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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

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Notice of Annual Meeting

and Proxy Statement

April 27, 2012

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AUXILIUM PHARMACEUTICALS, INC.

40 Valley Stream Parkway

Malvern, Pennsylvania 19355

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 21, 2012

The 2012 Annual Meeting of Stockholders (the “Meeting”) of Auxilium Pharmaceuticals, Inc., a Delaware corporation (the “Company” or “Auxilium”), will be held at its offices at 40 Valley Stream Parkway, Malvern, Pennsylvania 19355 on Thursday, June 21, 2012, at 9:00 a.m., local time. The purpose of the Meeting shall be to consider and act upon the following matters:

The holders (the “Stockholders”) of the Company’s common stock of record at the close of business on April 23, 2012, are entitled to notice of, and to vote at, the Meeting, or any adjournments or postponements thereof. A complete list of such Stockholders will be open to the examination of any Stockholder at the Company’s principal executive offices at 40 Valley Stream Parkway, Malvern, Pennsylvania 19355, for a period of 10 days prior to the Meeting and on the day of the Meeting.

YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT AS SOON AS POSSIBLE IN THE ENCLOSED RETURN ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE ENCLOSED RETURN ENVELOPE IS MAILED IN THE UNITED STATES. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH PROXY CARD SHOULD BE SIGNED AND RETURNED TO ENSURE THAT ALL OF YOUR SHARES WILL BE VOTED.

By Order of the Board of Directors,

Andrew I. Koven

Secretary

Malvern, Pennsylvania

April 27, 2012

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE MEETING TO BE HELD ON JUNE 21, 2012

The Notice of Annual Meeting of Stockholders, Proxy Statement and Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2011, which Form 10-K, together with the additional cover materials attached thereto, constitutes our 2011 Annual Report to Stockholders, are available at http://ir.auxilium.com.

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AUXILIUM PHARMACEUTICALS, INC.

40 Valley Stream Parkway

Malvern, Pennsylvania 19355

PROXY STATEMENT

FOR THE ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 21, 2012

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ANNUAL MEETING OF STOCKHOLDERS

We have sent you this Proxy Statement and the enclosed Proxy Card because the Board of Directors (the “Board”) of Auxilium Pharmaceuticals, Inc. (referred to herein as the “Company”, “Auxilium”, “we”, “us” or “our”) is soliciting your proxy to vote at our 2012 Annual Meeting of Stockholders to be held on Thursday, June 21, 2012 (the “Meeting”), at our offices at 40 Valley Stream Parkway, Malvern, Pennsylvania 19355, at 9:00 a.m., local time, and at any adjournments or postponements thereof.

In addition to solicitations by mail, our directors, officers and regular employees, without additional remuneration, may solicit proxies by telephone, e-mail and personal interviews. All costs of solicitation of proxies will be borne by us. Brokers, custodians and fiduciaries will be requested to forward proxy soliciting material to the owners of stock held in their names, and we will reimburse them for their reasonable out-of-pocket expenses incurred in connection with the distribution of proxy materials.

We are mailing the Notice of Annual Meeting of Stockholders, this Proxy Statement and Proxy Card to our stockholders of record as of April 23, 2012 (the “Record Date”) for the first time on or about April 27, 2012. In this mailing, we are also including our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2011 (“Fiscal 2011”), which Form 10-K, together with the additional cover materials attached thereto, constitutes our 2011 Annual Report to Stockholders (“2011 Annual Report”). In addition, we have provided brokers, dealers, banks, voting trustees and their nominees, at our expense, with additional copies of our proxy materials and the 2011 Annual Report so that our record holders can supply these materials to the beneficial owners of shares of our common stock as of the Record Date.

Information About the Meeting

When is the Meeting?

The Meeting will be held at 9:00 a.m., local time, on Thursday, June 21, 2012.

Where is the Meeting?

The Meeting will be held at our offices at 40 Valley Stream Parkway, Malvern, Pennsylvania 19355.

What is the purpose of the Meeting?

At the Meeting, stockholders will act upon the matters listed in the Notice of Annual Meeting of Stockholders and any other matters that properly come before the Meeting or any adjournments or postponements thereof.

Who can attend the Meeting?

All stockholders as of the Record Date, or their duly appointed proxies, may attend the Meeting. Each stockholder may be asked to present valid picture identification, such as a driver’s license or passport. If you hold your shares through a broker or other nominee, you must bring a copy of a brokerage statement reflecting your stock ownership as of the Record Date. All stockholders must check in at the registration desk at the Meeting.

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What constitutes a quorum?

A quorum of stockholders is necessary to hold a valid meeting for the transaction of business. The presence at the Meeting, in person or by proxy, of the holders entitled to cast at least a majority of votes which all stockholders are entitled to cast as of the Record Date will constitute a quorum. Broker non-votes, abstentions and votes withheld count as shares present at the Meeting for purposes of calculating whether a quorum is present. On the Record Date, there were 48,374,688 shares of our common stock outstanding.

What are the recommendations of the Board?

Unless you instruct otherwise on your Proxy Card, the persons named as proxy holders on the Proxy Card will vote in accordance with the recommendations of the Board. The Board’s recommendations are set forth below.

The proxy holders will vote in their own discretion with respect to any other matter that properly comes before the Meeting or any adjournments or postponements thereof.

Information About Voting

Who can vote at the Meeting?

All stockholders of record at the close of business on the Record Date, April 23, 2012, are entitled to vote at the Meeting and any adjournments or postponements of the Meeting.

What are the voting rights of the holders of the common stock?

Holders of our common stock will vote on all matters to be acted upon by the stockholders at the Meeting. Each outstanding share of common stock will be entitled to one vote on each matter to be voted upon at the Meeting.

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How do I vote?

You may attend the Meeting and vote in person. Alternatively, you may vote your shares by proxy by mail. To vote by mail, simply complete, sign and date your Proxy Card and return it in the postage-paid return envelope provided for receipt by us prior to June 21, 2012 (Proxy Cards received on or after June 21, 2012 (i.e., the Meeting date) will not be counted). Please note that by casting your vote by proxy you are authorizing the individuals listed on the Proxy Card to vote your shares in accordance with your instructions and in their discretion with respect to any other matter that properly comes before the Meeting or any adjournments or postponements thereof.

If you want to vote in person at the Meeting and you hold shares of our common stock in street name, you must obtain a Proxy Card from your broker and bring that Proxy Card to the Meeting, together with a copy of a brokerage statement reflecting your stock ownership as of the Record Date and valid picture identification, such as a driver’s license or passport.

Is my vote confidential?

Yes. Proxy Cards, ballots and voting tabulations that identify stockholders are kept confidential except in certain circumstances where it is important to protect the interests of Auxilium and its stockholders.

What if I sign and return my Proxy Card but I do not indicate my preference on the Proxy Card?

If you sign and return your Proxy Card but do not indicate how you would like your shares to be voted for a particular proposal, your shares will be voted as follows for each such proposal:

As to other matters as may properly come before the Meeting or any adjournments or postponements thereof, the persons named in the proxy will be authorized to vote upon such matters in their own discretion.

Can I change my vote after I return my Proxy Card?

Yes. Even after you have submitted your Proxy Card, you may change your vote at any time before the proxy is exercised by filing with the Secretary of Auxilium either a notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy holders will be suspended if you attend the Meeting in person and request to recast your vote. Attendance at the Meeting will not, by itself, revoke a previously granted proxy. For information regarding how to vote in person, see “How do I vote?” above.

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What vote is required to approve each proposal?

Proposal 1: Election of Directors. The affirmative vote of a plurality of the votes cast at the Meeting is required for the election of directors, provided a quorum is present in person or by proxy. A plurality means that the seven nominees receiving the most votes for election to a director position are elected as directors. Our Board recently adopted a resolution that fixed the number of directors comprising the Board at seven, effective immediately upon the conclusion of the Meeting. This will reduce the size of our Board from nine to seven members. Accordingly, two of our current directors have not been included in the slate of director nominees submitted to the stockholders at the Meeting. Votes that are withheld and broker non-votes will be excluded entirely from the vote to elect directors and have no effect. Thus, the seven candidates with the most affirmative votes will be elected at the Meeting.

Proposal 2: Approval of the Amended and Restated Equity Compensation Plan. The affirmative vote of a majority of the votes cast at the Meeting is required to adopt and approve the amendment and restatement of the Equity Compensation Plan to: increase the number of shares of Company common stock authorized for issuance under the Plan by 1,400,000 shares from 14,400,000 to 15,800,000 shares; to remove the sub-limit applicable to stock awards, stock units and other equity-based awards (other than stock appreciation rights); and to provide for fungible share counting for shares issued in respect of stock awards, stock units or other equity-based awards (other than stock appreciation rights), provided a quorum is present in person or by proxy. Abstentions will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved. Broker non-votes are not counted as votes cast or shares voting on this proposal and will have no effect on the voting on this proposal.

Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm. The affirmative vote of a majority of the votes cast at the Meeting is required to ratify the selection by the Audit Committee of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for Fiscal 2012, provided a quorum is present in person or by proxy. Abstentions and broker non-votes will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved.

Proposal 4: Advisory Vote on Executive Compensation. Because the vote is advisory, it will not be binding upon the Company, the Board of Directors or the Compensation Committee of the Board. The Board of Directors and the Compensation Committee of the Board, which is comprised of independent directors, value the opinions of the Company’s stockholders and expect to take into account the outcome of the vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant negative voting results.

Proposal 5: Approval of Amendment to Company’s Bylaws. The affirmative vote of a majority of the votes cast at the Meeting is required to approve the amendment of the Company’s Bylaws to require any director nominee who receives, in an uncontested election, a greater number of votes “withheld” from and “against” his or her election than votes “for” such election to tender his or her resignation, the effectiveness of which shall be subject to acceptance by the Board, provided a quorum is present in person or by proxy. Abstentions will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved. Broker non-votes are not counted as votes cast or shares voting on this proposal and will have no effect on the voting on this proposal.

What is a broker non-vote?

A broker non-vote occurs when a broker submits a Proxy Card with respect to shares of common stock held in a fiduciary capacity (typically referred to as being held in “street name”), but declines to vote on a particular matter because the broker has not received voting instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such

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shares on routine matters, but not on non-routine matters. Routine matters include the ratification of auditors. Non-routine matters include matters such as the election of directors, the approval of, and amendments to, stock plans and the approval of an amendment to a company’s bylaws. Therefore, if you do not give your broker or nominee specific instructions, your shares will not be voted on non-routine matters and may not be voted on routine matters. However, shares represented by such “broker non-votes” will be counted in determining whether there is a quorum present at the meeting for the purpose of transacting business.

Will a proxy solicitor be used?

Yes. The Company has engaged Georgeson Inc. to assist in the solicitation of proxies for the Meeting, and the Company estimates that it will pay them a fee of approximately $12,500 and will reimburse them for reasonable administrative and out-of-pocket expenses incurred in connection with the solicitation.

Who can help answer my other questions?

If you have more questions about the Meeting, or require assistance in submitting your proxy or voting your shares or need additional copies of the proxy statement or the enclosed proxy card, please contact Georgeson Inc., our proxy solicitor, toll free at (877) 797-1153. If your broker, dealer, commercial bank, trust company or other nominee holds your shares, you should also call your broker, dealer, commercial bank, trust company or other nominee for additional information.

Important Notice Regarding the Availability of Proxy Materials for the Meeting

The Notice of Annual Meeting of Stockholders, Proxy Statement and Form 10-K, which Form 10-K, together with the additional cover materials attached thereto, constitutes our 2011 Annual Report, are available at http://ir.auxilium.com.

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DISCUSSION OF PROPOSALS

Proposal 1: Election of Directors

At the Meeting, seven directors are to be elected to hold office until the next Annual Meeting of Stockholders after his or her election or until his or her resignation or removal.

The affirmative vote of a plurality of the votes cast at the Meeting is required for the election of directors. A plurality means that the seven nominees receiving the most votes for election to a director position are elected as directors. Votes may be cast (i) FOR ALL NOMINEES, (ii) WITHHOLD FOR ALL NOMINEES or (iii) FOR ALL NOMINEES except as noted by you on the appropriate portion of your Proxy Card. Votes that are withheld and broker non-votes will be excluded entirely from the vote to elect directors and have no effect. Thus, the seven candidates with the most FOR votes will be elected at the Meeting.

The names and biographies of the nominees for election to our Board appear below. Each of these nominees is currently a member of the Board. In the event any of the nominees should become unavailable or unable to serve as a director, it is intended that votes will be cast for a substitute nominee designated by the Board. The Board has no reason to believe that the named nominees will be unable to serve if elected. Each nominee has consented to being named in this Proxy Statement and to serve if elected.

