import or export restrictions, delays in the implementation of the Project Plan and the Parties’ technical capabilities. Novasep recognizes the importance of, and agrees to use best efforts to ensure, timely performance of its obligations under this Agreement in accordance with the Project Plan. The Parties acknowledge that since the work detailed in the Project Plan is of a developmental nature, experimental or technical circumstances beyond Novasep’s control may prevent or delay completion of the Technical Transfer Program. In the event of such circumstances, Novasep shall nevertheless use best efforts to perform its obligations under this Agreement in as timely a manner as possible under such circumstances. In the event of (i) any proposed change in the Project Plan including with respect to any time schedule or (ii) any notice from Inspire of a revision permitted to be made in Inspire’s sole discretion under this Section 2.3, Novasep shall notify Inspire as promptly as practicable of any other adjustments to the Project Plan that Novasep proposes in light of Inspire’s revisions and the Parties shall then negotiate in good faith an adjusted Project Plan including, if appropriate, a revised time schedule to provide reasonable accommodation for the changed circumstances. Without limiting the foregoing, if the Parties fail to achieve agreed objectives, costs or timelines set forth in the Project Plan, the Party responsible for that deviation will (i) provide to the other Party a written description of the deviation, the cause and a proposed solution, and (ii) lead negotiations of a solution to minimize the impact of the delay or failure on the Technical Transfer Program. The Parties acknowledge that, as of the Effective Date, the Parties already have begun to undertake

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

the activities set forth in the Project Plan, and the Parties agree that all such activities occurring prior to the Effective Date will constitute activities covered and governed by the terms and conditions of this Agreement. The Parties acknowledge and agree that the deadline for completion of the Development Batches, excluding full results of outsourced analysis, in accordance with the Project Plan shall be [c.i.], and that the deadline for completion of process validation, including delivery of the final process validation report, in accordance with the Project Plan shall be [c.i.].

2.4 Changes. Promptly after the Effective Date, the Parties shall work together and cooperate in good faith to establish in writing the procedures to be followed in the event either Inspire or Novasep desires to change any aspect of the process by which the API is manufactured, including but not limited to any change in the Specifications (the “Change Control Operating Procedures”), and such written procedures shall be deemed a part of this Agreement and incorporated herein by reference, as if fully set forth herein. Any modification of the Change Control Operating Procedures shall be mutually agreed in writing by the Parties in accordance with the provisions of Section 10.9 below. Novasep shall not make any revisions to the Specifications, and shall not implement any change in the manufacturing process for the API, in each case, unless it has complied with the Change Control Operating Procedures. Without limiting the foregoing, Novasep shall not make any such revisions or implement any such changes without first obtaining the prior written consent of Inspire.

2.5 Personnel and Resources. Novasep shall commit to the Technical Transfer Program a project manager and additional appropriate personnel (including, without limitation, those with expertise in technical development, manufacturing, operations, quality control, quality assurance and regulatory affairs) and appropriate manufacturing and storage space and equipment at the Facility to accomplish the Project Plan within the time schedule set forth therein. Inspire shall commit such of its personnel with appropriate expertise to provide monitoring and, as appropriate, technical consultation for the Technical Transfer Program. The Parties shall each designate a project team for the Technical Transfer Program (each, a “Project Team”), with each Party designating a Project Team leader and other members who possess expertise appropriate to the current stage of the Technical Transfer Program. Each Party may replace or supplement the members on the Project Team with other individuals possessing the requisite expertise by providing written notice of such replacement or supplement to the other Party. The Project Team shall hold teleconferences or meetings as agreed by Project Team members or as requested by either Party, but not less than twice monthly.

2.6 Meetings. During the Term, the Parties shall meet every two (2) months, or more frequently if desired by either Party, to review the status of the Technical Transfer Program, determine progress under the Project Plan and receive reports or recommendations from the Project Team. Novasep’s representative at such meetings shall be its project manager designated for the Technical Transfer Program and Inspire’s representative at such meetings shall be its Project Team leader designated for the

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Technical Transfer Program. Additional personnel of either Party may be designated by such Party in its discretion to attend such meetings.

2.7 Specifications. The Parties will establish the final Specifications for manufacturing, packaging and labeling for the API in accordance with the Project Plan and subject to Inspire’s approval. The final Specifications will be comparable to the initial Specifications with regards to purity and potency, and consistent with all requirements imposed by cGMPs and Legal Requirements.

ARTICLE III

NOVASEP’S SERVICES AND OBLIGATIONS

3.1 Facility and Equipment.

(a) Novasep shall perform its obligations under this Agreement solely at the Facility unless Inspire consents in writing otherwise. Novasep shall, at its own expense, maintain the Facility in compliance with cGMPs and Legal Requirements.

(b) Novasep shall, in accordance with the Project Plan, design in collaboration with Inspire and procure, install and qualify the equipment specified in Schedule C at the Facility (collectively, the “Equipment”). Final selection of the Equipment shall be made by Novasep, subject to Inspire’s prior approval.

(c) Novasep shall keep the Equipment at the Facility, use it to accomplish the Project Plan or perform its obligations under the Supply Agreement, provide Inspire with access to the Equipment upon Inspire’s request, including without limitation under such terms and conditions as may be agreed in the Supply Agreement, and maintain, at Novasep’s own expense, the Equipment in good operating condition and in compliance with cGMPs and Legal Requirements. Inspire agrees that when the Equipment is not required in connection with the Project Plan or the manufacturing of the Product, Novasep shall have the right, subject to Inspire’s prior written approval, to use the Equipment for other purposes. Novasep will communicate requested time slots in advance to Inspire, and Inspire will have the right to approve such time slots on a case-by-case basis. Inspire’s written approval will not be unreasonably withheld or delayed. Novasep’s right to use the Equipment in each case shall be subject to all of the remaining terms and conditions of this Agreement, including without limitation the following conditions:

(i) there is no conflict with Inspire’s need for the Equipment in connection with this Agreement or the Supply Agreement, and

(ii) the Equipment is cleaned by Novasep in compliance with cGMPs and Legal Requirements after its use for other purposes, and

(iii) Novasep pays Inspire a fee of [c.i.] €/week of utilization (including set-up, production and cleaning), during the period beginning on the Effective date and ending on the [c.i.] anniversary of the Effective Date. The fee will

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be calculated based on the time elapsed between initiation of set-up and completion of cleaning for the applicable use and paid at the end of each calendar quarter.

Notwithstanding the foregoing, the resins used or required to be used in connection with the Project Plan or the manufacturing of the Product shall not be used for any purposes other than the Project Plan or the manufacture of the Product. The Equipment shall be solely owned by Inspire, and Novasep shall execute or cause to be executed any documents requested by Inspire to evidence or otherwise establish such ownership. Novasep shall mark the Equipment as owned by Inspire in a manner reasonably approved by Inspire. Novasep shall keep the Equipment free and clear of any liens or encumbrances and shall not transfer or assign the Equipment, and any such purported encumbrance, transfer or assignment shall be null and void. Novasep shall not make or cause to be made any material alterations or modifications to the Equipment without Inspire’s prior written approval. Novasep will maintain adequate insurance to cover the cost of replacement of the Equipment, and the risk of loss for the Equipment will be borne by Novasep.

(d) Inspire shall have the right to take possession of the Equipment at any time, by sending to Novasep a written notice explaining that Inspire intends to take possession of the Equipment. In this case, Novasep shall provide reasonable assistance to facilitate removal of the Equipment from the Facility by Inspire, and the reasonable, documented costs for removal and transportation of the Equipment will be paid by Inspire.

(e) In the event that Inspire makes a public announcement that it is discontinuing its program for the development and commercialization of an API-based product, then Inspire and Novasep agree to discuss and negotiate in good faith to reach mutually acceptable terms and conditions for the transfer of ownership of the Equipment from Inspire to Novasep. If no such mutually acceptable terms can be agreed between the Parties, then Inspire shall take possession of the Equipment, and the reasonable, documented costs for removal and transportation of the Equipment will be paid by Inspire, and Novasep shall provide reasonable assistance to facilitate removal of the Equipment from the Facility by Inspire.

3.2 Quality Agreement. Novasep and Inspire have entered into a Quality Agreement for the API effective as of July 2, 2009 (the “Quality Agreement”). Novasep and Inspire shall comply with the Quality Agreement in performing their activities under this Agreement.

3.3 Third Party Materials. Novasep shall be responsible for procuring, inspecting, testing and releasing adequate Third Party Materials as necessary to perform the Technical Transfer Program. Novasep will obtain Third Party Materials for API produced under this Agreement only from Third Party suppliers named in the

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Specifications, where applicable, or otherwise meeting the Specifications and approved in advance by Inspire.

3.4 Batches. Novasep shall manufacture kilolab batches, pilot batches and proof of process batches of the API as specified in the Project Plan (each, a “Demonstration Batch”). Novasep also shall manufacture development batches of the API as specified in the Project Plan (“Development Batch”). Novasep also shall manufacture batches of the API for the purposes of conducting validation studies as specified in the Project Plan (each, a “Validation Batch”). Inspire, in consultation with Novasep, will use the data from Validation Batches to finalize the Specifications consistent with regulatory expectations for purity, potency and other API characteristics. Novasep shall perform all validation studies specified in the Project Plan and as required by the Technical Transfer Program, Specifications, cGMPs or Legal Requirements in order to qualify the API produced at the Facility for incorporation into finished pharmaceutical products for commercial sale worldwide.

3.5 Release and Shipment of Batches.

(a) Novasep shall implement and perform operating procedures and controls for testing, validation, documentation and release of the API and such other quality assurance and quality control procedures as are required by the Specifications, cGMPs, Legal Requirements, and this Agreement and the Quality Agreement. Prior to release of the API, Novasep shall test the API in accordance with the testing procedures described in (i) the Specifications, (ii) cGMPs, (iii) Legal Requirements, (iv) those procedures and in-plant quality control checks applicable to any products produced by Novasep, and (v) such other methods and procedures as Inspire may reasonably determine. In the event that such other methods or procedures determined by Inspire create additional costs and/or expenses for Novasep, the Parties will negotiate in good faith to determine responsibility for such costs and/or expenses. Novasep shall provide Inspire with the applicable master batch record and any other information as requested by Inspire. Additionally, Novasep shall provide Inspire with a Certificate of Analysis for each batch of API. “Certificate of Analysis” means a document identified as such and provided by Novasep to Inspire that (i) sets forth the analytical test results for a specified batch of API, (ii) states that such API is in conformance with the Specifications, and (iii) states that such API is manufactured in accordance with the Specifications, Legal Requirements, cGMPs, all other regulatory documents, and such other methods as Inspire may determine.

(b) Inspire may request delivery of any API to Inspire or a Third Party, including without limitation for purposes of testing and releasing the API at a Third Party. In such event, Novasep shall ship the API FCA the Facility (as defined in INCOTERMS, 2000 edition, published by the International Chamber of Commerce, ICC Publication 560), except with regard to title and risk of loss, which are described below in this Section 3.5(b). Freight and insurance shall be

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for the account of Inspire, and the risk of loss, delay or damage in transit shall be with Inspire from and after delivery to Inspire’s designated carrier. Novasep shall use commercially reasonable efforts to assist Inspire in arranging any desired insurance. Novasep shall package the API for shipment (including but not limited to containers, packaging, container closure systems and labeling) in accordance with Inspire’s instructions and its customary practices therefore. In the event that these instructions and customary practices create additional costs and/or expenses for Novasep, the Parties will negotiate in good faith to determine responsibility for such costs and/or expenses. In the event of any conflict between Inspire’s packaging instructions and Novasep’s customary practices, the Parties shall endeavor in good faith to resolve such conflict as quickly as practicable. Novasep shall include the following with each shipment of the API: (i) a copy of the applicable Certificate of Analysis; (ii) the Batch numbers; (iii) the quantity of the API; (iv) a copy of the applicable Batch report; and (v) a copy of the Material Safety Data Sheet for the API. Title to and risk of loss for any API shall pass from Novasep to Inspire when such API is picked up by the carrier at the Facility. If any API is rejected by Inspire after shipment under this Agreement, and such API is to be returned to Novasep, then title to and risk of loss for the rejected API shall pass from Inspire to Novasep when such API is placed in the possession of the carrier for return to Novasep or for shipment on behalf of Novasep to a destination designated by Novasep.

3.6 Sale of API. Novasep shall neither market nor sell the API produced under this Agreement except for sales to Inspire permitted by this Agreement. Novasep shall not use any process developed under this Agreement with or on behalf of any Third Party.

3.7 Batch Samples. Novasep shall retain samples from each Batch of API for a period of thirty-six (36) months after the expiration date for such Batch or such longer period required by Legal Requirements. Novasep shall handle, store, use and dispose of all Third Party Materials, API or API derived wastes in compliance with Specifications and in accordance with cGMPs and all applicable Legal Requirements and the terms and conditions of this Agreement.

3.8 Novasep’s Site and Company Registrations. Novasep shall prepare, and provide to Inspire for review and comment, all necessary documentation for any registrations of Novasep under applicable Legal Requirements as a manufacturer of active pharmaceutical ingredients, or as a site manufacturing the API, for incorporation in finished pharmaceutical products for commercial sale worldwide. Inspire may, in its discretion, handle or cause any agent or representative to handle the filing of such registrations relating to the API. Inspire shall be entitled to monitor or participate in all of Novasep’s interactions with Governmental Bodies with respect to Novasep’s production of the API. Upon notice of any visit to or inspection of the portion or portions of the Facility used in the manufacture of the API by an authorized agent of a Governmental Body, Novasep shall promptly notify Inspire and permit Inspire to review

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and provide comment regarding all related correspondence between Novasep and the Governmental Body.

3.9 Compliance with Laws. In carrying out its obligations under this Agreement, Novasep shall comply in all respects with cGMPs and Legal Requirements in effect from time to time. Prior to the manufacture of the API at the Facility, Novasep shall timely obtain all necessary inspections and Consents needed for it to perform its obligations under this Agreement. The Parties will promptly notify each other of any material revisions or amendment of or additions to cGMPs and will confer with each other with respect to the best means to comply with such requirements.

3.10 Taxes.

(a) Novasep shall pay and otherwise be responsible for all applicable sales, goods, services, transfer and similar taxes in connection with any payment made to Novasep pursuant to this Agreement.

(b) Any income or other tax that one Party is required to withhold and pay on behalf of the other Party with respect to amounts payable under this Agreement shall be deducted from said amounts prior to payment to the other Party; provided, however, that in regard to any tax so deducted, the Party making the withholding shall give or cause to be given to the other Party such assistance as may reasonably be necessary to enable that other Party to claim exemption therefrom or credit therefor, and in each case shall furnish the Party on whose behalf amounts were withheld, proper evidence of the taxes paid on its behalf. Each Party shall comply with reasonable requests of the other Party to take any proper actions that may minimize any withholding obligation.

3.11 Access to and Retention of Information.

(a) Novasep shall provide to Inspire for its review copies of all data generated during the Technical Transfer Program, including without limitation, stability and validation data, as may be requested by Inspire from time to time and in any format.

(b) Novasep shall provide Inspire representatives access during Novasep’s regular working hours to the portions of the Facility being utilized for manufacture of the API, including without limitation at the times specified in the Project Plan, for the purpose of observing, reporting on and consulting as to such manufacturing efforts, including review of Novasep’s safety and quality procedures, plans and implementation, and shall cooperate with Inspire representatives in fulfilling their responsibilities, including making temporary desk space, knowledgeable personnel and other reasonable resources available to the Inspire representatives. Inspire and Novasep shall discuss the results of any review by Inspire and agree upon any modifications required to produce API in

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accordance with the Specifications, cGMPs, Legal Requirements and this Agreement.

