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Article by DailyStocks_admin    (04-11-12 01:28 AM)

Description

Cornerstone Thr. 10% Owner Farmaceutici SpA Chiesi bought 1443913 shares on 4-03-2012 at $ 6.25

BUSINESS OVERVIEW

Background

Cornerstone Therapeutics Inc. is a specialty pharmaceutical company focused on commercializing products for the hospital, niche respiratory and related specialty markets. Prior to our October 31, 2008 merger with Cornerstone BioPharma Holdings, Inc., or Cornerstone BioPharma (which we refer to herein as the Merger), we were known as Critical Therapeutics, Inc., or Critical Therapeutics. Following the closing of the Merger, we changed our name to Cornerstone Therapeutics Inc. Cornerstone BioPharma was deemed to be the acquiring company for accounting purposes. Our financial statements for periods prior to the Merger reflect the historical results of Cornerstone BioPharma, and not Critical Therapeutics, and our financial statements for all subsequent periods reflect the results of the combined company.

Unless specifically noted otherwise, as used herein, the terms “we,” “us” and “our” refer to the combined company after the Merger and acquisition and, as applicable, Critical Therapeutics and Cornerstone BioPharma prior to the Merger.

Strategy

We are a specialty pharmaceutical company focused on commercializing products for the hospital, niche respiratory and related specialty markets. We are actively seeking to expand our portfolio of products for these markets through the acquisition of companies and/or products and internal development.

Our strategy is to:




Focus our commercial and internal development efforts in the hospital and related specialty product sector within the U.S. pharmaceutical marketplace;




Acquire companies and marketed and/or registration-stage products that fit within our focus areas; and




Market approved generic products through our wholly owned subsidiary, Aristos Pharmaceuticals, Inc., or Aristos.

We believe this strategy will allow us to improve our revenue growth rate, margins, and profitability and enhance stockholder value.

Our management team has broad experience in the acquisition, commercialization, development, and integration of pharmaceutical companies and products. During the last two years, we have made an intentional, strategic shift to focus on the branded approved products identified as “Branded Products” below and building an effective hospital sales force around our lead product, CUROSURF ® , which we believe we can deploy to promote additional hospital-based products that we develop or acquire. We intend to leverage our management expertise and our sales infrastructure to grow our branded products, launch our product candidates and position ourselves as an ideal partner to acquire, develop and commercialize additional products.

We currently do not devote resources to early stage pharmaceutical research or captive manufacturing.

In March 2011, the FDA announced that it intended to initiate enforcement action against marketed unapproved prescription cough, cold and allergy products manufactured on or after June 1, 2011 or shipped on or after August 30, 2011 (this announcement is referred to as the March 2011 FDA Announcement). We expected this action, and all of our marketed unapproved products had already been manufactured and shipped prior to December 31, 2010. However, as a result of the March 2011 FDA Announcement, in August 2011 our distribution partners began returning substantial amounts of products that were in the distribution channel. Because we have historically derived significant revenues and income from these products, our net product sales, gross margin and income from operations declined in 2011 when compared to 2010. Going forward, we anticipate replacing these revenues and income with increased revenues and income from our branded products, particularly CUROSURF, ZYFLO CR ® and any products we acquire, and, if approved, our product candidates CRTX 067, a generic product, and CRTX 080, the lixivaptan development program we acquired through our December 2011 acquisition of Cardiokine, Inc., or Cardiokine, a specialty pharmaceutical company focused on developing hospital products for cardiovascular indications.

CUROSURF

Overview. CUROSURF is a porcine-derived natural lung surfactant with the active pharmaceutical ingredient, or API, poractant alfa. It is a world-leading treatment that was approved by the FDA in 1999 and launched in the United States in 2000 for the treatment of Respiratory Distress Syndrome, or RDS, in premature infants. CUROSURF is currently available in 1.5mL and 3.0mL vials in over 60 countries, including the United States and most of Europe, and has been administered to over one million infants since 1992. RDS can lead to serious complications and is one of the most common causes of neonatal mortality.

Our net sales of CUROSURF were $34.9 million, $33.6 million and $10.5 million in 2011, 2010 and 2009, respectively. Net sales in 2009 represent sales made from our launch in September 2009 until the end of 2009. We acquired the CUROSURF product rights in the United States from Chiesi Farmaceutici S.p.A., or Chiesi, during the third quarter of 2009 and began promoting and selling CUROSURF in September 2009.

Market Opportunity. Approximately one out of every 10, or 50,000, premature infants require surfactant treatment in the United States each year. Surfactants are typically dispensed in over 2,000 hospital neonatal intensive care units annually. According to IMS Health’s NPA™ ( National Prescription Audit Family of Services), or NPA, a third-party provider of prescription data, the surfactant market generated approximately $70 million, $75 million, $74 million in sales in 2011, 2010, and 2009, respectively and is relatively stable because the number of premature infants requiring treatment does not vary significantly from year to year.

Benefits of CUROSURF. CUROSURF has a higher concentration of phospholipids and lower volume per dose as compared to other surfactant products used to treat RDS. We believe that these characteristics provide efficient RDS treatment by shortening the drug’s administration time, reducing the required manipulation of the infant and potentially lowering the rate of reflux and endotracheal tube blockage.

In a prospective, randomized clinical trial comparing CUROSURF and Survanta ® (a surfactant marketed by Abbott Nutrition to treat RDS) in 293 infants, CUROSURF produced a significantly faster reduction in infant oxygen requirement, as reflected in the lower fraction of inspired oxygen, or FiO 2 over the first six hours. In this same study, 73% of infants required only one dose of CUROSURF, while only 51% of Survanta-treated infants required one dose of Survanta.

In another randomized controlled clinical study comparing CUROSURF and Survanta, CUROSURF produced a faster and more substantial reduction in FiO 2 and sustained results over the first 48 hours, while in the Survanta group infants required a higher need for redosing of surfactant. In another study in very premature infants with RDS, infants treated with CUROSURF required a lower level of respiratory support for the first 72 hours and were significantly more likely to be extubated at 48 and 72 hours than infants treated with Survanta.

It has been suggested that a rapid onset of action and a faster reduction in oxygen requirement may allow for faster weaning from mechanical ventilation and may lower the risk of oxygen toxicity for infants with RDS. Additionally, these features may facilitate the use of less invasive ventilation techniques, which is a key trend in the treatment of premature infants with RDS in the United States.

CUROSURF has been studied in conjunction with techniques such as nasal continuous positive airway pressure and nasal intermittent positive pressure ventilation, and has demonstrated a reduction in the rate of reintubation and surfactant redosing when used in combination with these advanced treatment methods versus conventional mechanical ventilation.