The principal occupations and business experience, for at least the past five years, and the key experience, attributes and qualifications of each director nominee are as follows:

Rolf A. Classon was appointed as the Chairman of our Board of Directors in April 2005. He formerly served as Vice Chairman from March 2005 to April 2005 and has served as one of our directors since May 2004. Mr. Classon currently serves as Chairman of Hill-Rom Corporation, where he also served as Interim CEO from May 2005 until March 2006. Mr. Classon also currently serves as Chairman of the Board of Directors of Tecan Group Ltd. and as a member of the Board of Directors of Fresenius Medical Care. He also served as a member of the Board of Directors of Enzon Pharmaceuticals, Inc. until May 2011 and also served as Chairman and Independent Director of EKR Therapeutics, Inc. until October 2011. From October 2002 until July 2004, Mr. Classon was Chairman of the Executive Committee of Bayer HealthCare AG, a subsidiary of Bayer AG. Between 1995 and 2002, he served as President of Bayer Diagnostics, and from 1991 to 1995, he served as Executive Vice President of Bayer Diagnostics. Prior to that, he held various management positions with Pharmacia Corporation. Mr. Classon received his Chemical Engineering Certificate from the Gothenburg School of Engineering in 1965 and a Business Degree from the Gothenburg University in 1969. With over 40 years in the pharmaceutical industry, Mr. Classon brings valuable insights into all facets of our business. In addition, as a result of Mr. Classon’s years of board experience for numerous companies, he brings valuable knowledge of corporate governance and provides valuable oversight.

Adrian Adams has served as our President and Chief Executive Officer and as a director since December 7, 2011. Prior to joining Auxilium, he served as Chief Executive Officer and Chairman of the Board of Directors of

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Neurologix, Inc. from September 2011 until November 2011. Previously, he served as President and Chief Executive Officer and as a director of Inspire Pharmaceuticals, Inc. from February 2010 until May 2011, at which time Inspire was acquired by Merck & Co., Inc. Prior to joining Inspire, Mr. Adams served as President and Chief Executive Officer of Sepracor Inc. from March 2007 until February 2010, at which time Sepracor was acquired by Dainippon Sumitomo Pharma Co., Ltd. Prior to joining Sepracor, Mr. Adams was President and Chief Executive Officer of Kos Pharmaceuticals, Inc. from 2002 until the acquisition of the company by Abbott Laboratories in December 2006. Mr. Adams also serves on the Board of Directors of Amylin Pharmaceuticals. With over 30 years’ experience in the pharmaceutical industry, including extensive prior experience as a public company chief executive, Mr. Adams brings to the Company vision, leadership and proven experience in growing organizations, driving corporate development activities and successfully building pipelines to create value for stockholders.

Peter C. Brandt has served as one of our directors since December 2010. Since February 2011, Mr. Brandt has served on the Board of Directors and, in March 2012, became Vice Chairman of the Board of Directors of ePocrates, Inc. Also, from November 2011 until March 2012, Mr. Brandt served as interim Chief Executive Officer and President of ePocrates, Inc. Also, since September 2010, Mr. Brandt has served on the Board of Directors of Rexahn Pharmaceuticals, Inc. Mr. Brandt was most recently President and Chief Executive Officer of Noven Pharmaceuticals, a specialty pharmaceutical company. He served as President, Chief Executive Officer, and as a member of the Board of Directors from early 2008 to late 2009, at which time Noven was acquired by Hisamitsu. Before leading Noven, Mr. Brandt was the President of U.S. Pharmaceuticals Operations at Pfizer in 2006. Prior to leading Pfizer’s U.S. Pharmaceuticals Operations, Mr. Brandt held roles at Pfizer with both operational responsibilities—as President of Latin America Pharmaceuticals Operations—and global pharmaceuticals staff responsibilities—as Senior Vice President of Finance, Information Technology, Planning and Business Development, and Pfizer Health Solutions. Mr. Brandt began his 28-year career at Pfizer in Finance. Mr. Brandt holds a BA from the University of Connecticut and an MBA from the Columbia School of Business. Through his years of experience in the pharmaceutical industry, Mr. Brandt brings valuable strategic development, corporate leadership, operations and finance experience to the Board.

Oliver S. Fetzer, Ph.D., has served as one of our directors since December 2005. In April 2009, Dr. Fetzer was appointed President and Chief Executive Officer of Cerulean Pharma Inc. Since April 2011, Dr. Fetzer has served as a member of the Board of Directors of Tecan Group Ltd. From July 2004 until September 2007, Dr. Fetzer served as Senior Vice President, Corporate Development and Research & Development at Cubist Pharmaceuticals, Inc. From January 2003 to July 2004, he served as Cubist Pharmaceuticals, Inc.’s Senior Vice President, Corporate Development and Chief Business Officer and, from July 2002 until January 2003, he served as its Senior Vice President, Business Development. Before his time at Cubist Pharmaceuticals, Inc., starting in 1993, Dr. Fetzer held various positions of increasing responsibility at the Boston Consulting Group (BCG), a leading management consulting firm, including Consultant, Project Leader, Manager and Vice President and Director. Dr. Fetzer received a B.S. in Biochemistry from the College of Charleston (South Carolina), a Ph.D. in Pharmaceutical Sciences from the Medical University of South Carolina and an M.B.A. from Carnegie Mellon University. Through his years of experience as an executive in the pharmaceutical industry, Dr. Fetzer brings valuable strategy and corporate development, drug discovery and development, medical affairs and project management experience to the Board.

Paul A. Friedman, M.D., has served as one of our directors since June 2010. Dr. Friedman has served as Chief Executive Officer and a director of Incyte Corporation since 2001. From 1994 to 1998, Dr. Friedman served as President of Research & Development for the DuPontMerck Pharmaceutical Company; and from 1998 to 2001 as President of DuPont Pharmaceuticals Research Laboratories, a wholly owned subsidiary of the DuPont Company. From 1991 to 1994, he served as Senior Vice President at Merck Research Laboratories. Prior to his tenures at Merck and DuPont, Dr. Friedman was an Associate Professor of Medicine and Pharmacology at Harvard Medical School. Dr. Friedman is a diplomat of the American Board of Internal Medicine and a member of the American Society of Clinical Investigation. Dr. Friedman was a director of Bausch & Lomb Incorporated from June 2004 until its acquisition in October 2007 and a director of Sirtris Pharmaceuticals, Inc. from March 2008 until its acquisition in June 2008. He received his A.B. in Biology from Princeton University and his M.D.

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from Harvard Medical School. Dr. Friedman’s more than 20 years of experience in the pharmaceutical industry brings management and research and development expertise to the Board. In addition, his experience as a director of other publicly held life sciences and healthcare companies brings further oversight and corporate governance experience to the Board.

Nancy S. Lurker has served as one of our directors since June 2011. She has served as Chief Executive Officer and a director of PDI, Inc. (“PDI”) since November 2008. Prior to joining PDI, Ms. Lurker was Senior Vice President and Chief Marketing Officer of Novartis Pharmaceuticals Corporation, the U.S. subsidiary of Novartis AG, where she oversaw a product portfolio in multiple therapeutic areas from June 2006 to December 2007. Prior to that, she served as President and Chief Executive Officer of ImpactRx, Inc. since 2003. From 2000 to 2003, Ms. Lurker served as Group Vice President—Global Primary Care Products for Pharmacia Corporation and as Global and US Vice President for Detrol from 1998-2000 at Pharmacia. From 1984 to 1998, Ms. Lurker rose from senior sales representative at Bristol Myer Squibb to various product management and business development positions, ultimately becoming Senior Director-Worldwide Cardiovascular Franchise Management of Bristol-Myers Squibb. Ms. Lurker was a director of Elan Pharmaceuticals during 2005 and 2006; and of ConjuChem Biotechnologies Inc. from 2004 to 2006. Ms. Lurker received a B.S. in Biology with high honors from Seattle Pacific University and an M.B.A. from the University of Evansville. Ms. Lurker’s more than 25 years of experience in the life sciences industry bring valuable commercial, operations and general management experience to the Board. In addition, her experience as a director of other publicly held life sciences companies brings further oversight and corporate governance experience to the Board.

William T. McKee has served as one of our directors since March 2009. Since July 2010, Mr. McKee has served as Chief Operating Officer and Chief Financial Officer for EKR Therapeutics, Inc. Until March 2010, Mr. McKee served as the Executive Vice President and Chief Financial Officer of Barr Pharmaceuticals, LLC, a subsidiary of Teva Pharmaceutical Industries Limited (“Teva”) and the successor entity to Barr Pharmaceuticals, Inc. (“Barr”), a NYSE listed company, which was acquired by Teva on December 23, 2008. Mr. McKee was also Executive Vice President and Chief Financial Officer of Barr prior to its acquisition by Teva, after having served in positions of increasing responsibility at Barr from 1995 until its acquisition. Prior to joining Barr, Mr. McKee served as Director of International Operations and Vice President-Finance at Absolute Entertainment, Inc. from June 1993 until December 1994. From 1990 until June 1993, Mr. McKee worked at Gramkow & Carnevale, CPA’s, and from 1983 until 1990, he worked at Deloitte & Touche. Mr. McKee received his Bachelor of Business Administration degree from the University of Notre Dame. Through his years of experience as a chief financial officer and a public accountant, Mr. McKee provides valuable financial and leadership experience to the Board.

Our Board has recently adopted a resolution that fixed the number of directors comprising the Board at seven, effective immediately upon the conclusion of the Meeting. This will reduce the size of our Board from nine to seven members. Accordingly, two of our current directors, Al Altomari and Renato Fuchs, Ph.D., have not been included in the slate of director nominees submitted to the stockholders at the Meeting.

THE BOARD BELIEVES THAT THE ELECTION OF THE NOMINEES FOR DIRECTOR IS IN THE BEST INTERESTS OF AUXILIUM AND ITS STOCKHOLDERS AND, THEREFORE, THE BOARD RECOMMENDS A VOTE “FOR ALL NOMINEES” FOR DIRECTOR.

Proposal 2: Approval of the Amended and Restated Equity Compensation Plan

On April 3, 2012, the Board unanimously approved the amendment and restatement of the Equity Compensation Plan, subject to approval by the stockholders of the Company at the Meeting, to: increase the number of shares of Company common stock authorized for issuance under the Plan by 1,400,000 shares from 14,400,000 to 15,800,000 shares; to remove the sub-limit applicable to stock awards, stock units and other equity-based awards (other than stock appreciation rights); and to provide for fungible share counting for shares

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issued in respect of stock awards, stock units or other equity-based awards (other than stock appreciation rights). Accordingly, pursuant to the amendment and restatement of the Plan, there will be no sub-limit in the Plan applicable to stock awards, stock units or other equity-based awards (other than stock appreciation rights). Instead, the amendment and restatement of the Plan provides for fungible share counting. Specifically, the Plan currently provides that each share issued in respect of any award is counted as one share against the aggregate share limit. The amendment and restatement provides that shares issued in respect of any stock awards, stock units or other equity-based awards (other than stock appreciation rights) are counted against the aggregate share limit as 1.7 shares for every one share actually issued in connection with the award.

The Board has directed that the proposal to amend and restate the Plan be submitted to the Company’s stockholders for their approval at the Meeting. Stockholder approval of the amendment and restatement of the Plan is being sought (i) so that compensation attributable to grants under the Plan may continue to qualify for an exemption from the $1 million deduction limit under section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) in order for incentive stock options to meet the requirements of the Code, and (iii) in order to meet the Nasdaq Global Market listing requirements. If the stockholders do not approve the amendment and restatement of the Plan at the Meeting, the amendment and restatement of the Plan will not become effective, and the number of shares authorized for issuance under the Plan will not be increased by 1,400,000 shares, the sub-limit applicable to stock awards, stock units and other equity-based awards (other than stock appreciation rights) will remain in place, and each share issued in respect of any award will continue to be counted as one share against the aggregate share limit.

The Board believes that our interests and the interests of our stockholders will be advanced if we can continue to offer our employees, notably at the senior management level, advisors, consultants, and non-employee directors the opportunity to acquire or increase their proprietary interests in us. The Board has concluded that our ability to attract, retain and motivate top quality management and employees is material to our success and would be enhanced by our continued ability to grant equity compensation under the Plan. Accordingly, the Board has determined that the number of shares of Company common stock available for issuance or transfer under the Plan should be increased so that we may continue our compensation structure and strategy and succession planning process.