(c) Novasep shall maintain, in accordance with and for the period required under cGMPs and Legal Requirements or any longer period specified in the Quality Agreement, complete and systematic records pertaining to all activities in connection with, and the portion or portions of the Facility used for, the manufacture, processing, testing, packaging, labeling, storage and distribution of the API, Third Party Materials or Inspire Materials. Novasep shall keep accurate books and accounts of record in connection with the manufacture, use and/or sale by it of API hereunder in sufficient detail to permit accurate determination of all figures necessary for verification of payment obligations set forth in this Agreement. Such records related to verification of payment obligations shall be maintained for a period of five (5) years from the end of each year to which it relates. Novasep shall maintain and keep records required under this Agreement in English.

(d) Novasep shall from time to time upon request of Inspire provide Inspire with access during Novasep’s regular working hours to, and copies of, all records retained by Novasep pursuant to this Agreement, including without limitation any records Novasep is required to maintain pursuant to this Article III. Novasep shall cooperate with Inspire during its inspection or audit of such records.

ARTICLE IV

INSPIRE OBLIGATIONS

4.1 Technology Transfer. Inspire shall provide on a reasonably prompt basis technology and technical information reasonably necessary for Novasep to perform the Agreement, including without limitation, validated analytical procedures for all non-compendial testing, reference standards of the API and major impurities, API formulations and Specifications, labeling specifications, packaging configurations, and manufacturing safety information, all in accordance with the schedule specified in the Project Plan. Inspire’s personnel with appropriate expertise will be available from time to time to participate in meetings or teleconferences with Novasep’s specialists in order to facilitate the proper performance of the Project Plan attached to the Agreement.

4.2 API Registrations. Inspire shall be responsible for filing and strategy relating to all API registrations, and Novasep shall support Inspire’s efforts by providing all documentation relating to Inspire’s ongoing API registrations as specified in the Project Plan.

4.3 Payments.

(a) For all work performed under this Agreement, Inspire shall pay Novasep as provided for on Schedule B attached hereto. Novasep acknowledges

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and agrees that Inspire has paid in full all amounts contemplated to be invoiced prior to the Effective Date pursuant to Schedule B. Inspire agrees to reimburse Novasep for actual documented out-of-pocket costs reasonably incurred as a result of travel required by Novasep’s personnel in the performance of Novasep’s obligations under this Agreement, provided such costs are contemplated in the Project Plan or approved in advance by Inspire and submitted for reimbursement to Inspire in a timely manner. All payments made under this Agreement shall be made in Euros unless otherwise agreed in writing by the Parties.

(b) All invoices for expenses and fees shall be submitted by Novasep on or about the twenty-fifth (25 ^th) day of each month during the Term for review and processing. All invoices shall include the following: (i) ‘Invoice’ written on the top of the document, (ii) the date of the invoice, (iii) an invoice number, (iv) a description of the items manufactured, or services rendered, as the case may be, (v) the total amount being invoiced in the applicable currency for payment and (vi) a reference to this Agreement and the original Inspire purchase order number, and shall be submitted to:

Inspire Pharmaceuticals, Inc.

4222 Emperor Boulevard, Suite 200

Durham, North Carolina 27703-8466

Attention: Accounts Payable

Email: isphap@inspirepharm.com

Inspire shall pay each invoice consistent with this Section 4.3(b) within thirty (30) days of receipt of the invoice, subject in each case to Inspire’s right to dispute invoice amounts and/or delay the payment of disputed invoices under this Agreement. Payments of invoices incorrectly addressed or from which any of the information required by this Section 4.3(b) has been omitted may take longer than thirty (30) days.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

5.1 Novasep Representations and Warranties. Novasep represents and warrants that:

(a) Novasep will manufacture, store and handle each Batch in accordance with cGMPs (except as otherwise set forth in the Project Plan) and Legal Requirements applicable to that Batch’s anticipated use and in conformity with the Specifications in effect at the time of production. Novasep shall ensure that the services provided under this Agreement are performed in a competent, professional, workmanlike and timely manner by qualified personnel in conformance with the standard of care usually and reasonably expected in the

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performance of such services, this Agreement and reasonable instructions provided by Inspire.

(b) Novasep will provide each Batch to Inspire free and clear of any liens or encumbrances.

(c) Novasep is a validly existing corporation in good standing under the laws of the jurisdiction of its incorporation; the execution, delivery and performance of this Agreement by Novasep has been duly authorized by all requisite corporate action; this Agreement constitutes a legal, valid and binding obligation of Novasep, enforceable against Novasep in accordance with the terms hereof; and the execution, delivery and performance of this Agreement by Novasep will not violate or conflict with any other agreement or instrument to which Novasep is a party.

(d) The equipment used in the production of the API, including the Equipment, will be adequate to timely produce (in accordance with the Project Plan, cGMPs, Legal Requirements and other agreed Inspire requirements) API, in the amounts required pursuant to Section 5.1(h) below, that consistently meets or exceeds the final Specifications. All such equipment will be in good operating condition and will be maintained in good operating condition for the Term.

(e) Novasep has not used, and will not use during the Term, in any capacity associated with or related to the manufacture of the API, the services of any Persons who have been, or are in the process of being, (i) debarred under 21 U.S.C. § 335a(a) or (b) or any comparable Legal Requirements, or (ii) excluded from participation in the Medicare program, any state Medicaid program or any other federal health care program. Furthermore, neither Novasep nor any of its officers, employees, or consultants has been convicted of an offense under (x) either a federal or state law that is cited in 21 U.S.C. § 335(a) as a ground for debarment, denial of approval, or suspension, or (y) any other law cited in any comparable Legal Requirements as a ground for debarment, denial of approval or suspension. Novasep shall notify Inspire immediately upon learning of any circumstance that would cause this certification under this Section 5.1(e) to become false or inaccurate.

(f) Novasep has, and will maintain and comply with, all Consents necessary in performance of its obligations hereunder and the manufacture of the API for incorporation in finished pharmaceutical products for commercial sale worldwide.

(g) There is no claim, suit, proceeding, or other investigation pending, or to the knowledge of Novasep, threatened, which is likely to prevent or materially affect Novasep’s ability to perform its obligations hereunder.

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(h) After installation of the Equipment, Novasep will have and will maintain during the Term, the capacity to supply to Inspire 1000 kilograms per year of the API.

5.2 Inspire Representations and Warranties. Inspire represents and warrants that:

(a) Inspire is a validly existing corporation in good standing under the laws of Delaware; the execution, delivery and performance of this Agreement by Inspire has been duly authorized by all requisite corporate action; this Agreement constitutes a legal, valid and binding obligation of Inspire, enforceable against Inspire in accordance with the terms hereof; and the execution, delivery and performance of this Agreement by Inspire will not violate or conflict with any other agreement or instrument to which Inspire is a party.

(b) To Inspire’s knowledge as of the Effective Date, Inspire has the authority to provide the Inspire Intellectual Property and the Inspire Materials to Novasep under this Agreement and to authorize Novasep to utilize the Inspire Intellectual Property and the Inspire Materials in accordance with this Agreement.

(c) As of the Effective Date, there is no claim, suit, proceeding, or other investigation pending, or to the knowledge of Inspire, threatened in writing, which is likely to prevent or materially affect Inspire’s ability to perform its obligations hereunder.

5.3 WARRANTIES. THE FOREGOING EXPRESS WARRANTIES IN SECTIONS 5.1 AND 5.2 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, OR AGAINST INFRINGEMENTS, AND ALL OTHER WARRANTIES ARE HEREBY DISCLAIMED AND EXCLUDED BY EACH PARTY.

ARTICLE VI

INTELLECTUAL PROPERTY

6.1 Ownership.

(a) Inspire Ownership. Novasep acknowledges and agrees that, as between Inspire and Novasep, Inspire owns all rights in and to the Inspire Intellectual Property, including all Intellectual Property rights in and to the API, the drug application for the API, the Data and documentation, specifications and processes associated with the API. In particular, Novasep acknowledges and agrees that: (i) all of the Specifications contain valuable trade secrets and Inspire Confidential Information and are and shall remain the copyrighted works of Inspire; and (ii) all of the patents, trademarks and software files owned by Inspire

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which apply to the manufacture, use or sale of API are and shall remain Inspire Intellectual Property. Except as expressly provided in Section 6.3 below, nothing in this Agreement shall be deemed to transfer or convey, expressly or by implication, any Inspire Rights to Novasep.

(b) Novasep Ownership. Inspire acknowledges and agrees that Novasep owns all rights in and to the Novasep Intellectual Property. Novasep may not implement or use any Novasep Intellectual Property in a manner that would require a change to the Specifications, or in a manner in which the compliance of the API with cGMPs or Legal Requirements would become dependent upon such Novasep Intellectual Property, without the prior written consent of Inspire with respect to such implementation or use. In the event that Novasep implements or uses any Novasep Intellectual Property in such a manner without the prior written approval of Inspire, Novasep hereby grants to Inspire and Inspire Affiliates a non-exclusive, irrevocable, royalty-free, worldwide, fully sublicensable, perpetual license to use such Novasep Intellectual Property solely with the API and products containing the API and their manufacture.

6.2 New Developments and Modifications.

(a) API Developments. All Intellectual Property relating to the API or the development or manufacture of the API, or that utilizes or is based on any Inspire Rights or Inspire Confidential Information, that is conceived, reduced to practice, authored, or otherwise invented, discovered, generated or developed in whole or in part in the course of activities under this Agreement, whether patentable or not, and any authorship of works relating to the API, including any trademarks, trade dress, trade secrets or copyrights, shall be “API Developments.”

(b) Ownership of API Developments. Without further payment to Novasep and subject only to the rights and licenses granted in Section 6.3 below, Inspire shall own all right, title and interest in and to all API Developments, whether made, conceived, reduced to practice, authored or otherwise invented, discovered, generated or developed solely by or on behalf of Novasep or Inspire, or jointly by or on behalf of Novasep and Inspire, and all rights to Intellectual Property arising therefrom. Novasep will, and hereby does, assign to Inspire all of its rights, title and interest in and to API Developments and rights to Intellectual Property arising therefrom. Novasep shall provide reasonable assistance to Inspire (and shall cause its employees, Affiliates and Subcontractors to do so as well) in obtaining, enforcing, and defending Inspire’s ownership of the API Developments and appurtenant rights to Intellectual Property, at Inspire’s expense. Novasep shall ensure that each of Novasep’s employees, Affiliates and Subcontractors under this Agreement shall have in place a binding agreement that assigns to the fullest extent possible all Intellectual Property rights arising from their activities to Novasep (for further allocation as specified in this Agreement). Novasep promptly shall inform Inspire in writing of all API Developments and provide Inspire with all written materials related to such API Developments and,

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at the request of Inspire, will meet with Inspire to discuss activities conducted under this Agreement in order to identify any API Developments. Novasep may not disclose, implement or use any API Development without the prior written consent of Inspire.

(c) Patents. Notwithstanding any obligation of confidentiality between Novasep and Inspire under Section 7.3 hereto or any other agreement, Inspire, at its own expense, may elect to file and prosecute appropriate patent applications and maintain patents issuing therefrom covering API Developments. Upon Inspire’s reasonable request and at its expense, Novasep shall take such reasonable actions as Inspire deems necessary or appropriate to assist Inspire in obtaining patent or other proprietary protection in Inspire’s name with respect to all API Developments.

6.3 Grant of Licenses. Subject to the terms and conditions of this Agreement, Inspire hereby grants Novasep a non-exclusive, royalty-free, non-transferable, non-sublicensable license to use the Inspire Intellectual Property and the API Developments (collectively, the “Inspire Rights”) solely to the extent necessary to perform Novasep’s obligations under this Agreement. The licenses granted in this Section 6.3 shall be collectively referred to as the “Inspire License.” Novasep shall have no right or license to make, manufacture, supply, distribute or sell the API or use the Inspire License for any purpose other than as necessary to perform its obligations under this Agreement. The Inspire License shall immediately terminate at the expiration or termination of this Agreement. Novasep agrees to comply with all restrictions or other terms and conditions contained in any agreements or licenses with Third Parties related to the Inspire License of which Novasep has been given written notice. No license rights shall be created hereunder by implication, estoppel, or otherwise.

6.4 Infringement. Novasep shall promptly notify Inspire of any suspected or threatened infringement, misappropriation or other unauthorized use of Intellectual Property licensed by Inspire to Novasep under this Agreement that comes to Novasep’s attention. The notice shall set forth the facts of such suspected or threatened infringement in reasonable detail. Inspire shall have the sole right, but not the obligation, to institute, prosecute and control, at its expense, any action or proceeding against the Third Party infringer of such Intellectual Property. If Inspire institutes an action against such infringer, Novasep shall give Inspire reasonable assistance and authority to control, file and prosecute the suit as necessary at Inspire’s expense. Inspire shall retain any damages or other monetary awards that it recovers in pursuing any action under this Section 6.4.

6.5 Data. As between Novasep and Inspire, Inspire shall be and remain the sole and exclusive owner of any and all data and information, in any form, relating to: (i) the business of Inspire; (ii) customers and suppliers of Inspire, as it relates to the API; (iii) the API and its development and manufacture; and (iv) any Inspire Rights (collectively, the “Data”). The Data shall include current, historical, archived and outcomes information regarding the API, whether or not present at the Facility or in

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electronic or hard-copy form. Inspire shall own all Intellectual Property rights that may subsist in the Data, and Novasep will assign, and hereby assigns, any such rights to Inspire. Novasep agrees to access, use and disclose the Data only as and to the extent necessary and appropriate for the performance of its obligations under this Agreement.

ARTICLE VII

CONFIDENTIALITY

7.1 Definition of “Inspire Confidential Information”. As used herein, the term “Inspire Confidential Information” shall mean all confidential business and technical communications, documents and other information, whether in written, oral or other form, which Inspire or an Inspire Affiliate furnishes or discloses to Novasep or which Novasep otherwise learns in connection with the negotiation or performance of this Agreement (whether relating to Inspire, an Inspire Affiliate or any Third Party for which Inspire has an obligation of confidentiality), including the terms of this Agreement and any information disclosed prior to the Effective Date. Novasep represents and warrants that prior to the Effective Date, it has not used or disclosed to any Third Party any Inspire Confidential Information, except as would be permitted hereunder.

7.2 Definition of “Novasep Confidential Information”. As used herein, the term “Novasep Confidential Information” shall mean all confidential business and technical communications, documents or other information, in each case not constituting Inspire Rights or Data, whether in written, oral or other form, of Novasep or a Novasep Affiliate that are disclosed to Inspire by Novasep or a Novasep Affiliate or Inspire otherwise learns in connection with the negotiation or performance of this Agreement; provided, however, that all information relating solely to the API shall be Inspire Confidential Information. Inspire agrees that the provisions of this Agreement shall apply to all Novasep Confidential Information disclosed by Novasep or any Novasep Affiliate or learned by Inspire prior to the Effective Date.

7.3 Treatment of Confidential Information. Both during the Term of this Agreement and thereafter, Inspire Confidential Information and Novasep Confidential Information (collectively for this Section 7.3 “Confidential Information”) shall be treated in accordance with the requirements of this Article VII.