CUROSURF has demonstrated a consistent trend towards survival advantage compared to Survanta in trials that measure mortality as a secondary endpoint. In a prospective, randomized trial, a 3% mortality rate at 36 weeks post-conceptional age in the group of infants born at 32 weeks or less gestational age was demonstrated with CUROSURF compared with an 11% mortality rate for infants of the same subgroup who were treated with Survanta. Three other published studies demonstrated trends toward a survival advantage with CUROSURF treatment versus Survanta.

Most recently, a retrospective study compared all-cause, in-hospital mortality in more than 14,000 preterm infants with RDS. This analysis found that the group receiving a 200 mg/kg initial dose of CUROSURF was associated with a significantly reduced likelihood of death compared to Infasurf ® (a surfactant marketed by ONY, Inc., or ONY), and a trend toward reduced mortality when compared with Survanta. Additionally, a new meta-analysis published in Pediatrics ® showed lower mortality rates and less need for re-dosing when treating RDS with CUROSURF versus Survanta.

Proprietary Rights. We have an exclusive license from Chiesi under its CUROSURF know-how and the CUROSURF trademark to import, store, handle, promote, market, offer to sell and sell CUROSURF for RDS in the United States and its territories and possessions.

ZYFLO CR

Overview. ZYFLO CR and ZYFLO ® , which contain the API zileuton, are leukotriene synthesis inhibitor drugs. ZYFLO was approved by the FDA in 1996 as an immediate-release, four-times-a-day tablet for the prevention and chronic treatment of asthma in adults and children 12 years of age and older. ZYFLO was first launched in the United States in 1997; we began selling ZYFLO in the United States in October 2005. The FDA approved our new drug application, or NDA, for ZYFLO CR in May 2007, and we launched ZYFLO CR in October 2007. We believe ZYFLO CR offers a more convenient regimen for patients, which we believe may increase patient drug compliance because of its twice-daily, two tablets per dose dosing regimen, as compared to ZYFLO’s four-times daily dosing regimen.

Net product sales of ZYFLO CR and ZYFLO combined were $30.7 million, $30.6 million and $18.0 million in 2011, 2010 and 2009, respectively.

Market Opportunity. Asthma is a chronic respiratory disease characterized by the narrowing of the lung airways, making breathing difficult. An asthma attack leaves the victim short of breath as the airways become constricted and inflamed. The National Center for Health Statistics estimated that in 2009 in the United States approximately 8.2% of the population, or approximately 24.6 million people, had asthma and approximately 4.2% of the population, or 12.8 million people, had asthma attacks.

Benefits of ZYFLO CR. We believe that many patients with asthma may benefit from therapy with ZYFLO CR or ZYFLO. ZYFLO CR and ZYFLO actively inhibit the main enzyme responsible for the production of a broad spectrum of lipids responsible for the symptoms associated with asthma, including all leukotrienes.

The full clinical development program for ZYFLO consisted of 21 safety and efficacy trials in an aggregate of approximately 3,000 patients with asthma. FDA approval was based on pivotal three-month and six-month safety and efficacy clinical trials in 774 asthma patients. The pivotal trials compared patients taking ZYFLO and their rescue bronchodilators as needed to patients taking placebo and rescue bronchodilators as needed. The results of the group taking ZYFLO and their rescue bronchodilators showed:




rapid and sustained improvement for patients over a six-month period in objective and subjective measures of asthma control;




reduction of exacerbations and need for either bronchodilatory or steroid rescue medications; and




acute bronchodilatory effect within two hours after the first dose.

In these placebo-controlled clinical trials, 1.9% of patients taking ZYFLO experienced an increase in a liver enzyme called alanine transaminase, or ALT, greater than three times the level normally seen in the bloodstream compared to 0.2% of patients receiving placebo. These enzyme levels resolved or returned towards normal in approximately 50% of the patients who continued therapy and all of the patients who discontinued the therapy.

In addition, prior to FDA approval, a long-term, safety surveillance trial was conducted in 2,947 patients. In this safety trial, 4.6% of patients taking ZYFLO experienced ALT levels greater than three times the level normally seen in the bloodstream compared to 1.1% of patients receiving placebo, with 61.0% of the patients experiencing such elevated ALT levels in the first two months of dosing. After two months of treatment, the rate of ALT levels greater than three times the level normally seen in the bloodstream stabilized at an average of 0.3% per month for patients taking a combination of ZYFLO and their usual asthma medications compared to 0.11% per month for patients taking a combination of placebo and their usual asthma medications. This trial also demonstrated that ALT levels returned to below two times the level normally seen in the bloodstream in both the patients who continued and those who discontinued the therapy. In these trials, one patient developed symptomatic hepatitis with jaundice, which resolved upon discontinuation of therapy, and three patients developed mild elevations in bilirubin.

After reviewing the data from these trials, the FDA approved ZYFLO in 1996 on the basis of the data submitted, and we are not aware of any reports of ZYFLO being directly associated with serious irreversible liver damage in patients treated with ZYFLO since its approval. We submitted an NDA for the ZYFLO CR formulation in asthma to the FDA based on safety and efficacy data generated from two completed Phase III clinical trials, a three-month efficacy trial and a six-month safety trial, each of which was completed by Abbott Laboratories, or Abbott.

Proprietary Rights. We licensed from Abbott exclusive worldwide rights to ZYFLO CR, ZYFLO and other formulations of zileuton for multiple diseases and conditions. The U.S. patent covering the composition of matter of zileuton that we licensed from Abbott expired in December 2010. One U.S. patent for ZYFLO CR will expire in June 2012 and relates only to the controlled-release technology used to control the bioavailability of zileuton over time. Another U.S. patent for ZYFLO CR, which we added to the Orange Book in December 2011, will expire in September 2013 and also relates only to the controlled-release technology. ZYFLO CR and ZYFLO are the only leukotriene synthesis inhibitor drugs approved for marketing by the FDA. We believe ZYFLO CR is a difficult formulation to manufacture and such difficulty may create barriers for generic competitors looking to enter the market.

Anti-Infective Franchise

Our anti-infective products include FACTIVE ® and SPECTRACEF ® . During 2011, we began to further deemphasize these products as we migrated away from our focus on primary care. The migration is due to the increased presence of generic products in this sector of the market. We are currently evaluating strategic options with respect to these products and expect that they will continue to become less significant as we execute on our plan to focus on the hospital market.