The affirmative vote of a majority of the votes cast at the Meeting is required to adopt and approve the amendment and restatement of the Plan, provided a quorum is present in person or by proxy. Votes may be cast FOR or AGAINST or you may ABSTAIN. Abstentions will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved. Broker non-votes are not counted as votes cast or shares voting on this proposal and will have no effect on the voting on this proposal.

For information with respect to grants to certain executive officers in Fiscal 2011 under the Plan, see the table captioned “Grants of Plan-Based Awards” on page 52 and for information with respect to grants to the Company’s non-employee directors, see page 29.

The material terms of the proposed amendment and restatement of the Plan are summarized below. A copy of the full text of the Plan is attached to this Proxy Statement as Appendix A. This summary of the Plan is not intended to be a complete description of the Plan. This summary is qualified in its entirety by the actual text of the Plan to which reference is made.

THE BOARD BELIEVES THAT THE AMENDMENT AND RESTATEMENT OF THE PLAN IS IN THE BEST INTERESTS OF AUXILIUM AND ITS STOCKHOLDERS AND, THEREFORE, IT RECOMMENDS A VOTE “FOR” THE AMENDMENT AND RESTATEMENT.

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Material Terms of the Plan

Purposes and Effects. The Plan was adopted by the Board and approved by the Company’s stockholders in June 2004. Amendment 2006-1 to the Plan was approved by the Company’s stockholders in June 2006, and was further amended and restated by the Compensation Committee of the Board on October 3, 2006. The Plan was further amended with the approval by the Company’s stockholders in June 2007 and in June 2009 and was amended and restated in December 2009 by the Compensation Committee of the Board. The Plan was most recently amended and restated with the approval of the Company’s stockholders in June 2011. The purpose of the Plan is to attract and retain employees, non-employee directors, consultants and advisors. The Plan provides for the issuance of incentive stock options, nonqualified stock options, stock awards, stock units, dividend equivalents and other equity-based awards. The Plan provides an incentive to participants to contribute to our economic success by aligning the economic interests of participants with those of our stockholders.

Administration of the Plan. The Plan is administered by the Compensation Committee of the Board. The Compensation Committee determines all of the terms and conditions applicable to grants under the Plan. The Compensation Committee determines who receives grants under the Plan and the number of shares of our Company common stock that will be subject to grants. Grants to our non-employee directors may only be made by the Board.

Share Reserve. The Plan currently has 14,400,000 shares of the Company common stock authorized for issuance, of which 3,848,394 shares of Company common stock have been issued and 8,086,872 shares of Company common stock have been reserved for issuance with respect to outstanding awards under the Plan, both as of March 31, 2012. The Plan currently limits the number of shares of Company common stock that may be issued under the Plan pursuant to stock awards, stock units and other equity-based awards (other than stock appreciation rights) to 4,450,000 shares, subject to adjustment as described below. Pursuant to the amendment and restatement of the Plan, up to 15,800,000 shares of Company common stock will be authorized for issuance, subject to adjustment as described below and the sublimit described in the preceding sentence will be eliminated. Instead, pursuant to the amendment and restatement of the Plan, for each share issued pursuant to stock awards, stock units and other equity-based awards (other than stock appreciation rights), the number of shares authorized for issuance under the Plan will be reduced by 1.7 shares. We intend to register the additional 1,400,000 shares of Company common stock authorized for issuance under the Plan as soon as practicable after the Meeting.

The Plan contains a limit of 500,000 shares as the maximum number of shares of Company common stock that may be issued with respect to all grants other than dividend equivalents to an individual in any calendar year, subject to adjustment as described below. A grantee may not accrue dividend equivalents during any calendar year in excess of $100,000. Stockholder approval of the amendment and restatement of the Plan will constitute reapproval of the 500,000 annual individual share limit and $100,000 annual dividend equivalent limit in the Plan for purposes of section 162(m) of the Code.

If any options or stock appreciation rights under the Plan terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised or if and to the extent any stock awards, stock units or other equity-based awards under the Plan are forfeited, the shares subject to such grants will again be available for purposes of the Plan; provided that with respect to shares subject to stock awards, stock units or other equity-based awards (other than stock appreciation rights) that are forfeited under the Plan, such forfeited shares will increase the pool by 1.7 shares for each share forfeited. If any shares of Company common stock are surrendered in payment of the exercise price of an option or withheld or surrendered for payment of taxes, those shares will not be available again for grants under the Plan. If stock appreciation rights are granted as other equity-based awards, the full number of shares subject to the stock appreciation rights will be considered issued under the Plan, without regard to the number of shares issued upon exercise of the stock appreciation rights and without regard to any cash settlement of the stock appreciation rights. If any grants are paid in cash, and not in shares of Company common stock, any shares of Company common stock subject to such grants will not count against the foregoing share limits.

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Adjustments. In connection with stock splits, reverse stock splits, stock dividends, recapitalizations and other events affecting Company common stock without the Company’s receipt of consideration, the maximum number of shares of Company common stock reserved for issuance as grants, the maximum number of shares of Company common stock that may be issued under the sub-limit in the Plan pursuant to stock awards, stock units and other equity-based awards (other than stock appreciation rights), the maximum number of shares of Company common stock that any individual participating in the Plan may be granted in any year, the number and kind of shares covered by outstanding grants, the kind of shares that may be issued or transferred under the Plan, and the price per share or market value of any outstanding grants will be equitably adjusted by the Compensation Committee, as the Compensation Committee deems appropriate, to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company common stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under grants; provided, however, that any fractional shares resulting from such adjustments shall be eliminated. The Compensation Committee will have discretion to make the foregoing equitable adjustments in any circumstances in which an adjustment is not mandated by the terms of the Plan or applicable law, including in the event of a change of control. Any adjustments to outstanding grants will be consistent with section 409A or 422 of the Code, to the extent applicable. Any adjustments determined by the Compensation Committee will be final, binding and conclusive.

Eligibility. All of our employees and employees of our subsidiaries are eligible to receive grants under the Plan. In addition, our non-employee directors and consultants and advisors who perform services for us and our subsidiaries may receive grants under the Plan. As of April 23, 2012, approximately 530 persons are eligible as employees or non-employee directors to receive awards under the Plan, including nine executive officers and eight non-employee directors. Consultants and advisors who perform services for us and our subsidiaries are also eligible to receive grants under the Plan, although we do not have current plans to make grants to such individuals.

Vesting. The Compensation Committee determines the vesting of awards granted under the Plan, subject to certain limitations as described in more detail in the Plan. Stock awards, stock units or other equity-based awards (other than stock appreciation rights) are subject to certain minimum vesting requirements as described in more detail in the Plan.

Options. Under the Plan, the Compensation Committee may grant options to purchase shares of Company common stock in amounts and at exercise prices as the Compensation Committee determines. Under the Plan, the Compensation Committee may grant options intended to qualify as incentive stock options under section 422 of the Code, or nonqualified stock options, which are not intended to so qualify. Incentive stock options may only be granted to employees. The exercise price of an incentive stock option cannot be less than the fair market value of a share of Company common stock on the date the option is granted. If an incentive stock option is granted to a 10% stockholder, the exercise price cannot be less than 110% of the fair market value of a share of Company common stock on the date the option is granted. The exercise price of a nonqualified stock option may be equal to or greater than the fair market value of a share of Company common stock on the date the option is granted, as determined by the Compensation Committee.

The exercise price for any option is generally payable:

The term of an option cannot exceed ten years from the date of grant. If an incentive stock option is granted to a 10% stockholder, the term cannot exceed five years from the date of grant.

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Except as provided in the grant instrument or as otherwise determined by the Compensation Committee, an option may only be exercised while a grantee is employed by or providing service to us or our subsidiaries or during an applicable period after termination of employment or service. Under the Plan, the Compensation Committee may accelerate the exercisability of any or all options at any time for any reason.

Stock Awards. Under the Plan, the Compensation Committee may grant stock awards. A stock award is an award of Company common stock that may be issued for consideration or no consideration and may be subject to restrictions as the Compensation Committee determines. The restrictions, if any, may lapse over a specified period of employment or based on the satisfaction of pre-established criteria, in installments or otherwise, as the Compensation Committee may determine. Except to the extent restricted under the grant instrument relating to the stock award, a grantee awarded a stock award will have all of the rights of a stockholder as to those shares, including the right to vote and the right to receive dividends or distributions on the shares. All unvested stock awards are forfeited if the grantee’s employment or service is terminated for any reason, unless the Compensation Committee determines otherwise in the grant instrument.

Stock Units. Under the Plan, the Compensation Committee may grant stock units. Stock units are phantom units that represent shares of Company common stock on a one-for-one basis. Stock units become payable on terms and conditions determined by the Compensation Committee and will be payable in cash or shares of Company common stock as determined by the Compensation Committee. All unvested stock units are forfeited if the grantee’s employment or service terminates for any reason, unless the Compensation Committee determines otherwise in the grant instrument.

Other Equity-Based Awards. Under the Plan, the Compensation Committee may grant other types of awards that are based on, measured by, or payable in shares, of Company common stock, including stock appreciation rights. The Compensation Committee will determine the terms and conditions of such awards. Other equity-based awards may be payable in cash, shares of Company common stock or a combination of the two.

Dividend Equivalents. Under the Plan, the Compensation Committee may grant dividend equivalents in connection with any grant made under the Plan. Dividend equivalents entitle the grantee to receive amounts equal to ordinary dividends that are paid on the shares underlying a grant while the grant is outstanding. The Compensation Committee will determine whether dividend equivalents will be paid currently or credited to a bookkeeping account as a dollar amount or in the form of stock units. Dividend equivalents may be paid in cash, in shares of Company common stock or in a combination of the two. The Compensation Committee will determine whether they will be conditioned upon the exercise, vesting or payment of the grant to which they relate and the other terms and conditions of the grant.

Qualified Performance-Based Compensation. The Plan permits the Compensation Committee to impose performance goals that must be met with respect to grants of stock awards, stock units, dividend equivalents and other equity-based awards that are intended to meet the exception for qualified performance-based compensation under section 162(m) of the Code. Prior to or soon after the beginning of the performance period, the Compensation Committee will establish the performance goals that must be met, the applicable performance periods, the amounts to be paid if the performance goals are met and any other conditions.

The performance goals, to the extent designed to meet the requirements of section 162(m) of the Code, will be based on one or more of the following criteria: total stockholder return; total stockholder return as compared to total stockholder return of comparable companies or a publicly available index; net income; pretax earnings; earnings before interest expense and taxes; earnings before interest expense, taxes, depreciation and amortization; earnings per share; return on equity; return on assets; revenues; asset growth; operating ratios; access to and availability of funding; asset quality; regulatory filings; regulatory approvals; or other operational, regulatory or departmental objectives. Stockholder approval of the amendment and restatement of the Plan will constitute reapproval of the foregoing list of performance criteria for purposes of section 162(m) of the Code.

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Deferrals. The Compensation Committee may permit or require grantees to defer receipt of the payment of cash or the delivery of shares of Company common stock that would otherwise be due to the grantee in connection with a grant under the Plan. The Compensation Committee will establish the rules and procedures applicable to any such deferrals.

Change of Control. If we experience a change of control and we are not the surviving corporation, unless the Compensation Committee determines otherwise, all outstanding options will be assumed or replaced with comparable options by the surviving corporation, and other outstanding grants will be converted into similar grants of the surviving corporation.

The Compensation Committee may also provide that:

In general terms, a change of control under the Plan occurs if:

Amendment; Termination. The Board may amend or terminate the Plan at any time; except that our stockholders must approve any amendment if such approval is required in order to comply with the Code, applicable laws, or applicable stock exchange requirements. Unless terminated sooner by the Board or extended with stockholder approval, the Plan will terminate on June 12, 2017.

Stockholder Approval for Qualified Performance-Based Compensation. If stock awards, stock units, other equity-based awards or dividend equivalents are granted as qualified performance-based compensation under section 162(m) of the Code as described under “Qualified Performance-Based Compensation” above, the Plan must be re-approved by the Company’s stockholders no later than the first stockholders meeting that occurs in the fifth year following the year in which the stockholders previously approved the Plan.

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Grants Under the Plan. Grants under the Plan are discretionary, so it is currently not possible to predict the number of shares of our common stock that will be granted or who will receive grants under the Plan after the Meeting. As of March 31, 2012, 3,848,394 shares of Company common stock have been issued and 8,086,872 shares are subject to outstanding awards under the Plan.

The last sales price of a share of Company common stock on April 23, 2012 was $17.34 per share.