(a) Nondisclosure and Non-Use. A Party receiving Confidential Information of the other Party shall (i) maintain in confidence such Confidential Information to the same extent such Party maintains its own proprietary information of similar kind and value (but at a minimum each Party shall use commercially reasonable efforts to maintain Confidential Information in confidence); (ii) not disclose such Confidential Information to any Third Party without prior written consent of the disclosing Party, except, in the case of Inspire, for disclosures to Inspire’s sublicensees and commercial partners for the API who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Article VII; and (iii) not use such

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Confidential Information for any purpose except those purposes permitted by this Agreement.

(b) Exceptions. Notwithstanding any other provision of this Agreement, the receiving Party may disclose Confidential Information of the disclosing Party to a Third Party: (i) to the extent and to the Persons as required by an applicable law, rule, regulation, legal process or court order, or an applicable disclosure requirement of any Governmental Body, the U.S. Securities and Exchange Commission, the Nasdaq market or any other securities exchange or market; or (ii) to the extent necessary to exercise the rights granted to the receiving Party under this Agreement in filing or prosecuting patent applications, prosecuting or defending litigation or otherwise establishing rights or enforcing obligations under this Agreement, or conducting clinical trials or seeking regulatory approval with respect to a product containing the API; provided, however, that the receiving Party shall first have given prompt notice to the disclosing Party to enable the disclosing Party to seek any available exemptions from or limitations on any applicable disclosure requirement and shall reasonably cooperate in such efforts by the disclosing Party.

(c) Terms of Agreement. The Parties agree that the existence of and the material terms of this Agreement shall be considered Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth below in this Section 7.3(c) (in lieu of the authorized disclosure provisions set forth in Section 7.3(b), to the extent of any conflict) and without limiting the generality of the definition of Confidential Information set forth in Sections 7.1 and 7.2. If either Party desires to make a public announcement concerning this Agreement or the terms hereof, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval. A Party shall not be required to seek the permission of the other Party to repeat any information as to the existence and terms of this Agreement that has already been publicly disclosed by such Party in accordance with the foregoing or by the other Party. Either Party may disclose the terms of this Agreement to such Party’s existing investors, directors and professional advisors and to potential investors, acquirors or merger partners and their professional advisors who are bound by written or professional obligations of non-disclosure and non-use that are at least as stringent as those contained in this Article VII or are customary for such purpose. The Parties acknowledge that Inspire may be obligated to file a copy of this Agreement with the SEC with its next quarterly report on Form 10-Q, annual report on Form 10-K or current report on Form 8-K or with any registration statement filed with the SEC pursuant to the Securities Act of 1933, as amended, and Inspire shall be entitled to make such filings.

7.4 Excluded Information. Notwithstanding any provision herein to the contrary, the requirements of this Article VII shall not apply to any information of either Party which:

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(a) at the time of disclosure hereunder is generally available to the public;

(b) after disclosure hereunder becomes generally available to the public, except through breach of this Article VII by the receiving Party or its Affiliates;

(c) was not acquired directly or indirectly from the disclosing Party or its Affiliates and which the receiving Party lawfully had in its possession prior to disclosure by the disclosing Party;

(d) is independently developed by employees or agents of the receiving Party without the use of the Confidential Information of the disclosing Party; or

(e) becomes available to the receiving Party from a Third Party that is not legally prohibited from disclosing such Confidential Information, provided such information was not acquired by such Third Party directly or indirectly from the disclosing Party or its Affiliates.

7.5 Return of Confidential Information. At any time upon the request of the other Party, to the extent such Confidential Information is not reasonably necessary to enable a Party to perform its obligations under this Agreement, or upon expiration or termination of this Agreement, the Party receiving Confidential Information will cease its use and, upon request, within thirty (30) days either return or destroy (and certify as to such destruction) all Confidential Information of the other Party, including any copies or other embodiments thereof, except that the receiving Party may retain a copy for archive purposes. The return and/or destruction of such Confidential Information as provided above shall not relieve the receiving Party of its other obligations under this Article VII.

ARTICLE VIII

INDEMNIFICATION

8.1 Indemnity by Novasep. Novasep shall defend, indemnify and hold harmless Inspire and each Inspire Affiliate and its and their respective directors, officers, employees and agents from and against all Losses arising from any claim, demand, suit, action or proceeding (a “Claim”) to the extent arising out of (a) any breach, nonperformance or failure to comply with any of Novasep’s covenants, agreements, obligations, representations or warranties under this Agreement or the terms of this Agreement; (b) recklessness or gross negligence by Novasep or Novasep Affiliates, their respective directors, officers, employees, agents or Subcontractors; or (c) Novasep Intellectual Property infringing upon the Intellectual Property or proprietary rights of a Third Party; provided that the foregoing obligations shall not apply to the extent that a Loss is a result of any matter for which Inspire is obligated to indemnify Novasep pursuant to Section 8.2.

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8.2 Indemnity by Inspire. Inspire shall defend, indemnify and hold harmless Novasep and each Novasep Affiliate and its and their respective directors, officers, employees and agents from and against all Losses arising from any Claim to the extent arising out of: (a) any breach, nonperformance or failure to comply with any of Inspire’s covenants, agreements, obligations, representations or warranties under this Agreement or the terms of this Agreement; (b) recklessness or gross negligence by Inspire or Inspire Affiliates, their respective directors, officers, employees, licensees or agents; or (c) Inspire Intellectual Property infringing upon the Intellectual Property or proprietary rights of a Third Party; provided that the foregoing obligations shall not apply to the extent that a Loss is a result of any matter for which Novasep is obligated to indemnify Inspire pursuant to Section 8.1.

8.3 Liability limitations. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR LOSS OF PROFITS, OR PUNITIVE OR EXEMPLARY DAMAGES, WHETHER IN CONTRACT OR IN TORT, ARISING OUT OF ANY TERMS OR CONDITIONS IN THIS AGREEMENT OR WITH RESPECT TO THE PERFORMANCE THERETO, EXCEPT IN CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

8.4 Procedures. Any person that may be entitled to indemnification under this Agreement (an “Indemnified Party”) shall give written notice to the Person obligated to indemnify it (an “Indemnifying Party”) with reasonable promptness upon becoming aware of any Claim or other facts upon which a claim for indemnification will be based; the notice shall set forth such information with respect thereto as is then reasonably available to the Indemnified Party. The Indemnifying Party shall have the right to undertake the defense of any such Claim with counsel reasonably satisfactory to the Indemnified Party and the Indemnified Party shall cooperate in such defense and make available all records, materials and witnesses reasonably requested by the Indemnifying Party at the Indemnifying Party’s expense. If the Indemnifying Party shall have assumed the defense of the Claim with counsel reasonably satisfactory to the Indemnified Party, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof. The Indemnifying Party shall not be liable for any Claim settled without its consent, which consent shall not be unreasonably withheld. The Indemnifying Party shall obtain the written consent of the Indemnified Party, which shall not be unreasonably withheld, prior to ceasing to defend, settling or otherwise disposing of any Claim if as a result thereof the Indemnified Party would become subject to injunctive or other equitable relief or if the Indemnified Party may reasonably object to such disposition of such Claim based on a continuing adverse effect on the Indemnified Party.

ARTICLE IX

TERM; TERMINATION; REMEDIES

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9.1 General. The term of this Agreement (the “Term”) shall commence on the Effective Date hereof and shall continue until December 31^st, 2011, unless earlier terminated pursuant to this Article IX.

9.2 Termination for Bankruptcy; Insolvency. To the extent permitted by Legal Requirements, each Party will have the right to terminate this Agreement immediately upon notice to the other Party, if any of the following occurs: (i) such other Party is declared bankrupt or insolvent, (ii) such other Party generally fails to pay its debts as they become due, (iii) there is an assignment for the benefit of such other Party’s creditors, (iv) a receiver is appointed or there is a voluntary or involuntary petition filed or an action or proceeding commenced for bankruptcy, reorganization, dissolution or winding up of such other Party that is not dismissed within sixty (60) days, or (v) there is a foreclosure or sale of a material part of such other Party’s assets by or for the benefit of any creditor or governmental agency.

9.3 Termination for Default After Notice. Either Party shall have the right to terminate this Agreement upon sixty (60) days’ prior written notice to the other upon or after the breach of any material provision of this Agreement by the other Party if the breaching Party has not cured such breach within the sixty (60)-day period following written notice of termination by the non-breaching Party.

9.4 Termination by Inspire for Change in Control of Novasep. If at any time during the Term there is or will be a Change in Control of Novasep, Novasep shall immediately notify Inspire in writing, and upon receiving notice or otherwise becoming aware of such a Change in Control, Inspire may terminate this Agreement immediately by written notice if it considers in its sole discretion that such Change in Control may be prejudicial to Inspire’s interests. For the purpose of this Section 9.4, “Change in Control” shall mean any proposed transaction or series of transactions which shall result in (i) any party other than Novasep, or an entity that is an Affiliate of Novasep as of the date of this Agreement, owning the Facility, (ii) direct or indirect ownership of more than fifty percent (50%) of the voting stock or assets of Novasep or an Affiliate that controls Novasep by Persons who are not shareholders of Novasep or the Affiliate that controls Novasep as of the date of this Agreement, or (iii) the merger of Novasep with or into a Third Party in a transaction in which Novasep is not the surviving or acquiring party.

9.5 Termination by Inspire for Convenience. After April 30, 2010, Inspire shall have a right to terminate this Agreement for any reason or no reason upon sixty (60) days written notice to Novasep. In such event, Inspire will reimburse Novasep for any costs and non-cancelable commitments reasonably and legitimately incurred by Novasep in accordance with this Agreement with respect to any then-current work-in-process under the Technical Transfer Program, unless payments for such work-in-process have already been made pursuant to Section 4.3 or are otherwise addressed in Section 9.7.

9.6 No Suspension of Obligations. If any dispute arises between the Parties, in no event shall Novasep interrupt, slow down, or reduce in any way the implementation

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of the Technical Transfer Program, unless Inspire consents or as specifically permitted by a court of competent jurisdiction.

9.7 Effect of Termination. Upon termination of this Agreement pursuant to Sections 9.2, 9.3, 9.4, 9.5 or 10.4, Novasep shall: (i) cease work under the Project Plan and this Agreement, (ii) provide to Inspire all Data obtained or produced by Novasep during the Term, and (iii) upon Inspire’s request and at Inspire’s sole cost and expense, assist Inspire to transfer promptly the API manufacturing process to any other facility or facilities selected by Inspire; provided that if this Agreement has been terminated by Inspire pursuant to Section 9.3, Novasep shall be responsible for the reasonable cost and expense of such transfer. In addition, in the event that Inspire terminates this Agreement pursuant to Section 9.5, Inspire shall reimburse Novasep for its reasonable out-of-pocket and non-cancellable, committed expenses associated with the purchase and installation of the Equipment up to that point in time, but only to the extent that such expenses have been actually incurred by Novasep and exceed two million one hundred thousand Euros (€ 2,100,000), and provided that such reimbursement shall not exceed five hundred thousand Euros (€ 500,000).

ARTICLE X

MISCELLANEOUS

10.1 Notices. In addition to the other specific procedures for notification provided herein, all notices, demands, requests and other communications made hereunder shall be in writing and shall be given either by personal delivery or by internationally recognized overnight courier (with charges prepaid), and shall be deemed to have been given or made: (i) if personally delivered, on the day of such delivery; or (ii) if sent by overnight courier, on the business day following the date deposited with such overnight courier service, in each case pending the designation of another address, addressed as follows:

If to Inspire:

Inspire Pharmaceuticals, Inc.

4222 Emperor Boulevard, Suite 200

Durham, North Carolina 27703-8566, USA

Attention: General Counsel

Facsimile: +1-919-941-9797

If to Novasep:

Finorga SAS

C.E.O.

Route de Givors

38670 Chasse / Rhône (France)

Telephone: +334 72 49 19 60

Facsimile: +334 78 07 49 30

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With a copy to:

Groupe NOVASEP SAS

Attn : Mr. Frédéric BEAUPRE

Site Eiffel - 82, Boulevard de la Moselle

54340 POMPEY – France

Tel: + (33)3 83 49 70 50

Fax: + (33)3 83 49 71 40

10.2 Independent Contractors. Each Party shall be treated as an independent contractor of the other. Neither Party shall be deemed to be a co-venturer, partner, employee or a legal representative of the other Party for any purpose. Neither Party shall have the authority to enter into any contracts in the name of or on behalf of the other Party or incur any charges or expenses for or in the name of the other Party.

10.3 Entire Understanding. The Parties agree, on their own and their respective Affiliates’ behalf, that this Agreement, including the Schedules hereto, and any other document identified herein, constitutes the entire agreement between the Parties and their Affiliates relating to the subject matter hereof, and all prior agreements or arrangements, written or oral, between the Parties and their Affiliates relating to the subject matter hereof are hereby superseded by this Agreement, including without limitation (a) that certain Mutual Confidential Disclosure Agreement between Inspire and Groupe Novasep SAS dated as of February 6, 2008, (b) that certain Materials Transfer Agreement between Inspire and Novasep dated as of March 31, 2009, (c) the Letter of Intent, (d) that certain Offer / Costs estimation – INSPIRE Pharmaceuticals, Inc., Denufosol Project dated March 16, 2009, as updated from time to time prior to the Effective Date, and (e) the Purchase Orders. The Parties agree, on their own and their respective Affiliates’ behalf, that the terms and conditions of this Agreement shall apply fully to any and all information disclosed, materials exchanged and activities conducted by the Parties or their Affiliates under the Mutual Confidential Disclosure Agreement, the Materials Transfer Agreement, the Letter of Intent and the Purchase Orders as if such information was disclosed, materials were exchanged or activities were conducted by the Parties under this Agreement.

10.4 Force Majeure Event. Neither Party shall be liable to the other on account of any failure to perform or on account of any delay in performance of any of its obligations under this Agreement, if and to the extent that such failure or delay shall be due to a cause beyond the control of the relevant Party and which, by the exercise of its commercially reasonable efforts of diligence and care, such Party could not reasonably have been expected to avoid (a “Force Majeure Event”). For the avoidance of doubt, the failure of Novasep to timely perform any of its obligations hereunder due to an order, injunction or any other action by a Governmental Body shall not constitute a Force Majeure Event. The Party experiencing a Force Majeure Event shall promptly notify the other Party of such event, the specific causes thereof, the probable duration of delay in performance, and use commercially reasonable efforts to perform its obligations as soon as practicable. This Agreement, in so far as it relates to such obligations, shall be deemed

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suspended so long as and to the extent that such Force Majeure Event prevents, hinders or delays the performance of any obligation under this Agreement, provided that Inspire shall have the right to terminate this Agreement immediately upon written notice if a Force Majeure Event affecting Novasep continues for more than sixty (60) days.

10.5 Assignment. This Agreement will be binding upon and inure to the benefit of the Parties, their successors and permitted assigns. Novasep shall not delegate, transfer, convey, assign or pledge this Agreement, in whole or in part, or any of its rights or obligations under this Agreement without the prior written consent of Inspire, and any such action without consent shall be void. Notwithstanding the foregoing, Novasep shall be permitted to assign this Agreement to its Affiliate, provided that such Affiliate agrees with Inspire in advance in writing to be bound by all of the terms and conditions of this Agreement and such assignment shall not relieve Novasep of any of its obligations under this Agreement.