FACTIVE

Overview. FACTIVE is a fluoroquinolone antibiotic with the API gemifloxacin mesylate. FACTIVE is currently available in 320 mg, once daily tablets packaged in five-day and seven-day dose packs. FACTIVE is approved for the treatment of acute bacterial exacerbation of chronic bronchitis, or ABECB, and community-acquired pneumonia, or CAP, of mild to moderate severity, caused by Streptococcus pneumoniae (including MDRSP), Haemophilus influenzae, Moraxella catarrhalis, Mycoplasma pneumoniae, Chlamydia pneumoniae , or Klebsiella pneumoniae . FACTIVE was launched in the United States in September 2004 and is the only fluoroquinolone approved in the United States for the five-day treatment of both ABECB and CAP.

Our net sales of FACTIVE were $6.3 million, $5.1 million and $1.2 million in 2011, 2010 and 2009, respectively. Net sales in 2009 include sales made following our launch in September 2009. We acquired the FACTIVE product rights and related inventory from Oscient Pharmaceuticals Corporation, or Oscient, on September 9, 2009. We began earning revenues from FACTIVE in September 2009; however, we did not begin marketing and promoting FACTIVE until October 2009.

Market Opportunity. The U.S. oral solid antibiotic market is fairly fragmented, with approximately 35 branded products and more than 45 generic products. Pharmacists typically fill prescriptions for antibiotics with generic products when available. According to NPA, in 2011, the U.S. oral solid antibiotic market generated approximately 224 million prescriptions, of which the U.S. oral solid fluoroquinolone market generated approximately 34 million prescriptions. Approximately 1.9 million prescriptions have been dispensed in the United States for FACTIVE since it was first launched. In 2010 and 2011, FACTIVE generated approximately 65,000 and 74,000 prescriptions respectively.

Fluoroquinolones generally are considered safe and efficacious overall and have convenient dosing regimens. Fluoroquinolones, however, have multiple interactions with commonly prescribed drugs, cannot be used in children and have been associated with tendon rupture and photosensitivity adverse reactions.

CEO BACKGROUND

Craig A. Collard, age 45, became a director in 2008.

Craig A. Collard has served as our President and Chief Executive Officer and the chairman of our Board of Directors since the consummation of our merger with Cornerstone BioPharma Holdings, Inc., or Cornerstone BioPharma, on October 31, 2008. We refer to this transaction as the “Merger.” Mr. Collard also served as our Interim Chief Financial Officer from July 2010 through January 2011. In March 2004, Mr. Collard founded Cornerstone Biopharma Holdings, Ltd. (the assets and operations of which were restructured as Cornerstone BioPharma in May 2005), and served as its President and Chief Executive Officer and a director from March 2004 to October 2008. Before founding Cornerstone BioPharma, Mr. Collard’s principal occupation was serving as the President and Chief Executive Officer of Carolina Pharmaceuticals, Inc., a specialty pharmaceutical company he founded in May 2003. From August 2002 to February 2003, Mr. Collard served as Vice President of Sales for Verum Pharmaceuticals, Inc., a specialty pharmaceutical company in Research Triangle Park, North Carolina. From 1998 to 2002, Mr. Collard worked as Director of National Accounts at DJ Pharma, Inc., a specialty pharmaceutical company which was eventually purchased by Biovail Pharmaceuticals, Inc. His pharmaceutical career began in 1992 as a field sales representative at Dura Pharmaceuticals, Inc., or Dura. He was later promoted to several other sales and marketing positions within Dura. Mr. Collard is a member of the Board of Directors of Hilltop Home Foundation, a Raleigh, North Carolina, non-profit corporation, in addition to our Board of Directors. Mr. Collard holds a B.S. in Engineering from the Southern College of Technology (now Southern Polytechnic State University) in Marietta, Georgia. As our founder and Chief Executive Officer, and as a former sales representative and/or executive at several other specialty pharmaceutical companies, Mr. Collard brings to our Board of Directors a depth of sales and executive experience both in the specialty pharmaceutical industry in general and at our company in particular.

Christopher Codeanne, age 43, became a director in 2008.

Christopher Codeanne has served on our Board of Directors since the consummation of the Merger. Since December 2010, Mr. Codeanne has served as the Executive Vice President, Finance, Chief Financial Officer and Director of Premier Research Group Limited, an international pharmaceutical and medical device services company. From April 2008 through November 2010, Mr. Codeanne served as Chief Operating Officer and Chief Financial Officer of Oncology Development Partners, LLC (d/b/a Oncopartners), a specialized international oncology contract research organization. From December 2006 through April 2008, Mr. Codeanne served as the Chief Financial Officer of Averion International Corp., or Averion, a publicly traded international contract research organization. Prior to Averion, from 2002 through July 2006, Mr. Codeanne was the Chief Financial Officer of SCIREX Corporation (which was acquired by Premier Research Group plc in 2006), or SCIREX, an international, full-service clinical research organization. From 1999 to 2002, Mr. Codeanne served as Director of Finance of SCIREX. Mr. Codeanne is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants and Financial Executives International. Mr. Codeanne holds a B.A. in Accounting from Fairfield University and an MBA from the University of Connecticut. He brings to our Board of Directors a depth of experience in financial, operational and public company matters and knowledge regarding pharmaceutical development and working with contract research organizations.

Michael Enright, age 49, became a director in 2008.

Michael Enright has served on our Board of Directors since the consummation of the Merger. Since February 2011, Mr. Enright has served as the President of OckhamCRO, a division of Ockham Development Group Inc., or Ockham, a global contract research organization. Prior to becoming President of OckhamCRO, Mr. Enright had served as the Chief Financial Officer for Ockham since its merger with Atlantic Search Group, Inc., a staff augmentation and functional outsourcing services organization serving pharmaceutical companies and contract research organizations in the United States and India, where he held the same position since 1995. Prior to 1995, Mr. Enright held positions in employee benefits administration with Hauser Insurance Group and The Prudential Insurance Company, and in financial management with General Electric Company’s aerospace business group. Mr. Enright holds a B.A. in Finance from Villanova University and an MBA from the Kenan-Flagler School of Business of the University of North Carolina at Chapel Hill. He brings to our Board of Directors a depth of experience in strategic planning and organizational development and human resources.

Michael Heffernan, age 46, became a director in 2008.

Michael Heffernan has served on our Board of Directors since the consummation of the Merger. Since 2002, Mr. Heffernan has served as President and Chief Executive Officer of Collegium Pharmaceutical, Inc., a specialty pharmaceutical company that develops and commercializes products to treat central nervous system, respiratory and skin-related disorders. From 1999 to 2001, Mr. Heffernan served as President and Chief Executive Officer of PhyMatrix Corp., an integrated health care services company. From 1995 to 1999, Mr. Heffernan served as President and Chief Executive Officer of Clinical Studies Ltd., a pharmaceutical clinical development company. From 1987 to 1994, Mr. Heffernan served in a variety of sales and marketing positions with Eli Lilly and Company, a pharmaceutical company. Mr. Heffernan has also served on the Board of Directors of TyRx Pharma, Inc. since 2002. Mr. Heffernan holds a B.S. in Pharmacy from the University of Connecticut and is a Registered Pharmacist. He brings to our Board of Directors a depth of experience in sales and marketing and knowledge regarding pharmaceutical development and working with contract research organizations.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

Strategy

We are a specialty pharmaceutical company focused on commercializing products for the hospital, niche respiratory and related specialty markets. We are actively seeking to acquire or develop additional products for these markets.