Federal Income Tax Consequences of the Plan

The federal income tax consequences of grants under the Plan will depend on the type of grant. The following description provides only a general description of the application of federal income tax laws to grants under the Plan. This discussion is intended for the information of stockholders considering how to vote at the Meeting and not as tax guidance to grantees, as the consequences may vary with the types of grants made, the identity of the grantees and the method of payment or settlement. The summary does not address the effects of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local, or foreign tax laws.

From the grantees’ standpoint, as a general rule, ordinary income will be recognized at the time of delivery of shares of our common stock or payment of cash under the Plan. Future appreciation on shares of our common stock held beyond the ordinary income recognition event will be taxable as capital gain when the shares of our common stock are sold. The tax rate applicable to capital gain will depend upon how long the grantee holds the shares. We, as a general rule, will be entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the grantee, and we will not be entitled to any tax deduction with respect to capital gain income recognized by the grantee.

Exceptions to these general rules arise under the following circumstances:

(i) If shares of Company common stock, when delivered, are subject to a substantial risk of forfeiture by reason of any employment or performance-related condition, ordinary income taxation and our tax deduction will be delayed until the risk of forfeiture lapses, unless the grantee makes a special election to accelerate taxation under section 83(b) of the Code.

(ii) If an employee exercises a stock option that qualifies as an incentive stock option, no ordinary income will be recognized, and we will not be entitled to any tax deduction, if shares of Company common stock acquired upon exercise of the stock option are held until the later of (A) one year from the date of exercise and (B) two years from the date of grant. However, if the employee disposes of the shares acquired upon exercise of an incentive stock option before satisfying both holding period requirements, the employee will recognize ordinary income to the extent of the difference between the fair market value of the shares on the date of exercise (or the amount realized on the disposition, if less) and the exercise price, and we will be entitled to a tax deduction in that amount. The gain, if any, in excess of the amount recognized as ordinary income will be long-term or short-term capital gain, depending upon the length of time the employee held the shares before the disposition.

(iii) A grant may be subject to a 20% tax, in addition to ordinary income tax, at the time the grant becomes vested, plus interest, if the grant constitutes deferred compensation under section 409A of the Code and the requirements of section 409A of the Code are not satisfied.

Section 162(m) of the Code generally disallows a publicly held corporation’s tax deduction for compensation paid to its chief executive officer or any of its four other most highly compensated officers in excess of $1 million in any year. Qualified performance-based compensation is excluded from the $1 million deductibility limit, and therefore remains fully deductible by the corporation that pays it. We intend that options and any stock appreciation rights granted under the Plan will be qualified performance-based compensation. Stock units, stock awards, dividend equivalents, and other equity-based awards granted under the Plan may be

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designated as qualified performance-based compensation if the Compensation Committee conditions such grants on the achievement of specific performance goals in accordance with the requirements of section 162(m) of the Code.

We have the right to require that grantees pay to us an amount necessary for us to satisfy our federal, state or local tax withholding obligations with respect to grants. We may withhold from other amounts payable to a grantee an amount necessary to satisfy these obligations. The Compensation Committee may permit a grantee to satisfy our withholding obligation with respect to grants paid in shares of our common stock by having shares withheld, at the time the grants become taxable, provided that the number of shares withheld does not exceed the individual’s minimum applicable withholding tax rate for federal, state and local tax liabilities.

Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm

Subject to ratification by our stockholders, the Audit Committee has selected PricewaterhouseCoopers LLP as our independent registered public accounting firm for Fiscal 2012. PricewaterhouseCoopers LLP has served as our independent registered public accounting firm since October 2005. PricewaterhouseCoopers LLP has informed us that they are not aware of any additional independence-related relationships between their firm and us other than the professional services discussed in “Independent Registered Public Accounting Firm Fees and Other Matters” below. The affirmative vote of a majority of the votes cast at the Meeting is required to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for Fiscal 2012. Votes may be cast (i) FOR, (ii) AGAINST or (iii) may ABSTAIN. Abstentions will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved. Broker non-votes are not counted as votes cast or shares voting on this proposal and will have no effect on the voting on this proposal.

Although stockholder ratification of the selection of PricewaterhouseCoopers LLP is not required by law, the Board believes that it is desirable to give our stockholders the opportunity to ratify this selection. If this Proposal 3 is not approved at the Meeting, the selection of such independent registered public accounting firm will be reconsidered by the Audit Committee. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm during the year if the Audit Committee determines such a change is advisable.

One or more representatives of PricewaterhouseCoopers LLP is expected to attend the Meeting and will have an opportunity to make a statement and respond to appropriate questions from our stockholders.

THE BOARD BELIEVES THAT THE AUDIT COMMITTEE’S SELECTION OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2012 IS IN THE BEST INTERESTS OF AUXILIUM AND ITS STOCKHOLDERS AND, THEREFORE, THE BOARD RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP.

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Independent Registered Public Accounting Firm Fees and Other Matters

Aggregate “Audit Fees” paid to PricewaterhouseCoopers LLP, our independent registered public accounting firm, for professional services rendered with respect to Fiscal 2011 and for the fiscal year ended December 31, 2010 (“Fiscal 2010”) were $675,000 and $677,300, respectively. These amounts consist of fees paid for professional services rendered with respect to the audit of our consolidated financial statements for Fiscal 2011 and 2010, the review of the interim consolidated financial statements included in our Quarterly Reports on Form 10-Q, and fees associated with comfort letters, consents and assistance with and review of documents filed with the SEC. In addition, “All Other Fees” paid to PricewaterhouseCoopers LLP during Fiscal 2011 and 2010 amounted to $1,800 and $187,941, respectively, and principally represented advisory and internal control services related to the implementation of document and learning management systems, and other services. There were no “Tax Fees” paid to PricewaterhouseCoopers LLP during Fiscals 2011 and 2010. The following table summarizes the fees that we paid to PricewaterhouseCoopers LLP for Fiscal 2011 and Fiscal 2010:

Pre-Approval Policies and Procedures

The Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm. This policy generally provides that we will not engage our independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.

From time to time, the Audit Committee may pre-approve specified types of services that are expected to be provided to us by our independent registered public accounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount.

The prior approval of the Audit Committee was obtained for all services provided by PricewaterhouseCoopers LLP in Fiscal 2011 and Fiscal 2010.

Proposal 4: Advisory Vote to Approve Executive Compensation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), gives our stockholders the right to vote to approve, on an advisory (non-binding) basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with the SEC’s rules. Specifically, these rules address the information we must provide in the compensation discussion and analysis, compensation tables and related disclosures included in this Proxy Statement.

As described more fully under “Compensation Discussion and Analysis,” starting on page 34, our executive compensation philosophy and programs are designed to meet our objectives of:

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We believe that providing a competitive compensation package to our named executive officers is critical to our ability to achieve the foregoing objectives.

In determining named executive officer compensation for 2011, the Compensation Committee considered our performance against our corporate objectives, as well as each named executive officer’s individual performance, macroeconomic conditions generally, and data from peer group companies. The Compensation Committee recognized the continued significant achievements with respect to the Testim^® and corporate net loss goals, but also considered that our XIAFLEX^® sales target was not met and made the following decisions regarding named executive officer compensation for 2011:

Our compensation practices emphasize compensation opportunities that reward our executives when they deliver targeted financial results. We believe that our executive compensation program is reasonable, competitive and strongly-focused on pay for performance principles and this belief was reinforced by the significant support we received from our stockholders with respect to the compensation of our named executive officers pursuant to the advisory say-on-pay vote we conducted in June 2011. Our Compensation Committee continually evaluates our philosophy and practices in connection with the annual compensation process and we periodically engage in a dialogue with certain of our largest stockholders to understand how stockholders view our pay for performance philosophy for named executive officer compensation and whether there is a belief that our compensation program is aligned with that philosophy. We believe that our executive compensation policies have enabled us to attract and retain talented and experienced senior executives, including our new Chief Executive Officer and other new members of our management team.

In sum, we believe that the Fiscal 2011 compensation of our named executive officers was appropriate and aligned with our Fiscal 2011 results and positions us for growth in future years. Accordingly, the Board recommends that our stockholders vote, on an advisory basis, in favor of the following resolution:

RESOLVED, that the stockholders of Auxilium Pharmaceuticals, Inc. approve, on an advisory basis, the compensation of our named executive officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, the compensation tables and any related materials disclosed in the Proxy Statement for the Meeting.

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While the vote is not binding on us, our Board and Compensation Committee value the opinions expressed by our stockholders and will carefully consider the outcome of the vote when making future compensation decisions for our named executive officers.

THE BOARD BELIEVES THAT THE COMPENSATION PACKAGE FOR OUR NAMED EXECUTIVE OFFICERS IS IN THE BEST INTERESTS OF AUXILIUM AND ITS STOCKHOLDERS AND, THEREFORE, THE BOARD RECOMMENDS AN ADVISORY VOTE “FOR” THE APPROVAL OF THIS COMPENSATION PACKAGE.

Proposal 5: Approval of Amendment to Section 2.9 of Bylaws

The Board recommends that the stockholders approve an amendment to the Company’s Bylaws to require any director nominee who receives, in an uncontested election, a greater number of votes “withheld” from and “against” his or her election than votes “for” such election (a “Majority Withheld Vote”) to tender his or her resignation, the effectiveness of which shall be subject to acceptance by the Board. For purposes of the proposed amendment to our Bylaws, an “uncontested election” means an election in which the number of nominees for election to the Board does not exceed the number of directors to be elected, determined as of a date that is 14 days in advance of the date the Company files its definitive proxy statement with the SEC, regardless of whether the Company thereafter revises or supplements such proxy statement.

Section 2.9 of the Company’s Bylaws currently provides that, when a quorum is present at any meeting, any election by stockholders of directors shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. A plurality means that the director nominees receiving the most votes for election to a director position are elected as directors. Accordingly, nominees who receive a plurality of votes cast are elected even if that plurality constitutes less than a majority. Despite this historical support, the Board understands the interest of the stockholders in ensuring that the Company’s directors continue to have the support of the stockholders. The Nominating and Corporate Governance Committee of the Board and the Board have considered the merits of alternative voting standards for the election of directors. In accordance with the recommendation of the Nominating and Corporate Governance Committee, the Board has concluded that it is appropriate to recommend that the stockholders approve a bylaw amendment that would retain the plurality voting standard for the election of directors, but would require any director nominee who receives a Majority Withheld Vote in an uncontested election to tender his or her resignation, the effectiveness of which would be subject to acceptance by the Board.

If the stockholders approve the proposed amendment to our Bylaws, all director nominees will continue to be elected by a plurality voting standard, and the director election process will remain unchanged from the status quo in the case of contested elections (that is, elections in which the number of nominees for election exceeds the number of directors to be elected, as of the determination date specified above). The Board believes that an unmodified plurality voting standard is most appropriate for contested elections because it is possible, for example, that in a contested election no director nominee would receive a greater number of votes “for” his or her election than votes “withheld” from and “against” such election. However, if the stockholders approve the proposed amendment to our Bylaws, any director nominee who receives a Majority Withheld Vote in an uncontested election will be required to tender an offer of resignation from the Board.

If the stockholders approve the proposed amendment to our Bylaws, after a director tenders such a resignation offer, the Nominating and Corporate Governance Committee will consider the resignation offer and recommend to the Board whether to accept the resignation. The Board will act on such recommendation within 90 days following certification of the Stockholder vote and will publicly disclose its decision regarding whether to accept the resignation by filing a Current Report on Form 8-K with the SEC. If the Board decides to reject a resignation offer, it will disclose the reasons for such rejection on the Form 8-K. Reasons for the Board to reject a resignation offer may include, without limitation, the Board’s determination that its membership should include a certain number of financial experts, the Board’s determination that its membership should include a certain number of independent directors or any other factors or considerations that the Board determines to be in the best interests of the Company.

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Under the terms of the proposed Bylaws amendment, a director who tenders his or her resignation pursuant to the terms of the amendment will not be permitted to participate in the Nominating and Corporate Governance Committee’s recommendation, or the Board’s action, regarding such resignation offer. However, if each member of the Nominating and Corporate Governance Committee shall have received a Majority Withheld Vote at the same election, the independent directors who did not receive a Majority Withheld Vote in such election will appoint a committee among themselves to consider the resignation offers and recommend to the Board whether to accept them. The foregoing provisions notwithstanding, in the event that at least four directors do not receive a Majority Withheld Vote in a given election, then all directors may participate in the action regarding whether to accept the resignation offers of those directors who did receive a Majority Withheld Vote in such election.