10.6 Dispute Resolution. If the Parties fail to resolve any claim, dispute, or controversy of whatever nature arising out of or relating to this Agreement (other than one relating to the validity, enforceability, infringement or misappropriation of Intellectual Property rights, which shall not be subject to this Section 10.6), the Parties shall refer the dispute to their respective officers designated below or such other officers as the Parties may designate in writing from time to time for attempted resolution by good faith negotiations within thirty (30) days after so submitting the dispute. The designated officers are as follows:

For Inspire:	Inspire Pharmaceuticals, Inc.
	4222 Emperor Boulevard, Suite 200
	Durham, North Carolina 27703-8466, USA
	Attn: Benjamin R. Yerxa, Ph.D.
For Supplier:	Groupe NOVASEP SAS
	Attn: Mr. Frédéric BEAUPRE
	Site Eiffel - 82, Boulevard de la Moselle
	54340 POMPEY – France
	Tel: + (33)3 83 49 70 50
	Fax: + (33)3 83 49 71 40
	frederic.beaupre@novasep.com

If such dispute is not resolved by the end of the thirty (30) day period, the Parties shall be free to pursue any legal or equitable remedy available to them. If any legal action or other legal proceeding is brought by a Party for the enforcement of this Agreement, or to recover damages or other applicable remedy based on the alleged dispute, breach or default in connection with the provisions of this Agreement, the successful or prevailing Party as to any specific and separable issue in such action or proceeding (in a final decision by the applicable court action or other legal proceeding, or by settlement or otherwise) shall be entitled to recover reasonable attorneys’ fees and other reasonable costs and expenses incurred in enforcing the specific obligation of the other Party under

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this Agreement that was the basis for such specific issue in such action or proceeding, in addition to any other relief to which it may be entitled. For avoidance of doubt, the foregoing shall not prohibit or delay a Party from seeking appropriate injunctive or other equitable relief.

10.7 Use of Affiliates. The Parties acknowledge and agree that Novasep may use the services of Novasep’s Affiliates to fulfill Novasep’s obligations under this Agreement; provided that nothing in this Section 10.7 shall relieve Novasep from any obligation under this Agreement. Novasep shall remain responsible and be directly and primarily liable for its Affiliates’ performance hereunder, and its Affiliates shall be subject to all of the terms and conditions of this Agreement in performing hereunder. Any failure of any Novasep Affiliate performing services hereunder to comply with any of the terms and conditions of this Agreement shall constitute a breach by Novasep for all purposes.

10.8 Subcontractors. Novasep may utilize Subcontractors with appropriate expertise and experience in the performance of its obligations under this Agreement; provided, however, that Inspire must give its written approval in each instance prior to the use of Subcontractors by Novasep and may require Subcontractors to agree to conditions consistent with those contained herein. Nothing in this Section 10.8 shall relieve Novasep from any obligation under this Agreement.

10.9 Amendment. This Agreement, including any Schedule hereto, may not be amended or modified in any manner except by an instrument in writing signed by a duly authorized representative of each Party.

10.10 Severability. If and to the extent that any court of competent jurisdiction holds any provision (or any part thereof) of this Agreement to be invalid or unenforceable, such holding shall in no way affect the validity or enforceability of the remainder of this Agreement, and the invalid or unenforceable provision shall be fully severed from this Agreement and there shall automatically be added in lieu thereof a provision as similar in terms and intent to such severed provision as may be legal, valid and enforceable.

10.11 Waiver. Any failure of a Party to comply with any obligation, covenant, agreement or condition herein contained may be expressly waived, in writing only, by the other Party hereto and such waiver shall be effective only in the specific instance and for the specific purpose for which made or given.

10.12 Survival. Articles I (to the extent required to enforce other surviving rights or obligations), V, VII, VIII and X (other than Sections 10.4 and 10.8), and Sections 2.2, 3.1(c), 3.1(d), 3.5, 3.6, 3.7, 3.10, 3.11, 6.1, 6.2, 6.5 and 9.7, and any other provision which by its terms specifically shall so state, together with any obligations accrued hereunder at the time of termination or expiration, shall survive the termination or expiration of this Agreement.

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10.13 Drafting Ambiguities. Each Party to this Agreement and its counsel have reviewed and revised this Agreement. The rule of construction to the effect that any ambiguities are to be resolved against the drafting Party shall not be employed in the interpretation of this Agreement or any amendment or Schedules hereto.

10.14 Headings; Schedules and Exhibits; Counterparts.

(a) Headings. The headings of the Sections of this Agreement are for reference purposes only, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement.

(b) Schedules. All Schedules delivered pursuant to this Agreement shall be deemed part of this Agreement and incorporated herein by reference, as if fully set forth herein. In the event that any Schedule conflicts with any of the terms or provisions of this Agreement, the terms and provisions of this Agreement shall prevail.

(c) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Facsimile signatures shall be treated as original signatures.

10.15 Governing Law. This Agreement and all matters arising out of or relating to this Agreement shall be governed, construed and enforced in accordance with the laws of the State of New York, USA, without regard to principles of conflicts of law, and the Parties hereby irrevocably consent to the exclusive jurisdiction of the state and federal courts of the State of New York, USA. Each of the Parties hereby waives and agrees not to assert in any such dispute, to the fullest extent permitted by Legal Requirements, any claim that (i) such Party is not personally subject to the jurisdiction of such courts, (ii) such Party and such Party’s property is immune from any legal process issued by such courts or (iii) any litigation or other proceeding commenced in such courts is brought in an inconvenient forum.

10.16 Remedies. Except as expressly set forth in this Agreement, none of the remedies set forth in this Agreement are intended to be exclusive, and each Party shall have available to it all remedies available under law or in equity or in any other agreement between the Parties.

10.17 Injunctive Relief. In the event that either Novasep or Inspire breaches or threatens to breach any provision of Article VI or Article VII of this Agreement or Novasep fails to meet any time schedule in the Project Plan (except where such failure was a direct result of Inspire’s failure to comply with this Agreement or the Project Plan), the Parties agree that irreparable harm to the other Party should be presumed and the damages to such Party would probably be very difficult to ascertain and would be inadequate. Accordingly, in the event of such circumstances, each of Novasep and Inspire agree that, in addition to any other right and remedies available at law or in

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equity, the other Party shall have the right to obtain injunctive relief from any court of competent jurisdiction.

10.18 Further Assurances. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

10.19 Counterparts. This Agreement may be executed in two counterparts and by facsimile or PDF signature, each of which shall be deemed an original and which together shall constitute one instrument.

10.20 English Language. The English language version of this Agreement will be controlling on the Parties. All information, documents, reports, records, notices and communications to be provided by one Party to the other Party hereunder will be provided in the English language.

[Remainder of page intentionally left blank.]

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[Signature Page to Technical Transfer & Development Services Agreement]

IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be duly executed as of the date first written above.

Inspire Pharmaceuticals, Inc.
By:	/s/ Adrian Adams
Name:	Adrian Adams
Title:	President and Chief Executive Officer
Finorga S.A.S.
By:	/s/ Yves Michon
Name:	Yves Michon
Title:	President and Chief Executive Officer

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SCHEDULE A

PROJECT PLAN

Novasep will conduct the work as defined below. The work includes the performance by Novasep of the following services:

1. Description of the work

Phase I : “ Laboratory Familiarization - Process Improvement Program and Piloting of the Selected Process”

Phase I started early [c.i.].

The Phase I work consists-of Phase IA and Phase IB which will be completed by a pilot batch using the selected process:

1.1. Phase IA - Laboratory Familiarization:

(i) reproducing INSPIRE’s Process in Novasep’s laboratories

(ii) assessment of INSPIRE’s Process critical parameters and

(iii) transferring INSPIRE’s analytical methods.

During the laboratory familiarization phase, Novasep will repeat the process transmitted by Inspire to reproduce the results described in the technical package provided by Inspire. On successful completion, and if Inspire is satisfied by the process as it is, Novasep will then identify or re-assess the Process Parameter Acceptable Ranges to adapt the given process for up-scaling. During Phase IA, the analytical methods will be transferred and they will be validated on Inspire’s request.

Novasep’s personnel may visit INSPIRE’s site(s), from time to time, to facilitate experience and know-how sharing between INSPIRE and Novasep. INSPIRE’s personnel are also prepared to visit Novasep’s site(s), from time to time, to facilitate the acquisition of and share experience and know-how between INSPIRE and Novasep. Phase I will include laboratory familiarization with the INSPIRE Process as well as laboratory development work (including analytical activities) to allow scale-up of INSPIRE’s Process during Phase II. Phase IA will be completed by end of [c.i.]

1.2. Phase IB - Process Improvement Program:

NOVASEP has investigated from early [c.i.] to beginning of [c.i.] new ideas to improve the current INSPIRE’s Process; this investigation for process improvement concerned essentially the purification steps. Phase IB was completed early [c.i.] and resulted in no major new finding.

1.3 Kilo-scale Batch:

Inspire asked Novasep to run a kilolab batch to test the process at a small scale and to generate enough material for crystallization studies and to test the ultrafiltration step. This kilolab batch was started in [c.i.] and completed in [c.i.].

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1.4. Pilot:

Phase I will be concluded with the piloting at [c.i.] batch size the INSPIRE Process or the improved INSPIRE Process to secure up-scaling during Phase II. The material produced during this piloting will not be cGMP material.

During Phase I, Novasep will, with the prior review and approval of INSPIRE, identify and purchase the equipment that Novasep does not already own or have access to and which is necessary to perform Phase I.

1.5 Safety Tests:

Once the development team confirms the safety test required to safely scale-up this process, the project team will then decide to pursue specific trials (RC1, DSC, etc.) if needed. Some of those trials might need to be outsourced (ARC). In the course of Phase I if any safety issue is identified and if sub-contracted additional activities are needed, the associated costs will be charged accordingly to Inspire. Before any commitment with a third party, Novasep will discuss and obtain Inspire’s approval.

Phase II: Specific Equipment Design/Installation and Qualification – Development batches - Proof of Process and production of validation batches

Phase II will be performed at industrial scale (up to 6000L reactors and adequate isolation equipments including filter dryers). The necessary separation columns and other purification equipment will be specifically designed to fit to Inspire’s project. During Phase II, Novasep will design, install and qualify the specific Denufosol equipment (Phase IIa) and perform a Proof of Process batch to test the up-scaling at real batch size followed by the three validation batches (Phase IIb).

Phase II will be divided into Phase IIa and Phase IIb described hereafter:

Phase IIa: specific equipment design/installation and qualification

The purification columns and chromatography will be designed specifically for and dedicated to Inspire’s project and dedicated to Denufosol for Phases II and Phase III. During Phase IIa, the workshop which will be used for production will be prepared and the specific equipment will be installed and qualified for use in Phase IIb. Phase IIa will be completed by end-[c.i.].

Pre-Phase IIb: Development batches

This phase consists in manufacturing four development batches during the period covering [c.i.] to end [c.i.] to generate enough data to be used in the NDA. Batch size of these industrial batches would be defined between Inspire and Novasep’s teams in order to reach the targeted quality level.

Phase IIb: Proof of Process and production of validation batches

Phase IIb will be performed at [c.i.] batch size at 50% of the anticipated future industrial scale. An optional [c.i.] proof of process (POP) batch will be produced followed by three [c.i.] process validation batches during this Phase IIb. Phase IIb will be realized during the period covering

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

[c.i.]. Validation protocols will be submitted for approval to Inspire prior to any validation activities.

2. Time Schedule

The work will start in [c.i.]. It shall be performed according to the following schedule :

Phases	Objectives	Starting date	Finishing date
Phase Ia + additional R&D work	Lab Familiarization/Process and analytical transfer	[c.i.]	[c.i.]
Phase Ib	Process optimization	[c.i.]	[c.i.]
Kilolab batch	Generate stream	[c.i.]	[c.i.]
Piloting	Test the selected Process	[c.i.]	[c.i.]
Phase IIa	Design, Installation and Qualification of Equipment	[c.i.]	[c.i.]
Pre-Phase IIb	Development batches	[c.i.]	[c.i.]
Phase IIb	Proof of Process batch (optional) + Process validation	[c.i.]	[c.i.]

3. Documentation

Novasep will provide the following documentation to Inspire for its review:

• Master Batch Record

• Methods for IPC and release testing

• Executed batch records

• Deviation/change control documents

• Campaign reports containing main information from the executed batch records including deviations and investigations

• Certificate of analysis

• Development reports

Note: Inspire and Novasep will work closely to optimize document issues and reviews in order to respect the project timelines.

4. Supplies by INSPIRE to Novasep

INSPIRE agrees to supply Novasep on a reasonably prompt basis with the following tangible materials (the “INSPIRE Materials”):

• dCMP and UMP-2Na

• Denufosol tetrasodium

• Samples of intermediate process streams taken from the current manufacturing process

• Samples of resins used in the manufacturing process

• Analytical standards

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

• Samples of individual raw material, starting material, and process impurities

• Spare HPLC column needed to run analytical method M1152

• Other materials needed to advance technology transfer, process development, and manufacturing activities at the Recipient.

The INSPIRE Materials will be supplied to Novasep in sufficient quantity and sufficiently in advance in order to allow Novasep to perform the work in accordance with the terms of the Agreement.

Novasep agrees to use the INSPIRE Materials solely for the work and in accordance with the terms and conditions of the Agreement.

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

SCHEDULE B

PROJECT FEES

INSPIRE shall pay Novasep the following fees for the performance of the work described in the Project Plan.

Novasep shall invoice INSPIRE as follows:

Service Fees, Invoices, Payments for Phase I:

PHASE I	Objectives/Deliverables	Total  price (€)	Payments	Invoicing date
Phase Ia Laboratory Familiarization	- Process familiarization, development & scale up - Lab sample deliveries - Development report	[c.i.]	[c.i.]	[c.i.]
Additional R&D work	- Analytical transfer & Process development
Phase 1b	Process Improvement	[c.i.]	[c.i.]	[c.i.]
Pilot batch	Scale-up	[c.i.]	[c.i.]	[c.i.]
Kilolab batch	Generate stream	[c.i.]	[c.i.]	[c.i.]
Total Cost Phase I	751,000

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

Equipment costs, Service Fees, Invoices, Payments for Phase II :

PHASE II	Objectives/Deliverables	Total Price (€)	Price (€)	Invoicing date
Phase IIa		[c.i.]	[c.i.]	[c.i.]
Workshop modifications	Workshop engineering and modification
Equipment cost	Skid design & Skid procurement	[c.i.]	[c.i.]	[c.i.]
Pre-Phase IIb Manufacturing of four Development batches	Production of Denufosol	[c.i.]	[c.i.]	[c.i.]
Phase IIb Manufacturing & Validation costs	Production of Denufosol	[c.i.]	[c.i.]	[c.i.]
TOTAL PHASE II	4,350,000 or 4,150,000 (excluding optional POP batch)

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Note: Certain portions of this document have been marked “[c.i.]” to indicate that confidential treatment has been requested for this confidential information. The confidential portions have been omitted and filed separately with the Securities and Exchange Commission.

SCHEDULE C

EQUIPMENT

[c.i.]

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EX-10.4

EXHIBIT 10.4

EXECUTIVE EMPLOYMENT AGREEMENT

This EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made as of April 2, 2010, by and between Inspire Pharmaceuticals, Inc. (together with its successors and assigns, “Inspire” or the “Company”), and Andrew I. Koven (“Executive”).

R E C I T A L S

WHEREAS, the Company desires to employ Executive and Executive desires to be employed by the Company as the Company’s Executive Vice President and Chief Administrative and Legal Officer.

NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and conditions herein, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows:

A G R E E M E N T

1. Employment and Term. The Company hereby agrees to employ Executive and Executive hereby accepts employment by the Company on the terms and conditions hereinafter set forth. Executive’s term of employment by the Company under this Agreement (the “Term”) shall commence on May 10, 2010 or such earlier date as the parties may agree (the “Effective Date”) and continue through December 31, 2014; provided, however, that the Term shall thereafter be automatically extended for unlimited additional one-year periods unless, at least six months prior to the then-scheduled date of expiration of the Term, either (x) the Company gives notice to Executive that it is electing not to so extend the Term or (y) Executive gives notice to the Company that he is electing not to so extend the Term. Notwithstanding the foregoing, the Term may be earlier terminated in strict accordance with the provisions of Section 5 below, in which event Executive’s employment with the Company shall expire in accordance therewith.

2. Position, Duties and Responsibilities; Location.

2.1 Position and Duties. Executive shall be employed as Executive Vice President and Chief Administrative and Legal Officer of the Company. Executive shall have, subject to the general direction of the Chief Executive Officer of the Company (the “CEO”), general overall authority and responsibility for the day-to-day management of the legal and administrative functions of the Company. Executive shall also have such other duties, powers and authority as are commensurate with his position as Executive Vice President and Chief Administrative and Legal Officer of a biopharmaceutical company focused on researching, developing and commercializing prescription pharmaceutical products, including such other duties and responsibilities as are reasonably delegated to him from time to time by the CEO. The Executive shall report to the CEO of the Company.

2.2 Exclusive Services and Efforts. Executive agrees to devote his efforts, energies, and skill to the discharge of the duties and responsibilities attributable to his position and, except as set forth herein, agrees to devote substantially all of his professional time and attention exclusively to the business and affairs of the Company. It is expressly understood and agreed that, during the Term, Executive will not be employed by, render services to, or represent, any other person, firm or company engaged in a business of a similar nature or in competition with the Company without the prior written consent of the Company, except that, for a period of one year following the Effective Date, Executive may consult with his current employer in a reasonable manner on matters relating to transition of his responsibilities, litigation or proceedings related to his work period with that employer, or other similar matters. Executive also agrees that he shall not take personal advantage of any business opportunities which arise during his employment and which in his good faith judgment may benefit the Company and are within the scope of the Company’s then business or natural extension thereof without the consent of the Company, provided that the foregoing does not apply to future employment opportunities. Notwithstanding the foregoing, Executive shall be entitled to engage in (a) with the consent of the Board (which consent shall not be unreasonably withheld) service on the board of directors of a for-profit company, business or trade organization, provided, that, the Executive shall provide the Company prior written notice of his intention to join any such board and provided further that he shall not serve on the board of any entity that directly and materially competes with the Company, (b) service on the board of directors of not-for-profit organizations, (c) other charitable activities and community affairs and (d) manages his personal and family investments and affairs, in each case to the extent such activities do not either individually or in the aggregate, materially interfere with the performance of his duties and responsibilities to the Company.

2.3 Compliance with Company Policies. To the extent not inconsistent with the terms and conditions of this Agreement and with due regard for his position, Executive shall be subject to the Bylaws, policies, practices, procedures and rules of the Company, including those policies and procedures explained in the Company’s Employee Handbook, but in no event shall anything in such documents expand the definition of a “Cause” termination hereunder. Notwithstanding the foregoing, the Board shall amend the Bylaws as soon as practicable following the execution of this Agreement so that roles, responsibilities, authority, and reporting lines of the Executive Vice President and Chief Administrative and Legal Officer as described therein are consistent with the terms of this Agreement.

2.4 Location. Executive’s principal office, and principal place of employment, shall be at the Company’s offices in Durham, North Carolina, but it is understood that Executive will commute on a weekly basis and sporadically at other times to the Company office from his home in New Jersey. The Company will provide an allowance of $3,750 per

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month for each month during the Term to cover housing costs and at the same time period an additional payment such that after the payment of all taxes on the allowance and the additional payment Executive retains the amount of the allowance. The Company will also reimburse the Executive for the cost of commuting (but in no event greater than the cost of first-class commercial airfare) and at the same time period provide an additional payment such that after the payment of all taxes on the commuting expenses and the additional payment Executive retains the amount of the commuting expenses. During the Term, the Company will also provide up to $65,000 to be applied to the cost of a leased automobile and cover all reasonable costs related thereto. The actual value of the leased automobile may exceed $65,000 provided that Executive pays for any cost associated with the leased automobile in excess of $65,000. In addition, the Executive shall have the right to purchase the leased automobile upon expiration of the lease term, provided that the entity leasing the automobile makes it available for purchase at the expiration of such lease. On or before March 15 of each year during the Term (including the first March 15 following the year in which the Term ends), the Company shall pay to the Executive an additional payment such that after the payment of all taxes on the taxable portion of the automobile perquisite and the additional payment Executive retains the amount of the taxable portion of automobile perquisite.

3. Compensation.

3.1 Base Salary. During the Term, the Company hereby agrees to pay to Executive an annualized base salary of Four Hundred Twenty Five Thousand Dollars ($425,000) (the “Salary”), subject to all applicable federal, state and local income and employment taxes and other required or elected withholdings and deductions, payable in equal installments on the Company’s regularly-scheduled paydays as it is earned. Executive’s Salary will be reviewed at least annually by the Board following the first anniversary date of the Effective Date and may be adjusted upward (in which case such increased amount shall be the “Salary” hereunder) or remain the same (but in no event shall the Salary be reduced) in consideration of (a) Executive’s performance, (b) peer company compensation reviews by the Compensation Committee of the Board (the “Compensation Committee”), (c) the Company’s financial performance, (d) the general economic environment and (e) such other factors as the Board or the Compensation Committee may deem relevant.

3.2 Cash Bonuses.

(a) Annual Cash Bonus. For each calendar year that ends during the Term, Executive shall be entitled to receive an annual cash incentive award (the “Annual Cash Bonus”) equal to 60% of Salary for performance at target levels. For each such year, the Board shall, after consultation with Executive and good faith consideration of the budget and goals developed by management (x) determine the financial and other goals to be used to measure

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Executive’s performance for such year, (y) establish the threshold and maximum performance levels for the goals for purposes of determining the amount of the Annual Cash Bonus for such year and (z) advise Executive of such goals and levels in writing prior to March 31 of such year. Within sixty (60) days after the end of each such calendar year, the Board shall consult with Executive to determine and approve Executive’s Annual Cash Bonus for such calendar year. Subject to any valid deferral election by Executive, the Annual Cash Bonus shall be paid in a cash lump sum as soon as reasonably practicable following the Board’s approval thereof, but in no event later than March 15 of the following calendar year. In no event shall Executive’s Annual Cash Bonus payable in 2011 with respect to 2010 be less than $255,000.

(b) Discretionary Cash Bonuses. The Board may, at any time or from time-to-time, grant Executive additional cash bonuses in amounts to be determined by the Board should it, in its sole discretion, deem the same appropriate in light of Executive’s performance and the Company’s financial performance (each, a “Discretionary Cash Bonus”); provided, however, that the failure of the Board to award any such bonus shall not give rise to any claim against the Company. The timing of the payment of any Discretionary Cash Bonus shall be determined in the Board’s sole discretion; however, in no event will any Discretionary Cash Bonus be paid later than March 15 following the year in which it vests.

3.3 Equity Compensation.

(a) Annual Equity Award. Executive will be eligible for annual grants of long-term incentive and equity compensation awards at the Board’s good faith discretion, based upon the Compensation Committee’s evaluation of his performance and peer company compensation practices.

(b) Discretionary Equity Award. The Board may, at any time or from time-to-time, grant Executive additional equity or equity-based awards in forms and amounts to be determined by the Board should it, in its sole discretion, deem the same appropriate in light of Executive’s performance and the Company’s financial performance (each, a “Discretionary Equity Award”); provided, however, that the failure of the Board to grant any such award shall not give rise to any claim against the Company.

3.4 Sign-On Awards. Sign-On Awards. The Company shall grant to Executive an award of 500,000 Restricted Stock Units (the “Sign-On RSUs”) and options to purchase 200,000 shares of Common Stock (the “Sign-On Options” and, together with the Sign-On RSUs, the “Sign-On Awards”).

(a) Sign-On Options. The Sign-On Options shall be granted on the Effective Date. Subject to the terms of this Agreement and the Sign-On Options award agreement into which Executive and the Company shall enter evidencing the grant of the Sign-

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On Options, 25% of the shares of Common Stock subject to the Sign-On Options shall become vested and non-forfeitable on the Effective Date (the “Initial Vested Sign-On Portion”). However, notwithstanding the preceding sentence, the Initial Vested Sign-On Portion shall not be exercisable prior to the date on which the shares underlying the Sign-On Options are registered on Form S-8. In addition, 2.0833% of the shares of Common Stock subject to the Sign-On Options shall vest and become exercisable on the first day of each of the first thirty-six (36) calendar months that begins after the first anniversary of the Effective Date.

(b) Sign-on RSUs. The Sign-On RSUs shall be granted as soon as practicable following execution of this Agreement but in no event prior to the date on which the shares underlying such awards are registered on Form S-8. Subject to the terms of this Agreement and the Sign-On RSUs award agreement into which Executive and the Company shall enter evidencing the grant of the Sign-On RSUs, 50% of the Sign-On RSUs shall become vested and non-forfeitable, on the grant date of the Sign-On RSUs. In addition, 1.38889% of the shares of the Sign-On RSU shall vest and become non-forfeitable on the first day of each of the first thirty-six (36) calendar months that begins after the first anniversary of the Effective Date.

3.5 Registration of Common Stock; Equitable Adjustment. The Company shall register a sufficient number of shares of Common Stock on a Form S-8 to satisfy its obligations under this Agreement as soon as practicable following the execution of this Agreement and in any event prior to the issuing of the Sign-On RSUs. The Company shall also accompany the S-8s with reoffer prospectuses and shall use reasonable best efforts to maintain the effectiveness of the form S-8s and reoffer prospectuses. Within ten (10) days following each vesting date of a Restricted Stock Unit or date of exercise of an Option (as applicable) described in this Agreement, a number of shares of Common Stock equal to the number of Restricted Stock Units that have vested, and the number of shares of Common Stock with respect to which an Option has been exercised, shall be transferred to Executive’s personal brokerage account and such shares shall be validly issued, fully paid, non-assessable and freely tradable. The Company shall issue the shares pursuant to the NASDAQ inducement grant exception and shall comply with the terms thereof.

4. Employee Benefits.

4.1 Participation in Benefit Plans. During the Term, Executive shall be entitled to participate in such health, group insurance, welfare, pension, and other employee benefit plans, programs and arrangements as are made generally available from time to time to senior executives of the Company (which shall include customary health, life insurance and disability plans), such participation in each case to be on terms and conditions no less favorable to Executive than to other senior executives of the Company generally. In the event that Executive elects to decline coverage under any or all of the aforementioned benefit plans, programs or arrangements, then he shall be permitted to receive cash in lieu of such coverage to

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the maximum extent permissible under the applicable plan document and applicable law. In lieu of participation in the health plan (if Executive so elects), the Company shall reimburse him for premiums for participation in his prior employer’s health plan upon presentation of evidence of payment of premiums with regard therewith.

4.2 Fringe Benefits, Perquisites and Vacations. During his employment by the Company, Executive shall be entitled to participate in all fringe benefits and perquisites made available to other senior executives of the Company, such participation to be at levels, and on terms and conditions, that are commensurate with his position and responsibilities at the Company and that are no less favorable than those applying to other senior executives of the Company. In addition, Executive shall be entitled to 25 days’ paid vacation per calendar year (which, if not used, may be carried over from year to year).

4.3 Reimbursement of Expenses. The Company shall reimburse Executive for all reasonable business and travel expenses (including first class airplane travel) incurred in the performance of his job duties and the promotion of the Company’s business, promptly upon presentation of appropriate supporting documentation and otherwise in accordance with the expense reimbursement policy of the Company.

4.4 Attorneys’ Fees. The Company shall pay promptly upon presentation of appropriate supporting documentation, for all reasonable attorneys’ fees incurred by Executive in connection with the negotiation and execution of this Agreement and to the extent taxable, an additional amount such that the Executive has no after tax cost for such fees and the additional payment.

5. Termination.

5.1 General. The Company may terminate Executive’s employment for any reason or no reason, and Executive may terminate his employment for any reason or no reason, in either case subject only to the terms of this Agreement. In the event of the termination of Executive’s employment hereunder for any reason, he shall promptly resign from any position he then holds that is affiliated with the Company or that he was holding at the Company’s request. For purposes of this Agreement, the following terms have the following meanings:

(a) “Accrued Obligations” shall mean: (i) Executive’s earned but unpaid Salary through the Termination Date; (ii) payment of any annual, long-term, or other incentive award earned in respect to any period ending on or before the Termination Date, or payable (but not yet paid) on or before the Termination Date; (iii) a lump-sum payment in respect of accrued but unused vacation days at Executive’s per-business-day Salary rate in effect

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as of the Termination Date; and (iv) any unpaid expense or other reimbursements due pursuant to Sections 2.4 or 4.3 hereof or otherwise.

(b) “Cause” shall mean (i) Executive is convicted of, or pleads guilty or nolo contendere to, a felony or a crime involving moral turpitude; (ii) in carrying out his duties hereunder, Executive engages in conduct that constitutes willful gross misconduct, or willful gross neglect and that, in either case, results in material economic or reputational harm to the Company; or (iii) Executive refuses to perform, or repeatedly fails to undertake good faith efforts to perform, the duties or responsibilities reasonably assigned to him (consistent with Section 2) by the Board, in either case after written notice thereof.

(c) “Change in Control” shall mean the first to occur of any of the following, provided that for any distribution that is subject to Section 409A (as defined in Section 8.2), a Change in Control under this Agreement shall be deemed to occur only if such event also satisfies the requirements under Treas. Regs. Section 1.409A-(i)(5):

(i) the determination by a vote of a majority of the members of the Board (which may be made effective as of a particular date), that a Change in Control has occurred, or is about to occur;

(ii) any Person or group of Persons becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities (a “Majority of the Securities”);

(iii) (A) the stockholders of the Company approve a plan of complete liquidation of the Company; (B) the sale or disposition of all or substantially all of the Company’s assets; or (C) a merger, consolidation or reorganization of the Company with or involving any other entity, other than (i) a merger, consolidation or reorganization that would result in the voting securities of Inspire outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least a Majority of the Securities of Inspire (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization owned in approximately the same proportion of such ownership by each of the prior shareholders as prior to the transaction; or (ii) a merger, consolidation or reorganization that would result in the voting securities of Inspire outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least a Majority of the Securities of Inspire (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization owned in approximately the same proportion of such ownership by each of the prior shareholders as prior to the transaction except for the fact

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that one of the shareholders owning more than 5% of the Company’s outstanding Common Stock as of the effective date of this Agreement increases its percentage of ownership by no more than 20% and to no greater than 49.99% immediately after the merger, consolidation or reorganization and the percentage ownership of the other shareholders are reduced proportionally; or

(iv) the date a majority of the members of the Board are replaced during any 12-month period by directors whose appointment or election are not endorsed by a majority of the members of the Board before the date of the appointment or election.

Notwithstanding the foregoing, in no event shall a restructuring, reorganization, merger or other change in capitalization in which the Persons who own an interest in the Company on the date hereof (the “Current Owners”) (or any individual or entity which receives from a Current Owner an interest in the Company through will or the laws of descent and distribution) maintain more than a fifty-percent (50%) interest in the resultant entity owned in approximately the same proportion of such ownership by each of the Current Owners as before the transaction, be deemed a Change in Control.