Our strategy is to:




Focus our commercial and internal development efforts in the hospital and related specialty product sector within the U.S. pharmaceutical marketplace;




Acquire companies and marketed and/or registration-stage products that fit within our focus areas; and




Market approved generic products through our wholly owned subsidiary, Aristos.

We believe this strategy will allow us to improve our revenue growth rate, margins, and profitability and enhance stockholder value.

2011 Highlights

In 2011, our management concentrated on executing four key initiatives:




realigning our respiratory sales force to respiratory specialist targets, which we completed in the third quarter;




harvesting our ALLERX pull-through revenue through the period permitted under the March 2011 FDA Announcement;

Table of Contents


focusing our existing development pipeline around CRTX 067 and CRTX 073; and




evaluating and executing upon strategic alternatives for our anti-infective products, which is still on-going.

In addition to the above initiatives, we directed our business development efforts on identifying products and companies that meet our strategic acquisition criteria. These efforts resulted in acquiring all of the outstanding shares of Cardiokine on December 30, 2011 and its pending NDA for lixivaptan to be used, if approved, to treat hyponatremia (CRTX 080). If approved, CRTX 080 will be marketed and sold by our hospital sales force.

The following summarizes certain key financial results for the year ended December 31, 2011:


• Cash and cash equivalents increased $23.1 million or 45% to $74.0 million as of December 31, 2011 from $50.9 million as of December 31, 2010;


• Net product sales from strategic products increased $5.2 million to $79.9 million in 2011 from $74.7 million in 2010, representing 7% year-over-year growth. The percentage of net product sales generated from strategic products increased to 79% in 2011 from 60% in 2010, exceeding our strategic plan target of 70%. Overall net product sales were $101.3 million and $123.7 million for the years ended December 31, 2011 and 2010, respectively.


• Income from operations decreased $9.1 million, or 116%, to a loss of $1.2 million in 2011 from income from operations of $7.9 million in 2010 on a GAAP basis, and decreased $5.7 million, or 24%, to $18.3 million in 2011 from $24.0 million in 2010 on a non-GAAP basis; and


• Net income decreased $6.9 million, or 111%, to a loss of $693,000 in 2011 from net income of $6.2 million in 2010 on a GAAP basis, and decreased $9.7 million, or 51%, to $9.2 million in 2011 from $18.9 million in 2010 on a non-GAAP basis.

In March 2011, the FDA announced that it intended to initiate enforcement action against marketed unapproved prescription cough, cold and allergy products manufactured on or after June 1, 2011 or shipped on or after August 30, 2011. We expected this action, and all of our marketed unapproved products had already been manufactured and shipped prior to December 31, 2010. However, as a result of the March 2011 FDA Announcement, in August 2011 our distribution partners began returning substantial amounts of products that were in the distribution channel. Because we have historically derived significant revenues and income from these products, our net product sales, gross margin and income from operations have declined in 2011 when compared to 2010. Going forward, we anticipate replacing these revenues and income with increased revenues from our branded products, particularly CUROSURF, ZYFLO CR and any products we acquire, and, if approved, our product candidates CRTX 067, a generic product, and CRTX 080, a branded product.

Opportunities and Trends

We continue to execute on our strategic plan, which calls for promoting our CUROSURF and ZYFLO franchises and transitioning away from our primary care-focused anti-infective franchise. Also, we are sharpening our focus on the hospital, niche respiratory and related specialty markets. In addition, we will continue our business development efforts to expand our product portfolio. Finally, we will continue to progress both CRTX 067 and CRTX 080 through the regulatory approval process. We believe these actions, combined with the experience and expertise of our management team, position us well to drive the future growth of our revenue and income.

We generate revenue by promoting our products to targeted health care professionals who are hospital-based or whose practices focus on the treatment of respiratory disorders. Primarily, these health care professionals are specialists. In 2011, we realigned our sales force to focus calls on neonatologists and respiratory specialists. As a result, our share of the hospital market for our lead product, CUROSURF, has continued to grow, and the percentage of our respiratory products prescribed by specialists continues to increase. We have also focused our development pipeline to concentrate on projects that may enhance the life cycle of our ZYFLO products.

As we continue to focus on the growth of our existing products and product candidates, we also continue to position ourselves to execute acquisitions that will drive our next phase of growth. We are systematically focusing our efforts on acquiring products or companies whose products will fit strategically with the focus and strengths of our sales force. We believe that we can continue to operate efficiently in challenging economic and industry environments and that we will find opportunities to invest our cash in ways that will drive future growth. We will need to continue to maintain our strategic focus, manage and deploy our available cash efficiently and strengthen our alliance and partner relationships in order to execute our strategy successfully.


Net Revenues

Net Product Sales.

CUROSURF net product sales increased $1.2 million, or 4%, during 2011 compared to 2010 primarily due to an increase in price, partially offset by an increase in the estimated fees to be paid to our distributors.

ZYFLO CR and ZYFLO net product sales were relatively flat during 2011 compared to 2010. Excluding the impact of an additional reserve of $1.9 million recorded in 2010 to account for an increase in actual returns compared to management’s initial estimate at the time of the Merger, net product sales decreased approximately $2.0 million, or 6%, during 2011. This decrease was primarily due to lower unit volume and increases in government rebates and the estimated fees to be paid to our distributors, partially offset by a price increase.

FACTIVE net product sales increased $1.2 million, or 23%, during 2011 compared to 2010. Excluding the impact of additional reserves of $1.6 million recorded in 2010 to account for an increase in our estimated rate of future returns, net product sales decreased approximately $400,000, or 6%, during 2011. This decrease was primarily due to relatively flat unit volume along with increased voucher redemption as a result of additional promotional efforts for our anti-infective products, partially offset by a price increase.

SPECTRACEF net product sales increased $2.8 million, or 52%, during 2011 compared to 2010. Excluding the impact of an additional reserve of $2.5 million for potential returns of discontinued product and increases in our estimated rates for product returns on net product sales during 2010, net product sales increased approximately $300,000, or 4%, during 2011. This increase was primarily due to increases in unit volume as a result of additional promotional efforts for our anti-infective products, increases in price and a reduction in Medicaid rebates, partially offset by increased voucher redemption.