The full text of the proposed amendment to the Company’s Bylaws is attached as Appendix B to this Proxy Statement. The Board encourages all stockholders to carefully review the proposed amendment and recommends that the stockholders approve the proposed amendment.

The affirmative vote of a majority of the votes cast at the Meeting is required to adopt and approve the amendment to our Bylaws, provided a quorum is present in person or by proxy. Votes may be cast FOR or AGAINST or you may ABSTAIN. Abstentions will count in the tabulations of votes cast on this proposal and will have the effect of a vote against for purposes of determining whether the proposal is approved. Broker non-votes are not counted as votes cast or shares voting on this proposal and will have no effect on the voting on this proposal.

THE BOARD BELIEVES THAT THE AMENDMENT TO THE BYLAWS IS IN THE BEST INTERESTS OF AUXILIUM AND ITS STOCKHOLDERS AND, THEREFORE, IT RECOMMENDS A VOTE “FOR” THE AMENDMENT.

Other Matters

As of the date of this Proxy Statement, the Board does not know of any other matters that may come before the Meeting, other than as set forth in the Notice of Annual Meeting of Stockholders and this Proxy Statement. If any other matters properly come before the Meeting or any adjournments or postponements thereof, it is intended that holders of the proxies will vote thereon in their discretion.

Deadline for Submission of Stockholder Proposals for the 2013 Annual Meeting of Stockholders

Proposals of stockholders intended to be presented at the 2013 Annual Meeting of Stockholders pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, must be received by us no later than the close of business on December 31, 2012 in order that they may be included in the proxy statement and form of proxy relating to that meeting. Proposals should be addressed to Andrew I. Koven, Secretary of Auxilium, at the address set forth below.

In addition, our Bylaws require that we be given advance notice of stockholder nominations for election to the Board and of other business that stockholders wish to present for action at an Annual Meeting of Stockholders (other than matters included in our proxy statement in accordance with Rule 14a-8 as described above). Such nominations and proposals, other than those made by or on behalf of the Board, must be made by notice in writing delivered to the Secretary at the address set forth below, and received no earlier than February 21, 2013 and no later than March 23, 2013, assuming that the 2013 Annual Meeting of Stockholders is to be held between May 24, 2013 and September 13, 2013, as we currently anticipate. In the event that the 2013 Annual Meeting of Stockholders is not held between May 24, 2013 and September 13, 2013, notice of stockholder nominees or proposals must be received no earlier than 120 days before the date of the 2013 Annual Meeting of Stockholders and no later than 90 days before the date of the 2013 Annual Meeting of Stockholders or the 10th day following our first public announcement of the date of such meeting, whichever is later. Our Bylaws also require that such notice contain certain additional information. Copies of our Bylaws can be obtained without charge from the Secretary.

Proposals and notices mailed should be addressed to Andrew I. Koven, Secretary, Auxilium Pharmaceuticals, Inc., 40 Valley Stream Parkway, Malvern, PA 19355.

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CORPORATE GOVERNANCE

Code of Conduct

We have adopted a Code of Conduct that applies to all of our directors, officers and employees. Our Code of Conduct contains written standards designed to deter wrongdoing and to promote:

Our Code of Conduct is posted on our Web site at www.auxilium.com under the heading “For Investors—Corporate Governance.” We intend to satisfy the disclosure requirements regarding any amendment to, or waiver from, a provision of the Code of Conduct by making disclosures concerning such matters available on our web site under the heading “For Investors—Corporate Governance.”

Committees and Meetings of our Board of Directors

Board of Directors. Our Corporate Governance Guidelines provide that directors are expected to prepare for, attend and participate in all Board meetings, meetings of committees on which they serve and our Annual Meeting of Stockholders. The Board held fifteen meetings during Fiscal 2011. Throughout this period, each member of the Board attended or participated in at least 75% of the aggregate of the total number of duly constituted meetings of the Board held during the period for which such person had been a director, and the total number of meetings held by all committees of the Board on which each such director served during the periods the director served. The Board has three standing committees: the Compensation Committee, the Audit Committee and the Nominating and Corporate Governance Committee, each of which operates under a charter that has been approved by the Board. Each of these charters is posted on our website at www.auxilium.com under the heading “For Investors—Corporate Governance.” All of our current directors attended the 2011 Annual Meeting.

Our Board recently adopted a resolution that fixed the number of directors comprising the Board at seven, effective immediately upon the conclusion of the Meeting. This will reduce the size of our Board from nine to seven members. Accordingly, two of our current directors, Al Altomari and Renato Fuchs, Ph.D., have not been included in the slate of director nominees submitted to the stockholders at the Meeting.

Compensation Committee. Our Compensation Committee Charter is posted on our website at www.auxilium.com under the heading “For Investors—Corporate Governance.” Our Board amended the Compensation Committee Charter on April 3, 2012, and the amended charter is attached to this proxy statement as Appendix C. Specific responsibilities of our Compensation Committee include:

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Our Compensation Committee is composed solely of “independent directors” under applicable NASDAQ listing standards. The members of our Compensation Committee are Dr. Fetzer (Chairman), Mr. Classon and Dr. Friedman. Our Compensation Committee held nine meetings during Fiscal 2011.

The Compensation Committee retained Radford, a division of AON Hewitt, as an independent compensation consulting firm during 2011. Radford reported directly to the Compensation Committee. The executive compensation consulting services provided by Radford with respect to 2011 totaled $89,691.89. During this time, neither Radford nor its parent AON Hewitt has provided any other services to us. The Compensation Committee has a standing directive that management may not engage Radford for any other services without Compensation Committee consent.

Additional information about the processes and procedures the Compensation Committee follows in considering and setting executive compensation is provided under “Compensation Discussion and Analysis.”

Audit Committee. Our Audit Committee Charter is posted on our website at www.auxilium.com under the heading “For Investors—Corporate Governance.” Our Audit Committee assists the Board in its oversight and review of:

The Audit Committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors, overseeing their work and monitoring the rotation of partners on our engagement team, as required by law. All audit services and all non-audit services to be provided to us by our independent auditors must be approved in advance by the Audit Committee. The Audit Committee also discusses with management and our independent auditors the results of any annual audit and review of our quarterly financial statements.

The current members of the Audit Committee are Mr. McKee (Chairman), Mr. Altomari and Mr. Brandt, each of whom is an “independent director” under applicable NASDAQ listing standards. The Board has determined that Mr. McKee is an “audit committee financial expert” as required by Section 407 of the Sarbanes-Oxley Act of 2002. The Audit Committee held nineteen meetings during Fiscal 2011. Mr. Altomari’s term as a member of our Board will end as of the Meeting.

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Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee Charter is posted on our website at www.auxilium.com under the heading “For Investors—Corporate Governance.” Specific responsibilities of our Nominating and Corporate Governance Committee include:

Our Nominating and Corporate Governance Committee is composed solely of “independent directors” under applicable NASDAQ listing standards. The members of our Nominating and Corporate Governance Committee are Mr. Classon (Chairman), Dr. Fuchs, and Ms. Lurker. Our Nominating and Corporate Governance Committee held two meetings during Fiscal 2011. Dr. Fuchs’ term as a member of our Board will end as of the Meeting.

Board Leadership Structure

Auxilium has a board leadership structure under which the roles of Chairman of the Board and Chief Executive Officer are separate. The Board believes that it is prudent governance to separate these two functions so that the Chairman of the Board can serve as a check and balance to the Chief Executive Officer and so that the Board can exercise a strong, independent oversight function.

Our Board is comprised, currently, of eight independent directors and one management director, who also is our Chief Executive Officer and President. All of our independent directors are highly accomplished and experienced business people in their respective fields, who have demonstrated leadership and are familiar with board processes. For additional information about the backgrounds and qualifications of our directors, see Proposal 1: Election of Directors in this Proxy Statement.

Our Board has three standing committees—Audit, Compensation, and Nominating and Corporate Governance. All of the committees are comprised solely of independent directors and have a separate, independent chair. The chair of each of these committees is responsible for directing the work of the committee in fulfilling its responsibilities, see “Committees and Meetings of our Board of Directors” in this Proxy Statement.

The Board’s Role in Risk Oversight

The Board has primary responsibility for overseeing the Company’s risk management and administers its oversight responsibility for risk management directly and through its Committees, as follows:

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Director Candidates

The process followed by our Nominating and Corporate Governance Committee to identify and evaluate director candidates includes requests to board members and others for recommendations, retention for a fee of search firms, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the Nominating and Corporate Governance Committee and the Board.

In considering whether to recommend any particular candidate for inclusion in the Board’s slate of recommended director nominees, our Nominating and Corporate Governance Committee will apply the criteria contained in the Nominating and Corporate Governance Committee’s charter. These criteria include the candidate’s understanding of and experience in the pharmaceutical industry, understanding of and experience in accounting oversight and governance, finance and marketing and leadership experience with public companies or other significant organizations. While we do not have a formal policy regarding the consideration of diversity in identifying director candidates, the Nominating and Corporate Governance Committee also considers how the candidate can contribute to the Board in a way that can enhance perspective and experiences through diversity in gender, ethnic background, geographic origin, and professional experience (public, private and non-profit sectors). We believe that the backgrounds and qualifications of our directors as a whole should collectively represent a broad range of skills, expertise, industry and other knowledge, and business and other experience useful to the effective oversight of our business.

Stockholders may recommend individuals to our Nominating and Corporate Governance Committee for consideration as potential director candidates by submitting their names, together with appropriate information about the candidate that would be required to be included in a proxy statement under the rules of the SEC, information about the relationship between the candidate and the recommending stockholder, the consent of the candidate to serve as a director and proof of the number of shares of our common stock that the recommending stockholder owns and the length of time the shares have been owned to the Nominating and Corporate Governance Committee via U.S. Mail (including courier or expedited delivery service) to the address set forth below. Assuming that appropriate material has been provided on a timely basis, the Nominating and Corporate Governance Committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others. Candidate and related information should be sent to the address listed below:

Nominating and Corporate Governance Committee

c/o Auxilium Pharmaceuticals, Inc.

40 Valley Stream Parkway

Malvern, PA 19355

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Stockholders also have the right to nominate director candidates themselves, without any prior review or recommendation by the Nominating and Corporate Governance Committee or the Board, by following the procedures set forth herein under the heading “Deadline for Submission of Stockholder Proposals for the 2013 Annual Meeting of Stockholders” beginning on page     .

Communicating with our Directors

Our Board will give appropriate attention to written communications that are submitted by stockholders and will respond if and as appropriate. The Chairman of the Board is primarily responsible for monitoring communications from our stockholders and for providing copies or summaries of such correspondence to the other directors as he considers appropriate.

Stockholders who wish to send communications on any topic to the Board as a whole should send such communication to the attention of the Chairman of the Board of Directors via U.S. Mail (including courier or expedited delivery service) to the address set forth below or by facsimile at 484-321-5996.

Stockholders who wish to send communications on any topic to an individual director in his or her capacity as a member of the Board, may send such communications to the attention of the individual director via U.S. Mail (including courier or expedited delivery service) to the address set forth below or by facsimile at 484-321-5996.

Auxilium Pharmaceuticals, Inc.

40 Valley Stream Parkway

Malvern, PA 19355

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Report of the Audit and Compliance Committee

The Audit and Compliance Committee (the “Audit Committee”) of the Board of Directors of Auxilium Pharmaceuticals, Inc., a Delaware corporation (the “Company”), is composed of three independent directors and operates under a written charter adopted by the Board of Directors.

Management is responsible for the Company’s internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes.

In this context, the Audit Committee has met and held discussions with management and the independent registered public accounting firm regarding the Company’s audited consolidated financial statements. Management represented to the Audit Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee discussed with management the critical accounting policies applied by management in the preparation of the Company’s consolidated financial statements, as well as management’s assessment of the effectiveness of the Company’s internal control over financial accounting. The Audit Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant that firm’s independence.

The Audit Committee met with the internal auditor and the independent registered public accounting firm, with and without management present, to discuss their respective evaluations of the Company’s internal controls, the overall quality of the Company’s financial reporting and the scope and plans for their respective audits.

Based upon the Audit Committee’s discussions with management and the independent registered public accounting firm and the Audit Committee’s review of the representations of management and the report of the independent registered public accounting firm to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC.

The members of the Audit Committee are William T. McKee (Chairman), Al Altomari, and Peter C. Brandt.

Respectfully submitted,

By the Audit and Compliance Committee of the Board of Directors

of Auxilium Pharmaceuticals, Inc.

