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Article by DailyStocks_admin    (01-05-09 05:48 AM)

The Daily Magic Formula Stock for 01/05/2009 is King Pharmaceuticals Inc. According to the Magic Formula Investing Web Site, the ebit yield is 29% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

King Pharmaceuticals, Inc. was incorporated in the State of Tennessee in 1993. Our wholly owned subsidiaries are Monarch Pharmaceuticals, Inc.; King Pharmaceuticals Research and Development, Inc.; Meridian Medical Technologies, Inc.; Parkedale Pharmaceuticals, Inc.; King Pharmaceuticals Canada Inc.; and Monarch Pharmaceuticals Ireland Limited.

Our principal executive offices are located at 501 Fifth Street, Bristol, Tennessee 37620. Our telephone number is (423) 989-8000 and our facsimile number is (423) 274-8677. Our website is www.kingpharm.com where you may view our Corporate Code of Conduct and Ethics (“Code”). To the extent permitted by U.S. Securities and Exchange Commission (“SEC”) and New York Stock Exchange (“NYSE”) regulations, we intend to disclose information as to any amendments to the Code and any waivers from provisions of the Code for our principal executive officer, principal financial officer, and certain other officers by posting the information on our website, to the extent such matters arise. We make available through our website, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments, as well as other documents, as soon as reasonably practicable after their filing with the SEC. These filings are also available to the public through the Internet at the website of the SEC, at www.sec.gov. You may also read and copy any document that we file at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

Our Chief Executive Officer, Brian A. Markison, submitted to the NYSE an Annual Chief Executive Officer Certification on June 12, 2007, pursuant to Section 303A.12 of the NYSE’s listing standards, certifying that he was not aware of any violation by King of the NYSE’s corporate governance listing standards as of that date.

King is a vertically integrated pharmaceutical company that performs basic research and develops, manufactures, markets and sells branded prescription pharmaceutical products. By “vertically integrated,” we mean that we have the following capabilities:




• research and development
• distribution

• manufacturing
• sales and marketing

• packaging
• business development

• quality control and assurance
• regulatory management

Through our national sales force we market our branded prescription pharmaceutical products to general/family practitioners, internal medicine physicians, neurologists, pain specialists, surgeons and hospitals across the United States and in Puerto Rico. Branded pharmaceutical products are innovative products sold under a brand name that enjoy, or previously enjoyed, some degree of market exclusivity.

Our corporate strategy is focused on target, specialty-driven markets, particularly neuroscience, hospital and acute care. We believe each of these target markets has significant market potential and our organization is aligned accordingly.

Under our corporate strategy we work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and prudent product life-cycle management. By “product life-cycle management,” we mean the extension of the economic life of a product, including seeking and gaining necessary related governmental approvals, by such means as:


• securing from the U.S. Food and Drug Administration, which we refer to as the “FDA,” additional approved uses (“indications”) for our branded pharmaceutical products;

• developing and producing different strengths;

• producing different package sizes;

• developing new dosage forms; and

• developing new product formulations.

Our strategy also focuses on growth through the acquisition of novel branded pharmaceutical products in various stages of development and the acquisition of pharmaceutical technologies, particularly those products and technologies that we believe have significant market potential and complement our neuroscience, hospital and acute care medicine platforms. Using our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in developing and commercializing innovative, clinically-differentiated therapies and technologies in our target, specialty-driven markets. We may also seek company acquisitions that add products or products in development, technologies or sales and marketing capabilities to our existing platforms or that otherwise complement our operations. We also work to achieve organic growth by continuing to develop investigational drugs, as we have a strong commitment to research and development and advancing the products and technologies in our development pipeline.

Recent Developments

Accelerated Strategic Shift

Following the Circuit Court’s decision in September 2007 invalidating our Altace ® patent, our senior management team conducted an extensive examination of our company and developed a restructuring initiative designed to accelerate a previously planned strategic shift emphasizing our focus on neuroscience, hospital and acute care markets. This initiative included a reduction in personnel, staff leverage, expense reductions and additional controls over spending, reorganization of sales teams and a realignment of research and development priorities. Pursuant to this initiative, we terminated approximately 20% of our workforce, primarily through a reduction in our sales force.