ALLERX Dose Pack net product sales decreased $4.0 million, or 15%, during 2011 compared to 2010. Deferred revenue related to the 2010 sales was recognized in 2011 as revenue when prescriptions were filled. The decrease in product sales was primarily due to the March 2011 FDA Announcement, which caused a decline in prescriptions. In addition, we received approximately $30.1 million in returns related to product for which revenue had been deferred. As of December 31, 2011, $915,000 remains in deferred revenue.

HYOMAX net product sales decreased $7.9 million, or 79%, during 2011 compared to 2010. This decrease was primarily due to lower net prices and lower unit volume as a result of increased competition from other manufacturers. During 2011, revenue has been recognized as prescriptions were filled instead of our historic practice of recognizing revenue at the time of sale. This change was due to our inability to estimate product returns as a result of changes in market dynamics, large amounts of channel inventory and extended payment terms offered on certain sales. As of December 31, 2011, $513,000 remains in deferred revenue.

Net product sales from other products decreased $15.7 million, or 134%, during 2011 compared to 2010 primarily due to our November 2010 withdrawal from the market of our propoxyphene/acetaminophe n products. Net product sales for propoxyphene/acetaminophe n products during 2010 were $11.8 million, whereas we had no product sales from propoxyphene/acetaminophe n products during 2011. During 2011, we also recorded returns in excess of our original estimates related to our propoxyphene/acetaminophe n products resulting in an additional $4.6 million decrease in net product sales.

License and Royalty Agreement Revenues.

License and royalty agreement revenues decreased $1.5 million, or 92%, during 2011 compared to 2010 primarily due to the one-time, upfront nonrefundable payment of $1.5 million we received in August 2010 in accordance with our license agreement with Targacept, Inc., or Targacept, under which we out-licensed certain rights with respect to our alpha-7 receptor technology.

Costs and Expenses

Cost of Product Sales. Cost of product sales (exclusive of amortization of product rights of $16.9 million and $14.7 million in 2011 and 2010, respectively) decreased $7.2 million, or 16% during 2011 compared to 2010. Cost of product sales consists primarily of standard costs for each of our commercial products, distribution costs, royalties and inventory allowances.

Net Revenues

Net Product Sales.

CUROSURF net product sales increased $23.2 million, or 221%, during 2010 compared to 2009. This increase was primarily due to the fact that we acquired the CUROSURF product rights from Chiesi during the third quarter of 2009 and began promoting and selling CUROSURF in September 2009. Accordingly, our 2010 net product sales for CUROSURF reflect a full year of marketing, promoting and selling the CUROSURF products, as opposed to a partial year in 2009.

ZYFLO CR and ZYFLO net product sales increased $12.7 million, or 70%, during 2010 compared to 2009, primarily due to the increase in our price and the steady prescription volume, which were partially offset by additional expense recorded for actual product returns related to sales made prior to the Merger.

FACTIVE net product sales increased $3.9 million, or 335%, during 2010 compared to 2009. This increase was primarily due to the fact that we acquired the FACTIVE product rights and related inventory from Oscient on September 9, 2009. We began earning revenues from FACTIVE in September 2009; however, we did not begin marketing and promoting FACTIVE until October 2009. Accordingly, our 2010 net product sales for FACTIVE reflect a full year of marketing, promoting and selling the FACTIVE products, as opposed to a partial year in 2009. This increase in net product sales was partially offset by an 8% increase in our estimated rate of product returns as a result of lower demand than expected and an increase in returns over our initial estimate at the acquisition date as well as an increase in rebates expected to be paid as a result of promotional activities.

SPECTRACEF net product sales decreased $4.1 million, or 43%, during 2010 compared to 2009, primarily due to lower sales volumes caused by some dilution of our sales promotion efforts as a result of the introduction of FACTIVE into our product portfolio. Net product sales in 2010 were also impacted by increases in our estimated rates for product returns for various SPECTRACEF products as well as an increase in rebates expected to be paid as a result of new healthcare regulations.

ALLERX Dose Pack net product sales decreased $4.4 million, or 14%, during 2010 compared to 2009. The decrease in product sales was primarily due to the deferral of revenue from sales made during 2010 and to additional expense recorded for an increase in actual returns of certain ALLERX products sold prior to 2010. At December 31, 2010, approximately $53.2 million of revenue from sales of ALLERX was deferred due to the inability to estimate returns. As a result of changes in market dynamics, large amounts of channel inventory and extended payment terms offered on certain sales, we were unable to estimate returns due to uncertainty regarding consumer demand and the level of competition. Deferred revenue related to these sales was recognized as revenue when prescriptions were filled.

HYOMAX net product sales decreased $18.1 million, or 64%, during 2010 compared to 2009. This decrease was primarily due to lower net prices and lower volume as a result of increased competition from other manufacturers as well as deferral of revenue from sales made during December 2010. At December 31, 2010, approximately $4.0 million of revenue from sales of HYOMAX products was deferred due to the inability to estimate returns. As a result of large amounts of channel inventory and extended payment terms offered on certain sales, we were unable to estimate returns. Deferred revenue related to these sales was recognized as revenue when prescriptions were filled.

Net product sales from other products increased $1.2 million, or 12%, during 2010 compared to 2009 primarily due to the increase in sales volume of our propoxyphene/acetaminophe n products, which included BALACET 325, APAP 325, our generic formulation of BALACET 325, and APAP 500. These products were voluntarily withdrawn from the market in November 2010 in response to the FDA’s actions requiring the withdrawal of the branded versions of propoxyphene, specifically Darvon ® , Darvon-N ® and Darvocet-N ® . Net product sales from our three propoxyphene products were $11.8 million and $9.6 million in 2010 and 2009, respectively.

License and Royalty Agreement Revenues.

License and royalty agreement revenues increased $1.3 million, or 470%, during 2010 compared to 2009 primarily due to the one-time, upfront, nonrefundable payment of $1.5 million we received in August 2010 in accordance with our license agreement with Targacept, under which we out-licensed certain rights with respect to our alpha-7 receptor technology, partially offset by a reduction in unrelated royalty revenue.

Costs and Expenses

Cost of Product Sales. Cost of product sales (exclusive of amortization of product rights of $14.7 million and $6.1 million in 2010 and 2009, respectively) increased $6.8 million, or 18% during 2010 compared to 2009. Cost of product sales consists primarily of standard costs for each of our commercial products, distribution costs, royalties, and inventory allowances.

Reconciliation of Non-GAAP Financial Measures

To supplement the consolidated financial statements presented in accordance with GAAP, we use non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP operating income, non-GAAP net income and non-GAAP net income per diluted share. Our management regularly uses supplemental non-GAAP financial measures to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods.