William T. McKee, Chairman

Al Altomari

Peter C. Brandt

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Certain Relationships and Related Party Transactions

Review, Approval or Ratification of Transactions with Related Persons. We engage in a process whereby we identify and review all relationships and transactions in which Auxilium and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. Our legal department is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the company or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to Auxilium or a related person are disclosed in our proxy statement. The process for the review of all potential related party transactions is documented in our written corporate policies. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed. In the course of its review and approval or ratification of a disclosable related party transaction, our legal department and the Audit Committee consider, among other factors:

Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.

In 2009, we entered into a consulting agreement with Inserve Support Solutions, Inc. (d/b/a Pharmakon LLC) (“Pharmakon”), a company that was, at that time, a wholly owned subsidiary of PDI, Inc. (“PDI”). Under that consulting agreement, Pharmakon has been providing us with marketing and logistical support for a series of marketing and medical education initiatives. Ms. Lurker, a member of our Board who is also standing for re-election to our Board at the Annual Meeting, is the Chief Executive Officer and a director of PDI. Since we have been doing business with Pharmakon and for most of 2011, Pharmakon was a wholly owned subsidiary of PDI. Upon her nomination to stand for election as a director at the 2011 Annual Meeting of Stockholders, Ms. Lurker became a “Related Party” under our related party transactions policy. Our Audit Committee believed that continuing the business relationship with Pharmakon was in, or not inconsistent with, the best interests of our Company and our stockholders and approved up to $850,000 in budgeted transactions with Pharmakon for the balance of 2011. In 2011, we paid Pharmakon approximately $821,234 for services rendered under the consulting agreement with us. In addition, the Audit Committee also ratified the payment in the first quarter of 2012 of $46,970 to Pharmakon for services provided under the 2011 statements of work which were not paid until 2012.

In December 2011, PDI entered into a transaction with Pharmakon and Informed Medical Communications Inc. (“IMC”), whereby PDI spun-off the Pharmakon business to IMC in exchange for, among other consideration, a 1% interest in IMC, which interest could rise to as much as 5% if certain earn-out targets are met. Even though PDI’s interest in Pharmakon is now substantially less than it was before the IMC transaction, our transactions with Pharmakon remain related party transactions under our related party transactions policy because one of our directors, Ms. Lurker, is employed by a company, PDI, which has an indirect interest in a company with whom we do business, Pharmakon. Our Audit Committee believes that continuing the business

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relationship with Pharmakon is in, or not inconsistent with, the best interests of our Company and our stockholders and, in 2012, the Audit Committee approved the Company entering into new statements of work with Pharmakon for additional services. These services relate to our speaker exchange teleconference services and non-personal promotional program and will be provided to the Company in exchange for approximately $269,000.

Director Independence. The Board has determined that each of our current directors, except for Adrian Adams, is an “independent director” as such term is defined under the applicable NASDAQ listing standards and in the Company’s Corporate Governance Guidelines. The Board also has determined that each member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee meets the independence requirements applicable to those committees as prescribed by NASDAQ, the SEC, the Internal Revenue Service, the Company’s Corporate Governance Guidelines and applicable committee charters. Our Corporate Governance Guidelines are posted on our web site at www.auxilium.com under the heading “For Investors—Corporate Governance.”

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DIRECTOR COMPENSATION

The following table provides information concerning the compensation of the Company’s non-employee directors for 2011. Directors who are employees of the Company receive no compensation for their services as directors or as members of Board Committees.

2011 Director Compensation

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Effective July 1, 2009, as part of a written plan adopted by our Board (the “Non-employee Director Compensation Plan”), we implemented a holding requirement with respect to stock options granted to our directors in consideration of their service. Under this holding requirement, each non-employee director must hold 75% of all vested stock options granted to each non-employee director in his or her capacity as a director until he or she no longer serves as one of our directors (the “2009 Non-employee Director Option Holding Requirement”). This includes any shares of common stock resulting from the exercise of such options, net of shares withheld to satisfy tax obligations with respect to such exercise to the extent permitted under the Company’s Equity Compensation Plan. The Board has the discretion to make exceptions to this holding requirement in the event of financial hardship or other unique circumstances. See footnote 1 to the Director Compensation Table above for further details regarding the Non-employee Director Compensation Plan.

We have implemented formal stock ownership guidelines and holding requirements for our directors, effective as of the Meeting, such that each director must hold a number of shares equal to three times the annual retainer for directors, by the third anniversary of the date he or she was first elected or appointed. These newly-adopted ownership and holding requirements will replace the 2009 Non-employee Director Option Holding Requirement. Each director that is elected at the Meeting must satisfy the new stock ownership requirement by June 21, 2015.

In addition, we have amended our Non-employee Director Compensation Plan, such amendment to become effective as of the Meeting, as follows:

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There will be no changes to the retainers for committee service.

The reason for amending our Non-employee Director Compensation Plan as described and replacing the 2009 Non-employee Director Option Holding Requirement with new stock ownership guidelines and holding requirements is to align director compensation practices and equity ownership requirements with the 50^th percentile of our peer group consistent with our compensation philosophy. We made this decision after we were advised by Radford, an AON Hewitt consulting company, the Compensation Committee’s independent compensation consultant, that our current Non-employee Director Compensation Plan is inconsistent with the practices of the 50^th percentile of our peer group. Radford advised us that after implementing the foregoing changes, our Non-employee Director Compensation Plan will be consistent with the practices of the 50^th percentile of our peer group.

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EXECUTIVE COMPENSATION

Executive Officers

Our executive officers are elected annually by our Board and serve until their successors are duly elected and qualified. The following table identifies our current executive officers:

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Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis describes the material elements of our executive compensation program for 2011 and explains how and why the Compensation Committee made its compensation decisions for our named executive officers for 2011. Our named executive officers are identified in the Summary Compensation Table that immediately follows this discussion and consist of our Chief Executive Officer and President (“CEO”), Adrian Adams; our Chief Financial Officer, James E. Fickenscher; and our five other most highly compensated executive officers in 2011, Alan Wills, Executive Vice President, Corporate Development; Roger Graham, former Executive Vice President, Sales and Marketing; Jennifer Evans Stacey, Esq., former Executive Vice President, General Counsel and Secretary; Edward Arcuri, former Executive Vice President, Technical Operations; and Armando Anido, former Chief Executive Officer and President. Mr. Graham’s employment terminated effective November 28, 2011; Mr. Anido’s employment terminated effective December 7, 2011 and both Ms. Stacey’s and Dr. Arcuri’s employment terminated effective February 3, 2012. Severance agreements were negotiated with each of the separated executive officers and the terms of those agreements were previously disclosed.

Executive Summary

We exceeded our corporate objectives for 2011 related to Testim sales and corporate net loss; however, our XIAFLEX sales target was not met. In determining named executive officer compensation for 2011, the Compensation Committee considered this performance against our corporate objectives, as well as each named executive officer’s individual performance, macroeconomic conditions generally, and data from peer group companies.

The Compensation Committee recognized the continued significant achievements with respect to the Testim and corporate net loss goals, but also considered that our XIAFLEX sales target was not met and made the following decisions regarding named executive officer compensation for 2011:

In June 2011, we held a stockholder advisory vote on the compensation of our named executive officers, commonly referred to as a say-on-pay vote. We had significant support from our stockholders with respect to the compensation of our named executive officers, with over 99.7% of stockholder votes cast in favor of our say-on-pay resolution. As we evaluated our compensation practices and talent needs throughout Fiscal 2011, we were mindful of the strong support our stockholders expressed for our philosophy of linking compensation to our strategic corporate performance objectives and the enhancement of stockholder value. As a result, the Compensation Committee decided to retain our general approach to executive compensation, with an emphasis on short and long-term incentive compensation that rewards our most senior executives when they deliver value for our stockholders.

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The Compensation Committee has begun the process of evaluating our philosophy and practices for our next annual compensation process. As part of this evaluation, we are in a dialogue with certain of our largest stockholders to understand how stockholders view our pay for performance philosophy for named executive officer compensation and whether there is a belief that our compensation program is aligned with that philosophy. The Compensation Committee is also evaluating equity delivery alternatives to potentially reduce the share overhang and dilution that our current program for granting options creates, with the goal of implementing changes in our compensation program for 2013 to address these issues. The Compensation Committee has approved director share ownership guidelines effective as of the date of the 2012 meeting of stockholders as described in more detail below as a precursor to its evaluation of the implementation of share ownership guidelines for executives in the future.

In late 2011 and early 2012, we experienced a significant change in management. In December 2011, our Board appointed Mr. Adrian Adams as our new Chief Executive Officer and President and a member of our Board. Mr. Adams succeeds Mr. Anido, who, after discussions with our Board, agreed to step down as Chief Executive Officer and President and resigned as a member of our Board. Mr. Adams’ previously disclosed employment agreement was the result of an arms-length negotiation. One of the terms that was negotiated was the grant of a nonqualified stock option to purchase 550,000 shares of our common stock (50,000 shares of which was classified as an inducement grant) which generally vests based on Mr. Adams continued service over four years beginning one year after the date of grant, as well as a performance-based restricted stock unit award which vests based upon attainment of strategic business goals, in each case, as discussed in more detail below. Our Board believes that these awards are reflective of our pay for performance philosophy by aligning Mr. Adams interests with those of our stockholders, as these awards are only of value to Mr. Adams to the extent our stock appreciates and we achieve significant strategic business goals. In connection with Mr. Anido’s departure, we entered into a separation agreement and general release that was disclosed previously and which provided Mr. Anido with severance payments and benefits substantially similar to the severance terms payable upon a termination without cause provided for in his employment agreement. In addition, in February 2012, we announced the appointments of Mr. Andrew I. Koven as Chief Administrative Officer and General Counsel and Mr. Mark A. Glickman as Senior Vice President, Sales. The departures of Ms. Stacey and Dr. Arcuri, as well as Ed Kessig, Senior Vice President of Sales, were announced simultaneously with the appointments of Messrs. Koven and Glickman.

Compensation Philosophy

Our compensation philosophy, which is set by the Compensation Committee, is designed to meet our objectives of:

We believe that providing a competitive compensation package to our named executive officers is critical to our ability to achieve the foregoing objectives and thereby deliver our best results to our stockholders.

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Administration of Our Executive Compensation Program and Determination of Competitive Compensation

The Compensation Committee administers our executive compensation program. The Compensation Committee annually retains an independent compensation consulting firm. For 2010 and 2011, the Compensation Committee retained Radford, an AON Hewitt consulting company (“Radford”), as its independent compensation consultant. Radford reports to the Compensation Committee directly. To assist the Compensation Committee in its determination of whether the overall compensation packages for each of our named executive officers are competitive, Radford provides the Compensation Committee with design alternatives for compensation programs, data regarding the compensation of named executive officers at companies in our peer group, and survey data Radford collects annually regarding compensation paid to executives at public life sciences companies. This data includes:

While the peer group data provided by Radford provides useful comparisons, the Compensation Committee uses the data as a guide, not as a rule, when establishing the compensation packages we provide to our named executive officers and takes into account other factors as it deems appropriate. The list of peer companies used in the executive compensation analysis is annually reviewed, updated and approved by the Compensation Committee.

In late 2010, Radford updated the list of peer group companies in light of industry consolidations and changes in our projected headcount, financial profile and business focus. This updated list of peer group companies was previously disclosed in last year’s proxy. At a February 2011 meeting, the Compensation Committee made final decisions regarding merit-based salary increases for 2011 based on 2010 performance (as well as decisions regarding the bonus awards and long-term incentive awards granted in 2011 based on 2010 performance that were previously disclosed in last year’s proxy) taking into account the comparative compensation data prepared by Radford using this late 2010 updated group of peer companies.

In late 2011, Radford again updated the list of peer group companies in light of industry consolidations and changes in our projected financial profile and business focus so that Radford could provide a report on executive compensation using the updated peer group list in preparation of a February 2012 meeting of the Compensation Committee at which final decisions would be made regarding salary increases, bonus awards and long-term incentive awards for 2011 performance.

Consistent with its practice in prior years, the Compensation Committee made its final compensation determinations for 2011 at a February meeting in the following year. In this case, the Compensation Committee made its final 2011 compensation determinations at its February 14, 2012 meeting. The Compensation Committee had reviewed progress with respect to the applicable performance metrics regularly throughout 2011 and its final determination followed several preliminary discussions of the Compensation Committee regarding 2011 compensation that were held during 2011 and early in 2012. At its February 14, 2012 meeting, the Compensation Committee determined 2011 short and long-term incentive awards and set base salaries and targets for bonus and long-term incentive awards for 2012.