(d) “Company Arrangement” shall mean any plan, program, agreement, corporate governance document or arrangement of the Company or any of its affiliates;

(e) “Disability” shall mean that Executive has been unable, with or without reasonable accommodation and due to physical or mental incapacity, to substantially perform his duties and responsibilities hereunder for 180 consecutive days; and

(f) “Good Reason” shall mean the occurrence of any of the following events without either (x) Executive’s express prior written consent or (y) full cure within 30 days after Executive gives written notice to the Company requesting cure, such notice to be given by Executive no later than 90 days after the date he first learns that the event has occurred: (i) a change in Executive’s authority, duties, responsibilities or reporting lines; (ii) the Company ceases to have any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934; (iii) a reduction in the Executive’s base salary; (iv) any relocation of Executive’s principal office, or principal place of employment, to a location that is more than 50 miles from Durham, North Carolina; (v) any other action or inaction that constitutes a material breach of this Agreement by the Company; or (vi) a Change of Control has occurred and the individual to whom Executive reports has ceased to be Adrian Adams prior thereto or at any time thereafter. No event shall constitute grounds for a Good Reason

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termination unless Executive terminates his employment hereunder within one year after such event occurs.

(g) “Pro Rata Annual Cash Bonus” shall mean an amount equal to (i) the Annual Cash Bonus that Executive would have been entitled to receive for the calendar year during which his employment hereunder terminated if his employment hereunder had continued (such amount to be determined with any subjective or personal performance goals rated at no less than target), multiplied by (ii) a fraction, the numerator of which is the number of days he was employed hereunder during such year and the denominator of which is the number of days in such year; and

(h) “Termination Date” shall mean the date on which Executive’s employment hereunder terminates in accordance with this Agreement (which, in the case of a notice of non-renewal of the Term in accordance with Section 1 hereof, shall mean the date on which the Term expires).

5.2 Termination by the Company Without Cause or by Executive With Good Reason. In the event that Executive’s employment is terminated by the Company without Cause or by the Executive for Good Reason, the Term shall expire on the Termination Date and Executive shall be entitled to:

(a) a single sum cash amount, payable on the 60^th day following his Termination Date, in an amount equal to (i) two times (ii) the sum of (1) his Salary as in effect immediately prior to the Termination Date and (2) the average Annual Cash Bonus that Executive received for each of the three preceding calendar years, provided, however, that if Executive is not employed for a sufficient time to have received three Annual Cash Bonuses, such calculation will assume that a target Annual Cash Bonus (or if the termination takes place in 2010, then $255,000, which is the minimum bonus payment in the case of a termination in 2010), was paid in each missing year and, provided further, that if Executive is terminated during the first six months of the Company’s fiscal year, then the prior year’s Annual Cash Bonus shall be disregarded if less than the average of the other two preceding years;

(b) a Pro-Rata Annual Cash Bonus, such amount to be paid in a cash lump sum to Executive on the date his Annual Cash Bonus for the year of termination would have been paid if his employment hereunder had continued;

(c) an immediate 100% vesting of the Sign-On Awards and an additional twenty-four months of vesting, exercisability and non-forfeitability service credited, as of the Termination Date, for any other outstanding equity or equity-based award, including but not limited to any outstanding Annual Equity Award or Discretionary Equity Award (with vested

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stock options remaining exercisable throughout the period ending on the first to occur of (A) the second anniversary of the Executive’s Termination Date; or (B) the end of their maximum stated term);

(d) the Accrued Obligations; and

(e) a single sum cash amount (payable to Executive on the sixtieth (60^th) day following the Termination Date subject to the six-month delay provided under Section 8.2, as applicable) equal to the cost of continuation of health and dental benefits under the Employer’s health plan to which Executive is entitled as of the Termination Date for a period of 24 months, and to the extent permissible under applicable law and under any insurance policy insuring the Employer’s health plan (if any), continued coverage under the Employer’s health plan with the full cost payable by the Executive for a period of 24 months commencing on the first day of the month following the Termination Date.

5.3 Death and Disability. Executive’s employment shall terminate in the event of his death, and either Executive or the Company may terminate Executive’s employment in the event of his Disability (provided that no termination of Executive’s employment hereunder for Disability shall be effective unless the party terminating Executive’s employment first gives at least 15 days’ written notice of such termination to the other party). In the event that Executive’s employment hereunder is terminated due to his death or Disability, the Term shall expire on the Termination Date and he and/or his estate or beneficiaries (as the case may be) shall be entitled to the benefits described in Section 5.2(b), (c) and (d).

5.4 Termination by the Company For Cause or by Executive Without Good Reason. In the event that Executive’s employment hereunder is terminated by Executive without Good Reason or by the Company for Cause, the Term shall expire as of the Termination Date and Executive shall be entitled to the Accrued Obligations.

5.5 Expiration of the Term. Executive or the Company may elect not to renew or extend the Term in accordance with Section 1 above, in which case the Termination Date shall be the date the Term expires. In the event of such a termination, Executive shall be entitled to the Accrued Obligations and on any termination of employment upon or after such expiration the Sign-On Award shall remain exercisable for the lesser of two years or the remainder of the initial term of such Sign-On Award.

5.6 Due to Change in Control. In the event that (x) within two years following a Change in Control Executive terminates his employment hereunder with Good Reason or the Company takes an action within the six-month time period specified in the flush language below in anticipation of a Change in Control that actually occurs within six months

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thereafter and the Executive terminates his employment for Good Reason as a result thereof or (y) within two years following a Change in Control, or in anticipation of a Change in Control that actually occurs within six months thereafter, the Company terminates Executive’s employment hereunder without Cause, then, in lieu of the payments otherwise due to Executive under Section 5.2 above, the Term shall expire on the Termination Date and Executive shall be entitled to (subject to the last paragraph of this Section 5.6):

(a) an amount equal to (i) three (3) times (ii) the sum of (A) Executive’s Salary as in effect immediately prior to the Termination Date (or, if greater, immediately prior to any event constituting Good Reason) and (B) the highest Annual Cash Bonus paid or payable to him in respect of any of the three completed years immediately prior to his Termination Date (or if the termination takes place in 2010, then $255,000, which is the minimum bonus payment in the case of a termination in 2010) such payment to be made in a cash lump sum to Executive on the sixtieth (60^th) day following the Termination Date (subject to the six-month delay provided under Section 8.2, as applicable);

(b) a Pro-Rata Annual Cash Bonus determined for this purpose by reference to Executive’s target Annual Cash Bonus then in effect, such payment to be made in a cash lump sum to Executive no later than thirty (30) days following the Termination Date;

(c) full vesting, exercisability and non-forfeitability, as applicable, as of the Termination Date, of any outstanding equity or equity-based awards, including but not limited to any outstanding Annual Equity Award, Discretionary Equity Award or Sign-On Awards;

(d) the Accrued Obligations; and

(e) a single sum cash amount (payable to Executive on the sixtieth (60^th) day following the Termination Date subject to the six-month delay provided under Section 8.2, as applicable) equal to the cost of continuation of health and dental benefits under the Employer’s health plan to which Executive is entitled as of the Termination Date for a period of 36 months, and to the extent permissible under law and under any insurance policy insuring the Employer’s health plan (if any), continued coverage under the Employer’s health plan with the full cost payable by the Executive for a period of 36 months commencing on the first day of the month following the Termination Date.

Notwithstanding the foregoing, in the event Executive is terminated in anticipation of a Change in Control or terminates for Good Reason as a result of a Company action in anticipation of a Change in Control then (i) if a Change in Control actually occurs within six-months thereafter, the Executive shall continue to receive the amount due under

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Section 5.2 and granted therein and any additional amounts above such amount due in accordance with this Section 5.6 shall be payable upon the later of the Change in Control and on the sixtieth (60^th) day after the termination of employment (subject to the six-month delay provided under Section 8.2, as applicable); and (ii) any outstanding equity or equity-based awards, including but not limited to any outstanding Annual Equity Award, Discretionary Equity Award or Sign-On Award that are not otherwise vested (or will not otherwise vest) in accordance with Section 5.2 of this Agreement shall not terminate before the six-month anniversary of the Executive’s termination of employment and, if a Change in Control actually occurs before such date, shall become fully vested and exercisable, as applicable in accordance with Section 5.6(c).

5.7 Release. Executive’s entitlement to the payments described in this Section 5 is expressly contingent upon Executive first providing the Company with a signed mutual release in substantially the form attached hereto as Exhibit A (the “Release”). In order to be effective, such Release must be (a) delivered by Executive to the Company no later than forty-five (45) days following the Termination Date and (b) counter-signed and returned by the Company to Executive within 10 days following the Company’s receipt thereof; provided, however, that if the Executive delivers the Release to the Company on a timely bases and the Company does not return a counter-signed Release during the applicable time period allowed, such Release of the Executive shall be null and void and the payments hereunder shall cease to be contingent on the Release and this Section 5.7.

6. Excess Parachute Payments. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to the excise tax, then Exhibit B attached hereto shall apply.

7. Indemnification.

7.1 If Executive is made a party, is threatened to be made a party, or reasonably anticipates being made a party, to any Proceeding by reason of the fact that Executive is or was a director, officer, shareholder, employee, agent, trustee, consultant or representative of the Company or any of its affiliates or is or was serving at the request of the Company or any of its affiliates, or in connection with his service hereunder as a director, officer, shareholder, employee, agent, trustee, consultant or representative of another Person, or if any Claim is made, is threatened to be made, or is reasonably anticipated to be made, that arises out of or relates to Executive’s service in any of the foregoing capacities, then Executive shall promptly be indemnified and held harmless to the fullest extent permitted or authorized by any Company

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Arrangement, or if greater, by applicable law, against any and all costs, expenses, liabilities and losses (including, without limitation, advancement and payment of attorneys’ and other professional fees and charges, judgments, interest, expenses of investigation, penalties, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement, with such legal fees advanced to the maximum extent permitted by law) incurred or suffered by him in connection therewith or in connection with seeking to enforce his rights under this Section 7.1, and such indemnification shall continue even if Executive has ceased to be a director, officer, shareholder, employee, agent, trustee, consultant or representative of the Company or other Person and shall inure to the benefit of his heirs, executors and administrators.

7.2 A directors’ and officers’ liability insurance policy (or policies) shall be kept in place, during the Term and thereafter until the sixth anniversary of the Termination Date, providing coverage to Executive that is no less favorable to him in any respect than the coverage then being provided to any other current or former director or officer of the Company.

7.3 For purposes of this Agreement, the following terms shall have the following meanings: “Affiliate” of a Person shall mean any Person that directly or indirectly controls, is controlled by, or is under common control with, such Person; “Claim” shall mean any claim, demand, request, investigation, dispute, controversy, threat, discovery request, or request for testimony or information; “Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, trust, estate, board, committee, agency, body, employee benefit plan, or other person or entity; and “Proceeding” shall mean any threatened or actual action, suit or proceeding, whether civil, criminal, administrative, investigative, appellate, formal, informal or other.

8. Other Tax Matters.

8.1 The Company shall withhold all applicable federal, state and local taxes, social security and workers’ compensation contributions and other amounts as may be required by law with respect to compensation payable to Executive pursuant to this Agreement.

8.2 Notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and applied so that the payment of the benefits set forth herein either shall either be exempt from the requirements of Section 409A of the Code (“Section 409A”) or shall comply with the requirements of such provision. Notwithstanding any provision of this Agreement to the contrary, if Executive is a “specified employee” within the meaning of Section 409A, any payments or arrangements due upon a termination of Executive’s employment under any arrangement that constitutes a “nonqualified deferral of compensation” within the meaning of Section 409A and which do not otherwise qualify under the exemptions under Treas. Regs. Section 1.409A-1 (including without limitation, the short-term deferral exemption or the

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permitted payments under Treas. Regs. Section 1.409A-1(b)(9)(iii)(A)), shall be delayed and paid or provided on the earlier of (i) the date which is six months after Executive’s “separation from service” (as such term is defined in Section 409A and the regulations and other published guidance thereunder) for any reason other than death, and (ii) the date of Executive’s death. The Company acknowledges and agrees that if any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) made or provided to Executive or for Executive’s benefit in connection with this Agreement, or Executive’s employment with the Company or the termination thereof (the “Payments”) are determined to be subject to the additional taxes, interest or penalties imposed by Section 409A, or any interest or penalties with respect to such additional taxes, interest or penalties (such additional taxes, together with any such interest and penalties, are referred to collectively as the “Section 409A Tax”), then the Executive will be entitled to receive an additional payment (an “409A Gross-Up Payment”) from the Company such that the net amount the Executive retains after paying any applicable Section 409A Tax and any federal, state or local income or FICA taxes on such 409A Gross-Up Payment, shall be equal to the amount the Executive would have received if the Section 409A Tax were not applicable to the Payments. All determinations of the Section 409A Tax and 409A Gross-Up Payment, if any, will be made by tax counsel or other tax advisers designated by Executive and approved by the Company, which approval won’t be unreasonably withheld or delayed. For purposes of determining the amount of the 409A Gross-Up Payment, if any, Executive will be deemed to pay federal income tax at the actual marginal rate of federal income taxation in the calendar year in which the total Payments are made and state and local income taxes at the actual marginal rate of taxation in the state and locality of Executive’s residence on the date the total Payments are made, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes. If the Section 409A Tax is determined by the Internal Revenue Service, on audit or otherwise, to exceed the amount taken into account hereunder in calculating the 409A Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the 409A Gross-Up Payment), the Company shall make another 409A Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Executive with respect to such excess). The Company and Executive shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Section 409A Tax with respect to the total Payments. The 409A Gross-Up Payments provided to Executive shall be made no later than the tenth (10th) business day following the last date the Payments are made but in all events within the time period specified in Section 8.5 also.

8.3 After any Termination Date, Executive shall have no duties or responsibilities that are inconsistent with having a “separation from service” within the meaning of Section 409A as of the Termination Date and, notwithstanding anything in the Agreement to

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the contrary, distributions upon termination of employment of nonqualified deferred compensation may only be made upon a “separation from service” as determined under Section 409A and such date shall be the Termination Date for purposes of this Agreement. Each payment under this Agreement or otherwise shall be treated as a separate payment for purposes of Section 409A. In no event may Executive, directly or indirectly, designate the calendar year of any payment to be made under this Agreement which constitutes a “nonqualified deferral of compensation” within the meaning of Section 409A and to the extent an amount is payable within a time period, the time during which such amount is paid shall be in the discretion of the Company.

8.4 Any amounts otherwise payable to Executive following a termination of employment that are not so paid by reason of this Section 8 shall be paid as soon as practicable following, and in any event within thirty (30) days following, the date that is six months after Executive’s separation from service (or, if earlier, the date of Executive’s death) together with interest on the delayed payment at the Company’s cost of borrowing. All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A.

8.5 To the extent that any reimbursements pursuant to Section 4 or otherwise are taxable to Executive, any reimbursement payment due to Executive pursuant to such Section shall be paid to Executive on or before the last day of the Executive’s taxable year following the taxable year in which the related expense was incurred. The reimbursements pursuant to Section 4 or otherwise are not subject to liquidation or exchange for another benefit and the amount of such reimbursements that Executive receives in one taxable year shall not affect the amount of such reimbursements that Executive receives in any other taxable year. Any tax gross-up shall be made no later than the end of the calendar year next following the calendar year in which the Executive remits the related tax.