These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. The additional non-GAAP financial information presented herein should be considered in conjunction with, and not as a substitute for, or superior to, the financial information presented in accordance with GAAP (such as operating income (loss), net income (loss) and earnings (loss) per share) and should not be considered measures of our liquidity. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

The non-GAAP financial measures reflect adjustments for stock-based compensation expense, amortization of product rights and transaction-related expenses. Transaction-related expenses consist of (1) costs incurred to complete product or company acquisitions or other strategic transactions, including due diligence and legal, consulting and other related fees; (2) integration costs related to our completed transactions; and (3) transaction-related fees associated with transactions that are not consummated. We exclude these expenses from our non-GAAP measures because we believe that their exclusion provides an additional means to assess the extent to which our efforts and execution of our strategy are reflected in our operating results. In particular, stock-based compensation expense is excluded primarily because it is a non-cash expense that is determined based on subjective assumptions, product rights amortization is excluded because it is not reflective of the cash-settled expenses incurred related to product sales, and transaction-related expenses are excluded because management believes they have no direct correlation to current operating results. Our management believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors’ and management’s overall understanding of our current financial performance and our prospects for the future.

The non-GAAP measures are subject to inherent limitations because (1) they do not reflect all of the expenses associated with the results of operations as determined in accordance with GAAP and (2) the exclusion of these expenses involved the exercise of judgment by management. Even though we have excluded stock-based compensation expense, amortization of product rights and transaction-related expenses from the non-GAAP financial measures, stock-based compensation is an integral part of our compensation structure, the acquisition of product rights is an important part of our business strategy and the transaction-related expenses, whether or not the transaction is successfully closed, may be significant cash expenses.

Net Cash Provided By Operating Activities

Our primary sources of operating cash flows are product sales. Our primary uses of cash in our operations are for funding working capital, selling, general and administrative expenses and royalties.

Net cash provided by operating activities in 2011 reflected our net loss of $693,000, adjusted by non-cash expenses totaling $22.9 million and changes in accounts receivable, inventories, income tax receivable, accrued expenses and other operating assets and liabilities totaling $2.0 million. Non-cash items consisted primarily of amortization and depreciation of $14.9 million, changes in allowances for prompt payment discounts and inventory of $3.7 million, impairment of product rights of $2.5 million and stock-based compensation of $2.2 million, partially offset by changes in deferred income tax assets of $388,000. Accounts receivable decreased by $61.1 million primarily due to collections of receivables and expected returns of our 2010 sales of ALLERX Dose Pack and HYOMAX products. Inventories decreased by $5.5 million primarily due to the decrease in CUROSURF finished goods and ZYFLO CR and FACTIVE API, partially offset by a reduction in inventory allowances due to write-offs of ALLERX Dose Pack and ZYFLO CR sample inventory. Prepaid expenses, long-term accounts receivable and other assets decreased by $8.5 million, primarily due to the decrease of long-term accounts receivables and long-term deferred cost of sales. Accounts payable decreased by $627,000 primarily due to the timing of payments. Accrued expenses decreased by $15.1 million primarily due to a decrease in accrued price adjustments and chargebacks, product returns and accrued bonuses. Deferred revenue decreased $55.8 million primarily due to expected product returns and revenue that was recognized based on prescriptions filled for our ALLERX and HYOMAX products. Income tax receivable increased by $1.7 million primarily due to lower than estimated taxable income for the year ended December 31, 2011.

Net cash provided by operating activities in 2010 reflected our net income of $6.2 million, adjusted by non-cash expenses totaling $18.8 million and changes in accounts receivable, inventories, income taxes payable, accrued expenses and other operating assets and liabilities totaling $8.1 million. Non-cash items consisted primarily of amortization and depreciation of $14.8 million, changes in allowances for prompt payment discounts and inventory of $5.2 million, stock-based compensation of $1.3 million and changes in deferred income tax assets of $3.0 million. Accounts receivable increased by $63.8 million primarily due to the sale of remaining ALLERX and HYOMAX inventories during December 2010. Inventories decreased by $1.6 million primarily due to reductions in ALLERX, HYOMAX and ZYFLO CR finished goods and sample inventories, partially offset by purchases of CUROSURF finished product and inventory destroyed or donated. Prepaid expenses, long-term accounts receivable and other assets increased by $8.8 million, primarily due to an increase in long-term accounts receivables and deferred cost of sales related to the sale of remaining ALLERX and HYOMAX inventories during December 2010, partially offset by the amortization of regulatory fees. Accounts payable increased by $499,000 primarily due to the timing of payments. Accrued expenses increased by $23.2 million primarily due to increases in our estimated product return rates and rebates and price adjustments related to the sale of remaining ALLERX and HYOMAX inventories during December 2010 and new laws, specifically Health Care Reform, partially offset by a decrease in accrued royalties related to our product mix. Deferred revenue increased $57.2 million primarily because of sales that were deferred due to extended payment terms and the inability to estimate product returns. Income taxes payable decreased by $1.8 million primarily due to a lower effective tax rate for the year ended December 31, 2010.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Executive Overview
Strategy
We are a specialty pharmaceutical company focused on respiratory, hospital and related specialty markets. We recently articulated our strategic plan which called for building upon our established strategic product base and focusing on therapeutic niches within the respiratory and hospital markets in order to deliver short-term value through increased market penetration and create long-term value by acquiring strategically-aligned products that leverage our existing commercial capabilities.
As part of that plan, we set ourselves the following objectives for 2011:
• Increasing the market penetration of our strategic products while maximizing the cash generated by our final sales of marketed unapproved products;

• Using this transition period to align our organizational structure to better support a business model built around strategic products;

• Identifying acquisition opportunities to boost our inorganic growth;

• Focusing our development pipeline to support our strategy; and

• Increasing our short-term revenues by launching our generic cough/cold product CRTX 067.
We believe that we continue to make good progress toward these objectives and that if we implement this strategy successfully, we can deliver consistent long-term revenue and earnings growth.
Third Quarter 2011 Highlights
The following summarizes certain key financial measures as of, and for the three months ended, September 30, 2011:
• Cash and cash equivalents equaled $81.5 million as of September 30, 2011.
• Net product sales were $25.2 million and $26.4 million for the three months ended September 30, 2011 and 2010, respectively. Net product sales from strategic products increased $1.6 million, or 9%, for the three months ended September 30, 2011 compared the three months ended September 30, 2011. The percentage of net product sales generated from strategic products increased from 67% for the three months ended September 30, 2010 to 77% for the three months ended September 30, 2011.