In order to update the list of companies in our peer group, Radford first identified all publicly traded, U.S.-headquartered companies in the biotechnology and pharmaceutical industries with the following financial criteria, based on the relevant Auxilium data at the time Radford conducted its research.

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Radford next qualitatively evaluated and refined the comparator pool to identify each company’s business focus and corporate strategy. Radford targeted commercial biotechnology and pharmaceutical companies that have a similar business profile to ours taking into account the number of employees, integrated sales and marketing functions, revenue, market value and strategy. In addition, Radford supplemented peer group data with broader life science market data from the Radford Global Life Sciences Survey for 2011 targeting public life sciences companies with headcount of 250 to 1,000 employees as well as a cut within the Radford Global Life Sciences Survey for 2011 of only those members of our peer group that participated in the survey, in each case, as a separate survey source, to further ensure comprehensive and competitive market data was evaluated. Radford ultimately selected companies most similar to ours in terms of financial profile, stage of development and business focus. Applying this methodology, the Compensation Committee approved the following companies as our peer group for 2011:

As a result of changes due to headcount, size and profile, as well as consolidation within the biotechnology/pharmaceutical industry, the following companies were removed from the peer list for 2011: Abraxis BioScience, Alexion Pharmaceuticals, Inc., Inspire Pharmaceuticals, Inc., OSI Pharmaceuticals, Theravance. Inc., and ZymoGenetics, Inc.; and the following were added: Amylin Pharmaceuticals, Inc., Exelixis, Inc., Incyte Corporation, InterMune, Inc., Jazz Pharmaceuticals, Inc., and Seattle Genetics, Inc. This updated group of peer companies was used by Radford to prepare the comparative compensation data considered by the Compensation Committee in connection with its compensation decisions made regarding 2011 performance of our named executive officers at a February 2012 meeting and discussed below under “Salary,” “Short-Term Incentive Awards” and “Long-Term Incentive Awards”.

In addition to peer group data, the Compensation Committee periodically reviews “tally sheets” for each named executive officer in order to analyze the total opportunity for wealth accumulation that is available to each of our named executive officers as supplemental data to the Radford report. The tally sheets provide the Compensation Committee with the following information for each of our named executive officers to the extent applicable to each named executive officer:

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Our Human Resources Department worked with Radford to match Company positions against similar positions reported in the results for Radford’s annual proprietary compensation survey to compile the annual compensation data for each named executive officer. Our Human Resources Department does not direct or oversee the activities of the compensation consultant retained by the Compensation Committee.

Timing and Role of Named Executive Officers in Compensation Decisions

Early in the calendar year, our Board approves our financial and operational objectives for that current year, which are used as the basis of the bonus plan that is approved by the Compensation Committee. The CEO sets individual objectives for each named executive officer for that current year. Each named executive officer’s individual objectives relate to the corporate function for which such named executive officer is responsible and are intended to align with the financial and operational objectives set by our Board so that each function is providing the support necessary to achieve such objectives. Generally, the Compensation Committee meets each February to determine the overall compensation package for each of our named executive officers. In doing so, the Compensation Committee reviews the degree to which we achieved the goals set by our Board for the prior year and the degree to which each of the named executive officers achieved their individual objectives for the prior year and their respective contributions to our financial and operational objectives for the prior year. As part of this review, our CEO provides a review of each named executive officer’s performance as well as compensation recommendations to the Compensation Committee. He also provides his self-evaluation. The CEO does not make recommendations with respect to his own compensation. While the Compensation Committee utilizes this information, and values the CEO’s observations with regard to the named executive officers other than himself, the ultimate decisions regarding executive compensation are made by the Compensation Committee.

The Compensation Committee may review named executive officer compensation at such other times during the year as it deems appropriate, such as in connection with new appointments or promotions during the year.

Elements of Compensation

General

Our compensation package for our named executive officers focuses on four principal elements:

In administering the compensation program for our named executive officers, the Compensation Committee attempts to strike an appropriate balance among the elements of our compensation program to achieve the compensation objectives listed above. Each of the elements of the program is discussed in greater detail below.

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The Compensation Committee does not apply fixed weighting or formulas when it considers the criteria applied to each component of an individual named executive officer’s overall compensation. Rather, the Compensation Committee exercises its judgment in determining the appropriate amount of each component of an individual named executive officer’s overall compensation. With respect to compensation decisions based on 2011 performance, the Compensation Committee placed an emphasis on the compensation packages provided by our peer companies when determining the components and levels of our compensation packages for our named executive officers in order to account for this increased competitive environment.

In addition, in determining the overall levels of salary, short-term incentive awards and long-term incentive awards for named executive officers, the Compensation Committee also considers our overall performance, talent management (including the recruitment and development of a diverse and superior talent pool), morale, and productivity of, management. Unless we disclose otherwise in the future, the Compensation Committee intends to employ the methodologies described below when considering future grants of short-term and long-term incentive awards.

Salary

The salary level for each named executive officer is based principally on the named executive officer’s responsibilities. We generally seek to position salaries for our named executive officers so that the salary corresponds to the 50^th percentile of salaries for comparable executive officers at our peer companies as reflected in the data provided by our compensation consultant. In setting base salaries and determining whether a merit increase is warranted, the Compensation Committee also gives consideration to:

Taking these considerations into account, the Compensation Committee may vary the salary of a named executive officer from the 50^th percentile. We believe that base salary is competitive if it is within a range of 10 percent above or 10 percent below the base salary amounts at the 50th percentile for comparable executives at our peer companies; however, we may establish base salary at a level outside this range due to differences in experience, as well as variations in responsibilities, performance and ability.

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In determining whether to provide a merit-based salary increase to our named executive officers for 2011 based on 2010 performance, the Compensation Committee considered the following factors: (i) the overall responsibilities of each named executive officer; (ii) the named executive officer’s individual performance, which includes the overall performance of the department(s) for which such named executive officer is responsible as well as the named executive officer’s level of achievement of his or her pre-determined individual performance objectives for 2010 discussed in detail under the “Short-Term Incentive Awards” section of last year’s proxy; and (iii) the named executive officer’s overall compensation as set forth on the tally sheets compared with that paid to comparably positioned executive officers based on the late 2010 peer group data provided by Radford. Based on those considerations, the Compensation Committee approved merit-based salary increases in February 2011 to the named executive officers as indicated in the chart below.

In determining whether to provide a merit-based salary increase to our named executive officers for 2012 based on 2011 performance, the Compensation Committee considered the following factors: (i) the overall responsibilities of each named executive officer; (ii) the named executive officer’s individual performance, which includes the overall performance of the department(s) for which such named executive officer is responsible as well as the named executive officer’s level of achievement of his or her pre-determined individual performance objectives discussed in more detail under “Short-Term Incentive Awards” below; and (iii) the named executive officer’s overall compensation as set forth on the tally sheets compared with that paid to comparably positioned executive officers based on the late 2011 peer group data provided by Radford. Based on those considerations, the Compensation Committee approved merit-based salary increases in February 2012 to the named executive officers as indicated in the chart below.

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Short-Term Incentive Awards

Our short-term incentive awards, or bonuses, are cash payments based upon:

To determine bonuses for performance in Fiscal 2011, the Compensation Committee reviewed peer group data and Radford’s industry data regarding the percentage of salary payable as annual bonuses upon achievement of target goals for comparable executives at our peer companies in order to establish compensation that rewards performance and serves to retain key contributors. We target total cash (base salary plus bonus) at the 50^th percentile with the opportunity to earn up to the 75^th percentile based upon significant Company and individual performance. We accrue short-term incentive awards for each named executive officer at 100% target bonus, so those amounts are reflected in our financial statements for the year ended December 31, 2011 although the actual awards are paid in the first quarter of 2012.

In January 2011, the Compensation Committee approved the 2011 bonus plan (in which all employees are eligible to participate). The plan was intended to motivate employees to achieve business goals in 2011, allow us to attract and retain quality employees by remaining competitive in the local employment market and reinforce a pay-for-performance culture.

An employee’s target bonus is calculated by multiplying the employee’s gross earnings in 2011 less any bonus paid in 2011 (“2011 base earnings”) by the specified percentage that is the employee’s target bonus percentage. For the named executive officers other than the CEO, 70% of each named executive officer’s bonus potential is based on the corporate achievement factor and the remaining 30% is based on the individual achievement factor. For the CEO, 80% of the CEO’s bonus potential is based on the corporate achievement factor and the remaining 20% is based on the individual achievement factor, and his employment agreement specifies that his bonus can range from 0% to 200% of target. The corporate achievement factor is determined by the Compensation Committee based on its review of achievements under the 2011 bonus plan. The individual achievement factor is recommended by the CEO and determined and approved by the Compensation Committee based on performance against individual objectives established at the beginning of each year. The corporate achievement factor can range from 0% to 150% and the individual achievement factor can range from 0% to 200%, both based on evaluation of performance. The corporate achievement factor under the 2011 bonus plan was based on the following weighted metrics, reflecting financial and operational objectives approved by our Board and designed to yield increased stockholder value:

In early 2012, the Compensation Committee assessed our performance against these metrics and determined that awards under the 2011 bonus plan should be paid out using a 93% corporate achievement factor for the reasons discussed above. The 2011 bonus plan was established in January 2011 and no changes were made to that plan during the course of the year.

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In order to determine the total short-term incentive award to each named executive officer for performance in 2011, the Compensation Committee, at a February 2012 meeting, reviewed and considered:

Other than for the CEO, the individual achievement factor for each named executive officer under the 2011 bonus plan was based on the overall performance of the department(s) for which such named executive officer is responsible as well as the named executive officer’s level of achievement of his or her pre-determined individual performance objectives agreed with the CEO at the beginning of 2011. These individual objectives were intended to align with the financial and operational objectives set forth in the 2011 bonus plan so that each function is providing the support necessary to achieve such objectives.

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In February 2012, the Compensation Committee confirmed the corporate achievement factor to be 93% and approved the individual achievement factor for each named executive officer (other than Ms. Stacey and Dr. Arcuri) and awarded cash bonuses for performance in 2011 as set forth below. With respect to Ms. Stacey and Dr. Arcuri, at the time of their separation from us in February 2012, the Compensation Committee determined the amount of their bonuses based on performance in 2011 as part of the severance packages negotiated and previously disclosed. Ms. Stacey received $152,304.46 and Dr. Arcuri received $104,077.14.

Also, in February 2012, the Compensation Committee elected to increase Mr. Fickenscher target cash bonus for 2011 from 45% to 50% of his base earnings in 2012, in consideration of peer group data for total cash compensation for Chief Financial Officers, internal equity of other senior officers and pay for performance.

Long-Term Incentive Awards

In accordance with our pay-for-performance philosophy, the long-term incentive awards are equity grants, in the form of grants of stock options and performance-based restricted stock units that are based directly upon both corporate performance and the individual performance of the named executive officer. We believe that providing our named executive officers with equity awards aligns their interest with those of our stockholders.

Each named executive officer’s equity grant delivered for and based on 2011 performance comprised two parts. The first component was a grant of performance-based restricted stock units issued at the beginning of the year, that were to be earned based on the target for U.S. net sales of XIAFLEX in 2011. Based on our 2011 results, at its meeting in January 2012, the Compensation Committee determined that the performance goal for the 2011 performance-based restricted stock unit awards for our named executive officers had not been met and as a result, the right of our named executive officers to receive shares of stock with respect to such award was forfeited effective December 31, 2011. The performance goal had been established by the Compensation Committee at as February 2011 meeting. The second component was a grant of stock options that was determined and approved by the Compensation Committee in early 2012 based on the Committee’s evaluation of the corporate and each individual named executive officer’s performance during 2011. The stock option grant based on 2011 performance was issued to each named executive officer at a meeting in February 2012, and will vest 25% per year over the next four years.

To determine long-term incentive awards for performance in Fiscal 2011, our Compensation Committee reviewed peer group data regarding long-term incentive awards to comparable executives at our peer companies. The Compensation Committee generally seeks to position long-term incentive awards, based on performance for our named executive officers, so that the stock option awards correspond to the 50% percentile with the opportunity to earn up to between the 60th and 75th percentiles of long-term incentive awards for comparable executives in our peer group based on the data provided by our compensation consultant, through performance share awards which are earned contingent upon significant individual and corporate performance.