9. Confidentiality, Invention Assignment and Non-Competition Agreement. Executive agrees to be bound by the terms of the Employee Confidentiality, Invention Assignment and Non-Compete Agreement, a copy of which is attached hereto as Exhibit C and incorporated herein by reference (the “Non-Compete Agreement”). Except as expressly set forth in this Agreement and the Non-Compete Agreement, Executive shall be subject to no contractual or similar restrictions on his right to terminate his employment hereunder or on his activities after the Termination Date.

10. Non-Disparagement. During and after the Term, Executive and the Company agree not to make any statement that criticizes, ridicules, disparages, or is otherwise derogatory of the other; provided, however, that nothing in this Agreement shall restrict either party from making truthful statements (a) when required by law, subpoena, court order or the like; (b) when

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requested by a governmental, regulatory, or similar body or entity; (c) in confidence to a professional advisor for the purpose of securing professional advice; (d) in the course of performing his duties during the Term; (e) from rebutting any statement made or written about them; or (f) from making normal competitive statements about the Company’s business or products. This provision shall not apply after three (3) years from the date of termination of Executives employment with the Company.

11. Notices. Except as otherwise specifically provided herein, any notice, consent, demand or other communication to be given under or in connection with this Agreement shall be in writing and shall be deemed duly given when delivered personally, when transmitted by facsimile transmission, one (1) day after being deposited with Federal Express or other nationally recognized overnight delivery service or three (3) days after being mailed by first class mail, charges or postage prepaid, properly addressed, if to the Company, at its principal office, and, if to Executive, at his address set forth following his signature below. Either party may change such address from time to time by notice to the other.

12. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of North Carolina, exclusive of any choice of law rules.

13. Arbitration; Legal Fees.

(a) Any dispute or controversy arising under or in connection with this Agreement (except with respect to injunctive relief under Section 9) shall be settled exclusively by arbitration in North Carolina, in accordance with the rules of the American Arbitration Association for employment disputes as then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

(b) In the event of any material contest or dispute relating to this Agreement or the termination of Executive’s employment hereunder, each of the parties shall bear its own costs and expenses, except that the Company agrees to promptly reimburse Executive for his costs and expenses (including reasonable attorneys’ fees and expenses) incurred by Executive in connection with such contest or dispute in the event Executive prevails, as determined by the arbitrator if in arbitration, by the court if pursuant to Section 9, or as a separate arbitration if otherwise. The amount shall be paid within thirty (30) days of the award of the arbitration or court, which shall also specify the amount due.

14. Amendments; Waivers. This Agreement may not be modified or amended or terminated except by an instrument in writing, signed by Executive and a duly-authorized officer of the Company (other than Executive). By an instrument in writing similarly executed, either

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party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. To be effective, any written waiver must specifically refer to the condition(s) or provision(s) of this Agreement being waived.

15. Inconsistencies. In the event of any inconsistency between any provision of this Agreement and any provision of any Company arrangement, the provisions of this Agreement shall control, unless Executive and the Company otherwise agree in a writing that expressly refers to the provision of this Agreement that is being waived.

16. Assignment. Except as otherwise specifically provided herein, neither party shall assign or transfer this Agreement nor any rights hereunder without the consent of the other party, and any attempted or purported assignment without such consent shall be void; provided, however, that any assignment or transfer pursuant to a merger or consolidation, or the sale or liquidation of all or substantially all of the business and assets of the Company shall be valid, so long as the assignee or transferee (a) is the successor to all or substantially all of the business and assets of the Company and (b) assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. Executive’s consent shall not be required for any such transaction. This Agreement shall otherwise bind and inure to the benefit of the parties hereto and their respective successors, penalties, assigns, heirs, legatees, devisees, executors, administrators and legal representatives.

17. Voluntary Execution; Representations. Executive acknowledges that (a) he has consulted with or has had the opportunity to consult with independent counsel of his own choosing concerning this Agreement and has been advised to do so by the Company and (b) he has read and understands this Agreement, is competent and of sound mind to execute this Agreement, is fully aware of the legal effect of this Agreement, and has entered into it freely based on his own judgment and without duress. Executive represents and covenants that his employment hereunder and compliance with the terms and conditions hereof will not conflict with or result in the breach by him of any agreement to which he is a party or by which he may be bound and in connection with his employment with the Company he will not engage in any unauthorized use of any confidential or proprietary information he may have obtained in connection with his employment with any other employer. The Company represents and warrants that it is fully authorized, by any person or body whose authorization is required, to enter into this Agreement and to perform its obligations under it.

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18. Headings. The headings of the Sections and sub-sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

19. Beneficiaries/References. Executive shall be entitled, to the extent permitted under applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit hereunder following Executive’s death by giving written notice thereof. In the event of Executive’s death or a judicial determination of his incompetence, references in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative.

20. Survivorship. Except as otherwise set forth in this Agreement, the respective rights and obligations of the parties shall survive any termination of Executive’s employment.

21. Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but the invalidity or unenforceability of any provision or portion of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision or portion of any provision, in any other jurisdiction.

22. No Mitigation/No Offset. Executive shall be under no obligation to seek other employment or to otherwise mitigate the obligations of the Company under this Agreement, and there shall be no offset against amounts or benefits due to Executive under this Agreement or otherwise on account of any claim (other than any preexisting debts then due in accordance with their terms) the Company may have against him or any remuneration or other benefit earned or received by Executive after such termination.

23. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Signatures delivered by facsimile or PDF shall be effective for all purposes.

24. Entire Agreement. This Agreement and the agreements described in the attached Exhibits contain the entire agreement of the parties and supersedes all prior or contemporaneous negotiations, correspondence, understandings and agreements between the parties, regarding the subject matter of this Agreement.

[Signature Page to Follow]

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IN WITNESS WHEREOF, this Agreement has been duly executed by or on behalf of the parties hereto as of the date first above written.

INSPIRE PHARMACEUTICALS, INC.:
By:	/s/ Adrian Adams

Name: Adrian Adams

Title: President and Chief Executive Officer

EXECUTIVE:

/s/ Andrew I. Koven

Name: Andrew I. Koven

Address: 10 Beechcroft Rd.

                Short Hills, N.J. 07078

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Exhibit A

FORM OF GENERAL RELEASE OF ALL CLAIMS

THIS GENERAL RELEASE OF ALL CLAIMS (this “General Release”), dated as of [____________________________], 2010, is made by and between Andrew I. Koven (the “Executive”) and Inspire Pharmaceuticals, Inc. (the “Company”).

WHEREAS, the Company and Executive are parties to that certain Employment Agreement, dated as of April 2, 2010 (the “Employment Agreement”);

WHEREAS, Executive’s employment with the Company has been terminated and Executive is entitled to receive severance and other benefits, as set forth in Section 5 of the Employment Agreement subject to the execution of this General Release;

WHEREAS, in consideration for Executive’s signing of this General Release, the Company will provide Executive with such severance and benefits pursuant to the Employment Agreement; and

WHEREAS, except as otherwise expressly set forth herein, the parties hereto intend that this General Release shall effect a full satisfaction and release of the obligations described herein owed to Executive by the Company and to the Company by Executive.

NOW, THEREFORE, in consideration of the premises, the mutual covenants of the parties hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby covenant and agree as follows:

1. Executive, for himself, Executive’s spouse, heirs, administrators, children, representatives, executors, successors, assigns, and all other individuals and entities claiming through Executive, if any (collectively, the “Executive Releasers”), does hereby release, waive, and forever discharge the Company and each of its respective agents, subsidiaries, parents, affiliates, related organizations, employees, officers, directors, attorneys, successors, and assigns in their capacities as such (collectively, the “Employer Releasees”) from, and does fully waive any obligations of Employer Releasees to Executive Releasers for, any and all liability, actions, charges, causes of action, demands, damages, or claims for relief, remuneration, sums of money, accounts or expenses (including attorneys’ fees and costs) of any kind whatsoever, whether known or unknown or contingent or absolute, which heretofore has been or which hereafter may be suffered or sustained, directly or indirectly, by Executive Releasers in consequence of, arising out of, or in any way relating to: (a) Executive’s employment with the Company; (b) the termination of Executive’s employment with the Company; (c) the Employment Agreement; or (d) any events occurring on or prior to the date of this General Release. The foregoing release

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and discharge, waiver and covenant not to sue includes, but is not limited to, all waivable claims and any obligations or causes of action arising from such claims, under common law including wrongful or retaliatory discharge, breach of contract (including but not limited to any claims under the Employment Agreement other than claims for unpaid severance benefits, bonus or Base Salary earned thereunder) and any action arising in tort including libel, slander, defamation or intentional infliction of emotional distress, and claims under any federal, state or local statute including the Age Discrimination in Employment Act (“ADEA”), Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866 and 1871 (42 U.S.C. § 1981), the National Labor Relations Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act of 1990, the Rehabilitation Act of 1973, or the discrimination or employment laws of any state or municipality, and/or any claims under any express or implied contract which Executive Releasers may claim existed with Employer Releasees. This also includes a release of any claims for wrongful discharge and all claims for alleged physical or personal injury, emotional distress relating to or arising out of Executive’s employment with the Company or any of its subsidiaries or affiliates or the termination of that employment; and any claims under the WARN Act or any similar law, which requires, among other things, that advance notice be given of certain work force reductions. Notwithstanding anything contained in this Section 1 above to the contrary, nothing contained in herein shall constitute a release by any Executive Releaser of any of his, her or its rights or remedies available to him, her or it, at law or in equity, related to, on account of, in connection with or in any way pertaining to the enforcement of: (i) any right to indemnification, advancement of legal fees or directors and officers liability insurance coverage existing under the constituent documents of the Company or applicable state corporate, limited liability company and partnership statutes or pursuant to any agreement, plan or arrangement; (ii) any rights to the receipt of employee benefits which vested on or prior to the date of this General Release; (iii) the right to receive severance and other benefits under the Employment Agreement; (iv) the right to continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act; (v) any rights of Executive under the Employment Agreement with respect to (A) the gross-up protections set forth in Sections 6 and 8.2 of the Employment Agreement, (B) amounts due upon a Change in Control occurring after a termination of employment that occurs in anticipation of a Change in Control as set forth in Section 5.6, and (C) any equity rights; or (vi) this General Release or any of its terms or conditions.

2. Excluded from this General Release and waiver are any claims which cannot be waived by applicable law, including but not limited to the right to participate in an investigation conducted by certain government agencies. Executive does, however, waive Executive’s right to any monetary recovery should any government agency (such as the Equal Employment Opportunity Commission) pursue any claims on Executive’s behalf. Executive represents and warrants that Executive has not filed any complaint, charge, or lawsuit against the Employer Releasees with any government agency or any court.

3. Executive agrees never to seek personal recovery from any Employer Releasee in any forum for any claim covered by the above waiver and release language, except that Executive

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may bring a claim under the ADEA to challenge this General Release. If Executive violates this General Release by suing an Employer Releasee (excluding any claim by Executive under the ADEA or as otherwise set forth in Section 1 hereof), then Executive shall be liable to the Employer Releasee so sued for such Employer Releasee’s reasonable attorneys’ fees and other litigation costs incurred in defending against such a suit. Nothing in this General Release is intended to reflect any party’s belief that Executive’s waiver of claims under ADEA is invalid or unenforceable, it being the intent of the parties that such claims are waived.

4. Each party agrees that neither this General Release, nor the furnishing of the consideration for this General Release, shall be deemed or construed at any time to be an admission by any party of any improper or unlawful conduct.

5. Each party acknowledges and recites that he or it has:

(a) executed this General Release knowingly and voluntarily;

(b) had a reasonable opportunity to consider this General Release;

(c) read and understands this General Release in its entirety;

(d) been advised and directed orally and in writing (and this subparagraph (d) constitutes such written direction) to seek legal counsel and any other advice such party wishes with respect to the terms of this General Release before executing it; and

(e) relied solely on such party’s own judgment, belief and knowledge, and such advice as such party may have received from such party’s legal counsel.

6. Section 13 of the Employment Agreement, which shall survive the expiration of the Employment Agreement for this purpose, shall apply to any dispute with regard to this release.

7. Executive acknowledges and agrees that (a) his execution of this General Release has not been forced by any employee or agent of the Company, and Executive has had an opportunity to negotiate the terms of this General Release and (b) he has been offered twenty-one (21) calendar days after receipt of this General Release to consider its terms before executing it.¹ Executive shall have seven (7) calendar days from the date he executes this General Release to revoke his or her waiver of any ADEA claims by providing written notice of the revocation to the Company, as provided in Section 11 of the Employment Agreement.

8. Capitalized terms used but not defined in this General Release have the meanings ascribed to such terms in the Employment Agreement.

¹     In the event the Company determines that Employee’s termination constitutes “an exit incentive or other employment termination program offered to a group or class of employees” under the ADEA, the Company will provide Employee with: (1) 45 days to consider the General Release; and (2) the disclosure schedules required for an effective release under the ADEA.

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9. This General Release may be executed by the parties in one or more counterparts, each of which shall be an original and all of which shall together constitute one and the same instrument. Each counterpart may be delivered by facsimile transmission or e-mail (as a .pdf, .tif or similar un-editable attachment), which transmission shall be deemed delivery of an originally executed counterpart hereof.

IN WITNESS WHEREOF, the parties hereto have executed this General Release as of the day and year first above written.

INSPIRE PHARMACEUTICALS, INC.:

By:

Name: Adrian Adams

Title: President and Chief Executive Officer

EXECUTIVE:

Name: Andrew I. Koven

Address:

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Exhibit B

PARACHUTE TAX INDEMNITY PROVISIONS

This Exhibit B sets forth the terms and provisions applicable to the Executive pursuant to the provisions of Section 6 of the Agreement. This Exhibit B shall be subject in all respects to the terms and conditions of the Agreement. Capitalized terms used without definition in this Exhibit B shall have the meanings set forth in the Agreement.

(A) In the event that Executive shall become entitled to payments and/or benefits provided by this Agreement or any other amounts in the “nature of compensation” (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, or any arrangement or agreement with any person whose actions result in a change of ownership or effective control or a change in the ownership of a substantial portion of the assets of the corporation covered by Code Section 280G(b)(2) (a “280G Change of Control”) or any person affiliated with the Company or such person) as a result of a 280G Change of Control (collectively the “Company Payments”), and such Company Payments will be subject to the tax (the “Excise Tax”) imposed by Code Section 4999 (and any similar tax that may hereafter be imposed by any taxing authority), the Company shall pay to Executive at the time specified below (i) an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the Company Payments and any U.S. federal, state, and for local income or payroll tax upon the Gross-up Payment provided for by this paragraph, but before deduction for any U.S. federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments and (ii) an amount equal to the product of any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Gross-Up Payment in Executive’s adjusted gross income multiplied by Executive’s actual marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Gross-Up Payment is to be made.

(B) In the event that the Internal Revenue Service or court ultimately makes a determination that the excess parachute payments plus the base amount is an amount other than as determined initially, an appropriate adjustment shall be made with regard to the Gross-Up Payment as applicable to reflect the final determination.