• When calculated in accordance with accounting principles generally accepted in the United States, or GAAP, income from operations was $191,000 for the three months ended September 30, 2011 compared to $98,000 for the three months ended September 30, 2010. On a GAAP basis, net income for the three months ended September 30, 2011 was $117,000 compared to $764,000 for the three months ended September 30, 2010.

• On a non-GAAP basis, income from operations was $4.5 million for the three months ended September 30, 2011 compared to $4.0 million for the three months ended September 30, 2010. On a non-GAAP basis, net income for the same periods was $3.4 million and $3.8 million, respectively.
In March 2011, the FDA announced that it intended to initiate enforcement action against marketed unapproved prescription cough, cold and allergy products manufactured on or after June 1, 2011 or shipped on or after August 30, 2011 (this announcement is referred to as the March 2011 FDA Announcement). All of our marketed unapproved products had already been manufactured and shipped prior to December 31, 2010 and this action did not require the recall or withdrawal of any products. However, during the three months ended September 30, 2011, certain wholesalers indicated that they interpreted the March 2011 FDA Announcement to cover distribution of ALLERX Dose Pack products by wholesalers and requested to return approximately $26.4 million of those products to us. In connection with the expected returns, we reclassified $26.4 million of deferred revenue and related accrued expenses to accrued product returns. During September 2011, we satisfied $16.7 million of our accrued product return liability for ALLERX Dose Pack returns by disbursing cash of $5.7 million and reducing accounts receivable by $11.0 million. Approximately $3.0 million of accounts receivable related to previously deferred sales of ALLERX Dose Packs remains recorded on the consolidated balance sheet as of September 30, 2011 and will be reversed (along with the associated accrued product return liability) when we receive the returned product. We anticipate a future negative impact on our cash flows from these returns of ALLERX Dose Pack product of approximately $6.7 million.
Opportunities and Trends
We continue to execute on our strategic plan, which calls for growing our core CUROSURF ® and ZYFLO ® franchises and transitioning away from our primary care-focused anti-infective franchise. As called for in our plan, we are sharpening our focus on the specialty and hospital markets. We will continue to focus on growing revenues from our strategic products and expect to cease recognizing revenues from our unapproved products by the end of 2011. We are also increasing our business development efforts to expand our product portfolio. We believe that this approach, combined with the experience and expertise of our management team, positions us well to drive the future growth of our strategic products’ revenue.
We generate revenue by promoting our products to targeted health care professionals who are hospital-based or whose practices focus on the treatment of respiratory disorders. Primarily, these health care professionals are specialists and, while we also identify and target general practitioners who treat particularly large numbers of patients with respiratory ailments, we have recently realigned our sales force to focus calls on neonatologists and respiratory specialists. As a result, our share of the hospital market for our lead product, Curosurf, has continued to grow, and the percentage of our respiratory products prescribed by specialists continues to increase.
At the same time, our strategic plan calls for migrating away from our primary-care focus particularly in the area of anti-infectives. This migration is due in part to the increased presence of generic products in this sector of the market and is driven by our decision to realign our respiratory sales force to specialists. This has reduced the portion of the total anti-infective prescriber base that we call on, but we have been able to maintain coverage of approximately 90% of the total prescription volume for our brands. As we continue to execute on this initiative we may continue to see a slight decline in prescription levels for our anti-infective products.
In part as a result of this realignment, our strategic products generated $59.0 million in net product sales for the nine months ended September 30, 2011, an 11% increase over the comparable 2010 time period. The growth of our strategic products and our overall product sales mix continue to reflect the transformation of our business, with strategic products accounting for 71% of total year-to-date net product sales. This achievement is in line with our 2011 strategic goal of having approximately 70% of 2011 net product sales generated from our strategic products. This metric will become less significant as our sales of marketed unapproved products wind down during the remainder of 2011, particularly since we believe that recent decisions of our partners in the distribution channel will likely cause us to cease recognizing sales of marketed unapproved products by the end of 2011 due to the quantity of those products that we now believe will be returned.
We have also focused our development pipeline to concentrate on projects that may enhance the life cycle of our ZYFLO products. This includes exploring the potential for using zileuton, the active ingredient in our ZYFLO products, to treat other unmet needs in our areas of therapeutic focus. We have also made organizational changes and upgraded our master data management system and internal sales and marketing data warehouse, and we expect to deploy a comprehensive business intelligence reporting infrastructure in the near future.

As we continue to focus on the growth of our existing products and product candidates, we also continue to position ourselves to execute acquisitions that will drive our next phase of growth. We are systematically focusing our efforts on acquiring products or companies whose products will fit strategically with the focus and strengths of our sales force. With the help of our commercial partner, Chiesi Farmaceutici S.p.A., or Chiesi, we believe that we can continue to operate efficiently in challenging economic and industry environments and that we will find opportunities to invest our cash in ways that will drive future growth. We will need to continue to maintain our strategic focus, manage and deploy our available cash efficiently and strengthen our alliance and partner relationships in order to execute our strategy successfully.

Net Revenues
Net Product Sales.
CUROSURF net product sales increased $1.3 million, or 16%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010, primarily due to the timing of sales orders placed by our customers and an increase in price, partially offset by an increase in the estimated fees to be paid to our distributors.
ZYFLO CR ® and ZYFLO net product sales increased $742,000, or 10%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was primarily due to timing of customer purchases and an increase in price, partially offset by an increase in the estimated fees to be paid to our distributors.
FACTIVE net product sales decreased $87,000, or 10%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This decrease was primarily due to a decrease in sales volume and increase in our estimated rates for product returns and voucher redemption, partially offset by a price increase.
SPECTRACEF product family net product sales decreased $312,000, or 26%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This decrease was primarily due to a reduction in sales volume.
ALLERX Dose Pack net product sales increased $1.6 million, or 43%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was primarily due to increased prescription volume, offset by an increase in the estimated fees to be paid to our distributors and voucher redemption. During the three months ended September 30, 2011, revenue continued to be recognized as prescriptions were filled instead of at the time of sale. At September 30, 2011, we had deferred revenue of approximately $1.7 million related to previous sales of ALLERX Dose Pack products.
HYOMAX net product sales decreased $1.6 million, or 82%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This decrease was primarily due to lower net prices and lower volume as a result of increased competition from other manufacturers. During 2011, revenue has been recognized as prescriptions were filled instead of our historic practice of recognizing revenue at the time of sale. This change was due to our inability to estimate product returns as a result of changes in market dynamics, large amounts of channel inventory and extended payment terms offered on certain sales. As a result, at September 30, 2011, we had deferred revenue of approximately $587,000 related to previous sales of HYOMAX products.
Net product sales from other products decreased $2.9 million, or 97%, during the three months ended September 30, 2011 compared to the three months ended September 30, 2010, primarily due to the November 2010 withdrawal from the market of our propoxyphene/acetaminophe n products, which included BALACET ® 325; APAP 325, our generic formulation of BALACET 325; and APAP 500. We voluntarily withdrew these products in response to the FDA’s actions requiring the withdrawal of the branded versions of propoxyphene, specifically Darvon ® , Darvon-N ® and Darvocet-N ® . Net product sales for these products during the three months ended September 30, 2010 were $2.9 million, whereas we had no product sales from these products during the three months ended September 30, 2011.