Long-term incentive awards are considered an important complement to the elements of our named executive officers’ compensation because they align the named executive officers’ interests with stockholders’ interests. A principal factor influencing the market price of our stock is our performance as reflected in our sales,

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earnings, cash flow and other results. By granting stock options and restricted stock units to our named executive officers, we believe our named executive officers are encouraged to increase stockholder value because the value of the stock options and restricted stock units is dependent on the market performance of our common stock following the date of grant. The decision as to whether to grant options and restricted stock units is made after an evaluation of what form or mix of equity instruments is needed as a retention/incentive tool for the individual named executive officer based upon industry practice, market conditions and the nature of the individual named executive officer’s expertise at the time the award is considered. Our stockholders have approved the plan under which such awards are made. The exercise price of our option grants equals the closing market price of our stock on the date of such grant, or if there were no trades on that date, the latest preceding date upon which a sale was reported. The effective date of the grant is the date of the meeting of the Compensation Committee at which the grants are approved. With respect to a newly hired named executive officer, his or her employment agreement, which is approved by the Compensation Committee, specifies that any grant of stock options or restricted stock units is effective on the later of the effective date of the employment agreement or the date on which the named executive officer commences employment with us and that the exercise price of the option grant equals the closing market price of our stock on the date of such grant. The standard options granted by the Compensation Committee to named executive officers generally vest at a rate of 25% per year over the first four years of the ten-year option term and provide for full vesting upon a change of control. Vesting is based solely on the passage of time and is not performance based. We believe that this vesting period provides a meaningful incentive to our named executive officers to continue their employment with us.

Options will only yield income to the named executive officer if the market price of our stock is greater at the time of exercise than it was on the date of grant. Awards of performance-based restricted stock unit awards are not earned and do not vest until a performance metric specified by the Compensation Committee is achieved, and subsequent service based vesting requirements set by the Compensation Committee are satisfied or if we experience a change of control. We select goals that are closely linked to creation of stockholder value as performance metrics, thereby aligning the goals of the executive with our goals. Grants of options and awards of restricted stock units provide inducements to the named executive officers to remain with us over the long-term, enhance corporate performance and, correspondingly, enhance stockholder value.

When determining whether to make grants of stock options or awards of restricted stock units, as well as the size of such grants or awards, for Fiscal 2011 the Compensation Committee considered:

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In February 2012, based upon the Compensation Committee’s assessment of our performance and the performance of the two continuing named executive officers for 2011 based on input from our CEO, the Compensation Committee approved the nonqualified stock option awards to our named executive officers (“2012 Stock Option Awards”) as listed below. The Compensation Committee determined that the size of the awards should be the same for each of Messrs. Fickenscher and Wills based on their performance for 2011 and as an incentive to deliver value to stockholders in the future.

In addition, in February 2012, the Compensation Committee approved performance-based restricted stock unit awards for our named executive officers to provide an incentive for our named executive officers to drive future performance with respect to XIAFLEX. The right to receive shares of our common stock with respect to such awards will be earned (subject to satisfaction of additional vesting requirements which are contingent upon the named executive officer’s continued employment or service over the two-year period following achievement of the performance goals) upon attainment of two performance goals, weighted as follows: 60% weighting on attaining a specified level of U.S. net revenues of XIAFLEX in the year ending December 31, 2012 and 40% weighting based on the date of filing of the sBLA for XIAFLEX in Peyronie’s disease. Depending upon the level of achievement of the performance goals, Mr. Adams can receive from 16,110 to 53,700 shares, Mr. Koven can receive from 4,620 to 23,100 shares, and the other named executive officers from 1,680 to 11,800 shares, as determined by the Compensation Committee in its sole discretion; provided that if the threshold levels for each performance goal component, as set by the Compensation Committee, is not achieved, no shares of our common stock can be earned under the foregoing restricted stock unit awards. In accordance with the terms of the employment agreements in place for our named executive officers, if a change of control occurs before the final determination is made by the Committee as to whether the 2012 performance goals are achieved, the awards shall be treated as fully earned and vested as of the date of the change of control. These performance-based restricted stock unit awards are part of each executive’s 2012 compensation. The Compensation Committee expects to supplement these awards with a stock option grant to be determined at the end of the year and issued in early 2013 based on its assessment of 2012 Company and individual performance.

The performance goals are based on the 2012 budget approved by our Board, which include a threshold amount of U.S. net revenues of XIAFLEX that must be achieved for any portion of the award to be earned. Upon achievement of the threshold or higher for 2012 U.S. net revenues of XIAFLEX and date of filing of the sBLA for XIAFLEX in Peyronie’s disease, as determined by the Compensation Committee at its meeting, expected to be held in the first quarter of 2013, the amount of the award would be approved, subject to vesting. Our ability to achieve the targets is difficult to predict, however while we believe the targets to be achievable, they represents a significant stretch over 2011 performance and are subject to the continually changing dynamics associated with reimbursement and physician acceptance in the marketplace for XIAFLEX sales and the quality of Phase III clinical trial data for use of XIAFLEX in Peyronie’s disease.

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If earned, the right to receive shares of our common stock under the above performance-based restricted stock unit awards (i) vests 33-1/3% on the date on which the performance goal is certified as achieved with the balance vesting in two equal installments thereafter on the first and second anniversary of the date on which the performance goal is certified as achieved, and (ii) are governed by our Equity Compensation Plan and standard form restricted stock unit grant agreement.

Stock Ownership Guidelines

While we do not have formal stock ownership guidelines or holding requirements for our named executive officers, our named executive officers are not permitted to sell more than 50% of the shares subject to their outstanding vested equity awards. Please see the table entitled “Security Ownership of Certain Beneficial Owners and Management” for information regarding the holdings of common stock of our current named executive officers. The Compensation Committee intends to evaluate the implementation of formal stock ownership guidelines and holding requirements for our named executive officers in the future.

We do have holding requirements in place with respect to the options granted to our non-employee directors in consideration of their service. Our current policy was adopted by the Board on July 1, 2009 as part of our Non-employee Director Compensation Plan described in more detail in the section entitled “Director Compensation” beginning on page 29. Under the current policy, each non-employee director must hold 75% of all vested stock options granted in his or her capacity as a director until he or she no longer serves as one of our directors (the “2009 Non-employee Director Option Holding Requirement”). This includes any shares of common stock resulting from the exercise of such options, net of shares withheld to satisfy tax obligations with respect to such exercise to the extent permitted under the Company’s Equity Compensation Plan. We have implemented new stock ownership guidelines and holding requirements for our directors, to become effective as of the Meeting, that replace the 2009 Non-employee Director Option Holding Requirement. Under the new ownership guidelines and holding requirement, by the third anniversary of the date upon which a director is first appointed or elected and during the term of his or her service, he or she must hold a number of shares equal to three times the annual retainer for directors (the annual retainer will be increased to $50,000 from $40,000 effective as of the Meeting) as described in more detail in the section entitled “Director Compensation.” Each director that is elected at the Meeting must satisfy this stock ownership requirement by June 21, 2015.

Employment Agreements and Potential Payments Upon Termination or a Change of Control

Employment Agreements

We have entered into employment agreements with each of our named executive officers. These agreements set forth the terms of the named executive officer’s employment and provide severance benefits upon certain types of termination of employment. These agreements are designed to be a part of a competitive compensation package. We believe that entering into employment agreements with our named executive officers that provide severance benefits upon an involuntary termination of employment provides financial security in the event of a termination without cause. Each named executive officer’s employment agreement also provides for certain payments and benefits upon a change of control if the named executive officer’s employment is terminated without cause or the named executive officer resigns for “good reason” within a specified period following the consummation of a change of control. We believe that the change of control severance benefits under the employment agreements with our named executive officers promote management stability during a period of uncertainty. Absent such arrangements, there is an increased risk that our named executive officers may be encouraged to seek other employment opportunities if they become concerned about their employment security following a change of control. See “Potential Payments Upon Termination or Change of Control” below for detailed descriptions of the provisions in the employment agreements of our named executive officers related to severance payments and payments made in the event of a change of control. Additionally, the employment agreements include non-competition, confidentiality, development assignment and non-solicitation covenants.

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Potential Payments Upon Termination or Change of Control

The employment agreements with our named executive officers provide for payments and other benefits if we terminate their employment without cause, if we fail to renew the term of the employment agreements, or they resign from employment for “good reason” upon, or within one year after, a change of control. None of the employment agreements provide for a gross-up of excess parachute payments within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the “Code”). The employment agreements include a modified cutback so that any parachute payments to the named executive officers are reduced in the event the named executive officer would be subject to an excise tax under section 4999 of the Code if such reduction would provide a greater net after-tax amount, after taking into account all taxes, including the excise tax. See below for detailed descriptions of the provisions in the employment agreements of our named executive officers related to severance payments and payments made in the event of a change of control.

Each of the named executive officer’s employment agreements may be terminated by us at any time for cause or upon 30 days written notice without cause. Under the agreements, if a named executive officer’s employment ends for any reason, we will pay accrued compensation and benefits. If we terminate the employment of any of the named executive officers without cause or if we fail to renew the term of the employment agreements, we will be obligated to pay to that named executive officer severance equal to twelve months of the named executive officer’s base salary plus bonus, in the case of Mr. Adams, eighteen months of his base salary plus bonus, and in the case of Mr. Anido, twenty-four months of his base salary plus bonus, in each case, payable in equal monthly installments. In addition, provided that the named executive officer is eligible for and elects COBRA continuation coverage, we will reimburse the named executive officer for the monthly COBRA costs of continued coverage for the named executive officer (including where applicable his or her spouse and dependents) during the applicable twelve-month or eighteen-month period, less the amount the named executive officer would be required to contribute for such health coverage if an active employee. All outstanding stock options and stock awards held by Mr. Adams, Mr. Anido and Ms. Stacey at the date of termination of employment that would have otherwise become vested and exercisable during the severance period will become vested and exercisable as if they had remained employed during the severance period. All other named executive officers forfeit any stock option and awards that are unvested as of their date of termination. For all named executive officers, the vested portion of any stock options are exercisable for 90 days from the date of termination.

For purposes of the employment agreements, cause is defined generally to mean:

As has been previously disclosed, Mr. Anido, Mr. Graham, Ms. Stacey and Dr. Arcuri were each paid severance benefits in connection with their terminations, in accordance with their respective employment agreements.

In addition, in the case of Mr. Adams, if a termination without cause were to occur within three months prior to a change of control and such termination is in contemplation of such change of control, Mr. Adams would additionally receive a lump sum severance payment in an amount equal to the difference between the payments he would be entitled to under a termination before a change of control and the severance payment as a result of a change of control, as described below. Additionally, all outstanding stock options and stock awards held by Mr. Adams at the date of termination of employment that would have otherwise become vested and exercisable during the severance period will become vested and exercisable as of the date of the change of control, as if Mr. Adams had remained employed.

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The employment agreements also provide for payments and other benefits if we terminate the named executive officers’ employment without cause, or if the named executive officer terminates employment for “good reason” upon or within one year after a change of control. In such event, the named executive officer will be entitled to the following change of control severance benefits:

For purposes of the employment agreements, good reason includes a substantial reduction of the named executive officer’s duties and responsibilities, relocation to a place of employment more than 50 miles from the named executive officer’s previous place of employment or material reduction in the named executive officer’s base salary.

In general, a change of control includes:

Tax Considerations

Under section 162(m) of the Code, a publicly held corporation may not deduct more than $1 million in a taxable year for compensation paid to the CEO and other named executive officers listed on the Summary Compensation Table. Our policy is generally to preserve the federal income tax deductibility of compensation paid to our named executive officers, and certain of our equity awards have been structured to preserve deductibility under section 162(m) of the Code. Nevertheless, we retain the flexibility to authorize compensation that may not be deductible if we believe it is in our best interests. While we believe that all compensation paid to our executives in 2011 was deductible, some portion of compensation paid in future years may not be deductible as a result of section 162(m) of the Code. In the event of a change of control, payments to a named executive officer may be subject to an excise tax, and may not be deductible by us, under sections 280G and 4999 of the Code. Effective in December 2010, all named executive officers who joined us prior to November 2008 executed

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amended employment agreements to remove the provisions related to the gross-up of excess parachute payments within the meaning of section 280G of the Code. The amended employment agreements now include a modified cutback so that any parachute payments to the named executive officers are reduced in the event the named executive officer would be subject to an excise tax under section 4999 of the Code if such reduction would provide a greater net after-tax amount, after taking into account all taxes, including the excise tax.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

COMPENSATION COMMITTEE

Oliver S. Fetzer, Ph.D., Chairman

Rolf A. Classon

Paul A. Friedman, M.D.

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Compensation of Executive Officers

Summary Compensation Table

The table below summarizes the total compensation paid to or earned by each of the named executive officers for the fiscal years ended December 31, 2011, December 31, 2010 and December 31, 2009.