(C) For purposes of determining whether any of the Company Payments and Gross-Up Payments (collectively the “Total Payments”) will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as “parachute payments” within the meaning of Code Section 280G(b)(2), and all “parachute payments” in excess of the “base amount” (as defined under Code Section 280G(b)(3)) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company’s independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants or the Company (the “Accountants”) such Total Payments (in whole or in part) either do not constitute “parachute payments,” including giving effect to the recalculation of stock options in accordance with Treasury

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Regulation Section 1.280G-1, Q&A 33, represent reasonable compensation for services actually rendered within the meaning of Code Section 280G(b)(4) in excess of the “base amount” or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Code Section 280G. To the extent permitted under Revenue Procedure 2003-68, the value determination shall be recalculated to the extent it would be beneficial to Executive. In the event that the Accountants are serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive may appoint with the approval of the Company, which approval shall not be unreasonable or unreasonably delayed, another nationally recognized accounting firm to make the determinations hereunder (which accounting firm shall then be referred to as the “Accountants” hereunder). All determinations hereunder shall be made by the Accountants which shall provide detailed supporting calculations both to the Company and Executive at such time as it is requested by the Company or Executive supported by such opinions or other confirmations as will let the Company and the Executive rely therein for purposes of filing their tax returns. The determination of the Accountants shall be final and binding upon the Company and Executive.

(D) For purposes of determining the amount of the Gross-Up Payment, Executive’s actual U.S. federal income tax rate in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at Executive’s actual rate of taxation in the state and locality of Executive’s residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in U.S. federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year, shall be used. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and U.S. federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Executive if such repayment results in a reduction in Excise Tax or a U.S. federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Code Section 1274(b)(2)(B). Notwithstanding the foregoing, in the event any portion of the Gross-Up Payment to be refunded to the Company has been paid to any U.S. federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed the interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive’s claim for refund or credit is denied.

(E) In the event that the Excise Tax is later determined by the Accountant or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional

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Gross-Up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined.

(F) The Gross-up Payment or portion thereof provided for above shall be paid not later than the sixtieth (60) day following a 280G Change of Control which subjects Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Accountant, of the minimum amount of such payments and shall pay the remainder of such payments, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting Executive to the Excise Tax. Notwithstanding any other provision of this Agreement, all Gross-Up Payments under this Exhibit B shall be paid pursuant to Section 8 of the Agreement. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, subject to Paragraph (G) below, such excess shall constitute a loan by the Company to Executive, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Code Section 1274(b)(2)(B)).

(G) In the event of any controversy with the Internal Revenue Service (or other taxing authority) with regard to the Excise Tax, Executive shall permit the Company to control issues related to the Excise Tax (at its expense), but Executive shall control any other issues unrelated to the Excise Tax. In the event that the issues are interrelated, Executive and the Company shall in good faith cooperate. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Executive shall permit the representative of the Company to accompany Executive, and Executive and his representative shall cooperate with the Company and its representative.

(G) The Company shall be responsible for all charges of the Accountant.

(I) The Company and Executive shall promptly deliver to each other copies of any written communications, and summaries of any verbal communications, with any taxing authority regarding the Excise Tax covered by this provision.

(G) Nothing in this Exhibit B is intended to violate the Sarbanes-Oxley Act and to the extent that any advance or repayment obligation hereunder would do so, such obligation shall be modified so as to make the advance a nonrefundable payment to Executive and the repayment obligation null and void.

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Exhibit C

EMPLOYEE CONFIDENTIALITY, INVENTION ASSIGNMENT

AND NON-COMPETE AGREEMENT

THIS EMPLOYEE CONFIDENTIALITY, INVENTION ASSIGNMENT AND NON-COMPETE AGREEMENT (“Agreement”) is made as of the date set forth on the signature page below between Inspire Pharmaceuticals, Inc. (“Inspire”), and the person whose name is set forth on the signature page below as Employee (“Employee”).

In consideration of Employee’s employment or continued employment by Inspire, with the intention that this Agreement shall apply to the entire period of Employee’s employment with Inspire (including the period prior to the date of this Agreement), Employee hereby agrees as follows:

1. CONFIDENTIAL INFORMATION DEFINED. “Confidential Information” means trade secrets, proprietary information and materials, and confidential knowledge and information which includes, but is not limited to, matters of a technical nature (such as discoveries, ideas, concepts, designs, drawings, specifications, techniques, models, diagrams, test data, scientific methods and know-how, and materials such as reagents, substances, chemical compounds, subcellular constituents, cell or cell lines, organisms and progeny, and mutants, derivatives or replications derived from or relating to any of the foregoing materials), and matters of a business nature (such as the identity of customers and prospective customers, the nature of work being done for or discussed with customers or prospective customers, suppliers, marketing techniques and materials, marketing and development plans, pricing or pricing policies, financial information, plans for further development, and any other information of a similar nature not available to the public).

“Confidential Information” shall not include information that: (a) was in Employee’s possession or in the public domain before receipt from the Company, as evidenced by the then existing publication or other public dissemination of such information in written or other documentary form; (b) becomes available to the public through no fault of Employee; (c) is received in good faith by Employee from a third party who is known to the Employee to be not subject to an obligation of confidentiality to the Company or any other party; or (d) is required by a judicial or administrative authority or court having competent jurisdiction to be disclosed by Employee, provided that Employee shall promptly notify the Company and not attempt to prevent the Company from opposing or limiting such order.

2. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION OF INSPIRE. Employee acknowledges that, during the period of Employee’s employment with Inspire, Employee has had or will have access to Confidential Information of Inspire. Therefore, Employee agrees that both during and after the period of Employee’s employment with Inspire, Employee shall not, without the prior written approval of Inspire, directly or indirectly (a) reveal, report, publish,

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disclose or transfer any Confidential Information of Inspire to any person or entity, or (b) use any Confidential Information of Inspire for any purpose or for the benefit of any person or entity, except in the good faith performance of Employee’s work for Inspire.

3. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION OF OTHERS. Employee acknowledges that, during the period of Employee’s employment with Inspire, Employee may have had or will have access to Confidential Information of third parties who have given Inspire the right to use such Confidential Information, subject to a non-disclosure agreement between Inspire and such third party. Therefore, Employee agrees that both during and after the period of Employee’s employment with Inspire, Employee shall not, without the prior written approval of Inspire, directly or indirectly (a) reveal, report, publish, disclose or transfer any Confidential Information of such third parties to any person or entity, or (b) use any Confidential Information of such third parties for any purpose or for the benefit of any person or entity, except in the good faith performance of Employee’s work for Inspire or to comply with an order from any court of competent jurisdiction.

4. PROPERTY OF INSPIRE. Employee acknowledges and agrees that all Confidential Information of Inspire and all reports, drawings, blueprints, materials, data, code, notes and other documents and records (other than Employee’s personal address book), whether printed, typed, handwritten, videotaped, transmitted or transcribed on data files or on any other type of media, and whether or not labeled or identified as confidential or proprietary, made or compiled by Employee, or made available to Employee, during the period of Employee’s employment with Inspire (including the period prior to the date of this Agreement) concerning Inspire’s Confidential Information are and shall remain Inspire’s property and shall be delivered to Inspire within five (5) business days after the termination of such employment with Inspire or at any earlier time on request of Inspire. Employee shall not retain copies of such Confidential Information, documents and records.

5. PROPRIETARY NOTICES. Employee shall not, and shall not permit any other person to, remove any proprietary or other legends or restrictive notices contained in or included in any Confidential Information.

6. INVENTIONS.

(a) Employee shall promptly, from time to time, fully inform and disclose to Inspire in writing all inventions, copyrightable material, designs, improvements and discoveries of any kind which Employee now has made, conceived or developed (including prior to the date of this Agreement), or which Employee may later make, conceive or develop, during the period of Employee’s employment with Inspire, which pertain to or relate to Inspire’s business or any of the work or businesses carried on by Inspire (“Inventions”). This covenant applies to all such Inventions, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection; and whether or not they are conceived and/or developed by Employee alone or

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with others; and whether or not they are conceived and/or developed during regular working hours; and whether or not they are conceived and/or developed at Inspire’s facility or not.

(b) Inventions shall not include any inventions made, conceived or developed by Employee prior to Employee’s employment with Inspire, a complete list of which is set forth on Schedule A attached.

(c) All Inventions shall be the sole and exclusive property of Inspire, and shall be deemed part of the Confidential Information of Inspire for purposes of this Agreement, whether or not fixed in a tangible medium of expression. Employee hereby assigns all Employee’s rights in all Inventions and in all related patents, copyrights and trademarks, trade secrets and other proprietary rights therein to Inspire. Without limiting the foregoing, Employee agrees that any copyrightable material shall be deemed to be “works made for hire” and that Inspire shall be deemed the author of such works under the United States Copyright Act, provided that in the event and to the extent such works are determined not to constitute “works made for hire”, Employee hereby irrevocably assigns and transfers to Inspire all right, title and interest in such works.

(d) Employee shall assist and cooperate with Inspire, both during and after the period of Employee’s employment with Inspire, at Inspire’s sole expense, to allow Inspire to obtain, maintain and enforce patent, copyright, trademark, trade secret and other legal protection for the Inventions. Employee shall sign such truthful documents, and do such things necessary, to obtain such protection and to vest Inspire with full and exclusive title in all Inventions against infringement by others. Employee hereby appoints the Secretary of Inspire as Employee’s attorney-in-fact to execute any truthful documents on Employee’s behalf for this purpose.

(e) Employee shall not be entitled to any additional compensation for any and all Inventions made during the period of Employee’s employment with Inspire.

7. COVENANT NOT TO COMPETE. If Employee is, at any time during Employee’s period of employment with Inspire, employed in the discovery or development areas of the Company in a non-clerical position, or as a director level or higher level senior manager of the Company, then this Section 7 shall apply. Employee and Inspire agree that the services rendered by the Employee are unique and irreplaceable, and that competitive use and knowledge of any Confidential Information would substantially and irreparably injure Inspire’s business, prospects and good will. Employee and Inspire also agree that Inspire’s business is global in nature due to the type of products and/or services being provided. Therefore, Employee agrees that during the period of Employee’s employment with Inspire and for a period of one (1) year thereafter, Employee shall not, directly or indirectly, through any other person, firm, corporation or other entity (whether as an officer, director, employee, partner, consultant, holder of equity or debt investment, lender or in any other manner or capacity):

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(a) develop, sell, market, offer to sell products and/or services anywhere in the world that have the same or similar technological approach or technology platform (e.g., same receptors (such as P2Y), same mechanism of action (such as mucociliary clearance)) and have the same indication as those being developed, offered or sold by Inspire on the date of the termination of Employee’s employment with Inspire for any reason, provided that the foregoing shall not be violated by Executive’s activities with an entity where the portion of the competitive business involved is less than 5% of the revenues of the portion of the entity that is under the Employee’s supervision;

(b) solicit, induce, encourage or attempt to induce or encourage any employee or consultant of Inspire to terminate his or her employment or consulting relationship with Inspire, or to breach any other obligation to Inspire (other than advertising not specifically targeted at the Company’s employees and serving as a reference upon request), however, notwithstanding the foregoing, Employee may engage in the activities described in this Section 7(b) with respect to one executive who worked with Employee in the past and joined the Company without it violating this provision; or

(c) interfere with, disrupt, alter or attempt to disrupt or alter the relationship, contractual or otherwise, between Inspire and any consultant, contractor, customer, potential customer, or supplier of Inspire.

Employee acknowledges that the foregoing geographic, activity and time limitations contained in this Section 7 are reasonable and properly required for the adequate protection of Inspire’s business. In the event that any such geographic, activity or time limitation is deemed to be unreasonable by a court, Employee shall submit to the reduction of either said activity or time limitation to such activity or period as the court shall deem reasonable. In the event that Employee is in violation of the aforementioned restrictive covenants, then the time limitation thereof shall be extended for a period of time equal to the pendency of such proceedings, including appeals.

8. DISCLOSURE OF THIS AGREEMENT. Employee hereby authorizes Inspire to notify others, including but not limited to customers of Inspire and any of Employee’s future employers, of the terms of this Agreement and Employee’s responsibilities under this Agreement.

9. SPECIFIC PERFORMANCE. Employee acknowledges that money damages alone would not adequately compensate Inspire in the event of a breach or threatened breach by Employee of this Agreement, and that, in addition to all other remedies available to Inspire at law or in equity, Inspire shall be entitled to injunctive relief for the enforcement of its rights and to an accounting of profits made during the period of such breach.

10. NO RIGHTS GRANTED. Employee understands that nothing in this Agreement shall be deemed to constitute, by implication or otherwise, the grant by Inspire to the employee of any

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license or other right under any patent, patent application or other intellectual property right or interest belonging to Inspire.

11. SEVERABILITY.

(a) Each of the covenants provided in this Agreement are separate and independent covenants. If any provision of this Agreement shall be determined to be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby and any such invalid or unenforceable provision shall be reformed so as to be valid and enforceable to the fullest extent permitted by law.

(b) It is not a defense to the enforcement of any provision of this Agreement that Inspire has breached or failed to perform any obligation or covenant hereunder or under any other agreement or understanding between Employee and Inspire.

12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflict of law rules. All suits and claims shall be made only in state or federal courts located in North Carolina.

13. SUPERSEDES OTHER AGREEMENTS. This Agreement contains the entire agreement of the parties with respect to subject matter hereof and supersedes all previous agreements and understandings between the parties with respect to its subject matter.

14. AMENDMENTS. This Agreement may not be changed, modified, released, discharged, abandoned or otherwise terminated in whole or in part except by an instrument in writing, agreed to and signed by the Employee and a duly authorized officer of Inspire.

15. ACKNOWLEDGEMENTS. THE EMPLOYEE ACKNOWLEDGES THAT (i) THE EMPLOYEE HAS READ AND FULLY UNDERSTANDS THIS AGREEMENT; (ii) THE EMPLOYEE HAS BEEN GIVEN THE OPPORTUNITY TO ASK QUESTIONS; (iii) THE EMPLOYEE HAS RECEIVED A COPY OF THIS AGREEMENT, THE ORIGINAL OF WHICH WILL BE RETAINED IN THE EMPLOYEE’S PERSONNEL FILE; AND (iv) THE EMPLOYEE’S OBLIGATIONS UNDER THIS AGREEMENT SURVIVE THE TERMINATION OF THE EMPLOYEE’S EMPLOYMENT WITH INSPIRE FOR ANY REASON.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth below.

INSPIRE PHARMACEUTICALS, INC.

4222 Emperor Boulevard

Durham, North Carolina 27703

By:	Adrian Adams
	President and Chief Executive Officer
	/s/ Adrian Adams
	(Signature Here)
Date:	April  2nd, 2010
Employee:	Andrew I. Koven
	/s/ Andrew I. Koven
	(Signature Here)
Date:	April 2, 2010
Address:	10 Beechcroft Rd.
	Short Hills, NJ 07078

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EX-31.1

Exhibit 31.1

INSPIRE PHARMACEUTICALS, INC.

CERTIFICATIONS

I, Adrian Adams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Inspire Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2010	/s/ Adrian Adams
	Adrian Adams President & Chief Executive Officer (principal executive officer)

EX-31.2

Exhibit 31.2

INSPIRE PHARMACEUTICALS, INC.

CERTIFICATIONS

I, Thomas R. Staab, II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Inspire Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2010	/s/ Thomas R. Staab, II
	Thomas R. Staab, II Chief Financial Officer & Treasurer (principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Inspire Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Adrian Adams, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 4, 2010	/s/    Adrian Adams
	Adrian Adams President & Chief Executive Officer (principal executive officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Inspire Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas R. Staab, II, Chief Financial Officer & Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 4, 2010	/s/    Thomas R. Staab, II
	Thomas R. Staab, II Chief Financial Officer & Treasurer (principal financial officer)