FACTIVE net product sales increased $1.1 million, or 26%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase was primarily due to an increase in sales volume as a result of additional promotional efforts for our anti-infective products combined with a price increase, partially offset by increases in our estimated rates for product returns and voucher redemption.
SPECTRACEF product family net product sales increased $2.6 million, or 74%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Excluding the impact of an additional reserve of $1.6 million for potential returns of discontinued product on net product sales for the nine months ended September 30, 2010, net product sales increased approximately $1.0 million during the nine months ended September 30, 2011. The increase was driven by increased sales volume as a result of additional promotional efforts for our anti-infective products as well as an increase in price, partially offset by increases in our estimated rates for product returns and voucher redemption.
ALLERX Dose Pack net product sales increased $4.1 million, or 18%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Excluding the impact of an additional reserve of $3.4 million for product returns in excess of our estimates during the nine months ended September 30, 2010, net product sales increased approximately $700,000 during the nine months ended September 30, 2011. This increase was due to increased prescription volume. At September 30, 2011, we had deferred revenue of approximately $1.7 million related to previous sales of our ALLERX Dose Pack products.
HYOMAX net product sales decreased $6.0 million, or 77%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This decrease was primarily due to lower net prices and lower volume as a result of increased competition from other manufacturers. During 2011, revenue has been recognized as prescriptions were filled instead of our historic practice of recognizing revenue at the time of sale. This change was due to our inability to estimate product returns as a result of changes in market dynamics, large amounts of channel inventory and extended payment terms offered on certain sales. As a result, at September 30, 2011, we had deferred revenue of approximately $587,000 related to previous sales of HYOMAX products.
Net product sales from our other products decreased $11.9 million, or 147%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, primarily due to our November 2010 withdrawal from the market of our propoxyphene/acetaminophe n products. Net product sales for these products during the nine months ended September 30, 2010 were $8.0 million, whereas we had no product sales from these products during the nine months ended September 30, 2011. During the nine months ended September 30, 2011, we also recorded returns in excess of our original estimates related to these products resulting in an additional $3.9 million decrease in net product sales.

Royalty Expenses . Royalty expenses decreased $3.6 million, or 37%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This decrease was primarily due to lower net product sales of the HYOMAX and propoxyphene/acetaminophe n products, partially offset by increased royalties relating to FACTIVE.
Research and Development Expenses. Research and development expenses decreased $2.4 million, or 63%, during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This decrease is due primarily to a reduction in expenses related to CRTX 067 and the timing of our product development expenses, which remains consistent with our development plan. Our product development expenses for particular product candidates vary significantly from period to period depending on the product development stage and the nature and extent of the activities undertaken to advance the product candidate’s development in a given reporting period.
Amortization of Product Rights. Amortization of product rights increased $2.5 million, or 23%, during the nine months ended September 30, 2011 compared to nine months ended September 30, 2010. During the nine months ended September 30, 2011, we made the decision to not pursue several product development projects that no longer align with our strategic focus and wrote off $2.5 million of related capitalized product rights.
Provision for Income Taxes
The provision for income taxes was $1.1 million for the nine months ended September 30, 2011 compared to $2.2 million for the nine months ended September 30, 2010. Our effective tax rates for the nine months ended September 30, 2011 and 2010 were 34.7% and 28.8%, respectively. The effective rate for the nine months ended September 30, 2010 reflected changes in the estimated tax provision related to the year ended December 31, 2009. The changes resulted from an increase in our net operating loss usage generating a tax benefit recognized in the three months ended September 30, 2010.
Reconciliation of Non-GAAP Financial Measures
To supplement the consolidated financial statements presented in accordance with GAAP, we use non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP operating income, non-GAAP net income and non-GAAP net income per diluted share. Our management regularly uses supplemental non-GAAP financial measures to understand, manage and evaluate our business and make operating and compensation decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods.
These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. The additional non-GAAP financial information presented herein should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP (such as operating income, net income and net income per share) and should not be considered measures of our liquidity. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
The non-GAAP financial measures reflect adjustments for stock-based compensation expense and amortization of product rights. We exclude these expenses from our non-GAAP measures because we believe that their exclusion provides an additional means to assess the extent to which our efforts and execution of our strategy are reflected in our operating results. In particular, stock-based compensation expense is excluded primarily because it is a non-cash expense that is determined based on subjective assumptions. Product rights amortization is excluded because it is not reflective of the cash-settled expenses incurred related to product sales. Our management believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors’ and management’s overall understanding of our current financial performance and our prospects for the future.
The non-GAAP measures are subject to inherent limitations because (1) they do not reflect all of the expenses associated with the results of operations as determined in accordance with GAAP and (2) the exclusion of these expenses involved the exercise of judgment by management. Even though we have excluded stock-based compensation expense and amortization of product rights from the non-GAAP financial measures, stock-based compensation is an integral part of our compensation structure and the acquisition of product rights is an important part of our business strategy.

Liquidity and Capital Resources
Sources of Liquidity
We require cash to meet our operating expenses and for capital expenditures, acquisitions and in-licenses of rights to products and payments on our license agreement liability. To date, we have funded our operations primarily from product sales, royalty agreement revenues and the investment from Chiesi. As of September 30, 2011, we had $81.5 million in cash and cash equivalents.
In connection with the March 2011 FDA Announcement, during the three months ended September 30, 2011, certain wholesalers indicated that they interpreted the March 2011 FDA Announcement to cover distribution of ALLERX Dose Pack products by wholesalers and requested to return approximately $26.4 million of ALLERX Dose Pack product to us. In connection with the expected returns, we reclassified $26.4 million of deferred revenue and related accrued expenses to accrued product returns. During September 2011, we satisfied $16.7 million of our accrued product return liability for ALLERX Dose Pack returns by disbursing cash of $5.7 million and reducing accounts receivable by $11.0 million. Approximately $3.0 million of accounts receivable related to previously deferred sales of ALLERX Dose Packs remains recorded on the consolidated balance sheet as of September 30, 2011 and will be reversed (along with the associated accrued product return liability) when we receive the returned product. We anticipate a future negative impact on our cash flows from these returns of ALLERX Dose Pack products of approximately $6.7 million.

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