New Generic Competition

In December 2007, a third party entered the market with a generic substitute for our Altace ® capsules. This followed the decision of the U.S. Circuit Court of Appeals for the Federal Circuit (the “Circuit Court”) in September 2007 which declared invalid U.S. Patent No. 5,061,722 (the “722 Patent”) that covered our Altace ® product, overruling the decision of the U.S. District Court for the Eastern District of Virginia (the “District Court”), which had upheld the validity of the patent. We filed with the Circuit Court a petition for rehearing and rehearing en banc , but this petition was denied in December 2007. As a result of the entry of a generic substitute, our sales of Altace ® have begun to decline. We launched a tablet formulation of Altace ® in February 2008.

In January 2008, we entered into an agreement with CorePharma, LLC (“CorePharma”) granting CorePharma a license to launch an authorized generic version of Skelaxin ® in December 2012, or earlier under certain conditions.

New Branded ® Competition

Beginning in 2008, Thrombin-JMI ® , our bovine thrombin product, has new competition from recombinant human thrombin and human thrombin. Omrix Biopharmaceuticals, Inc.’s Biologics Licensing Application (“BLA”) for its human thrombin product was approved in September 2007. Zymogenetics, Inc. received approval of its BLA for recombinant human thrombin in January 2008. The presence of these competing products in the marketplace may reduce net sales of Thrombin-JMI ® materially.

Clinical Trial Results

In December 2007, we, together with Pain Therapeutics Inc., announced positive results from the pivotal Phase III clinical trial for Remoxy tm . The Phase III trial was conducted in accordance with a Special Protocol Assessment (“SPA”) from the FDA. The top-line data indicates that the Phase III trial achieved a statistically significant result in its primary endpoint, defined by the SPA as a mean decrease in pain intensity scores during the 12-week treatment period. In addition, the Phase III trial achieved statistically significant results in secondary endpoints. Remoxy tm , an investigational novel formulation of extended release, long-acting oxycodone for moderate to severe pain, is designed to resist common methods of abuse, such as crushing, heating, or dissolution in alcohol, that are reported with respect to other long-acting opioids.

We entered into a series of agreements with Pain Therapeutics in November 2005 to develop and commercialize Remoxy tm and other extended release, long-acting opioid painkillers that resist common methods of abuse. We have worldwide exclusive rights to commercialize Remoxy tm and the other abuse-resistant opioid drugs that are developed pursuant to the collaboration, other than in Australia and New Zealand.

In early 2008, we received positive results from our Phase III clinical trials with CorVue tm (binodenoson) our next generation cardiac pharmacologic stress-imaging agent. We expect to file a new drug application (“NDA”) for CorVue tm with the FDA by early 2009. The Phase II clinical trial for Sonedenoson, formerly MRE-0094, an adenosine A2a receptor agonist for the topical treatment of chronic, neuropathic, diabetic foot ulcers, did not meet its primary endpoint. We are continuing to evaluate the data from this trial.

Expanded Product Portfolio and Development Pipeline

In October 2007, we entered into a License, Development and Commercialization Agreement with Acura Pharmaceuticals, Inc. (“Acura”) to develop and commercialize certain immediate release opioid analgesic products utilizing Acura’s proprietary Aversion ® (abuse-deterrent/abuse-re sistant) Technology in the United States, Canada and Mexico. The agreement provides us with an exclusive license for Acurox tm (oxycodone HCl, niacin and a unique combination of other ingredients) tablets and another undisclosed opioid product utilizing Acura’s Aversion ® Technology. In addition, the agreement provides us with an option to license all future opioid analgesic products developed utilizing Acura’s Aversion ® Technology. Acurox tm tablets are intended to effectively treat moderate to moderately severe pain while deterring or resisting common methods of abuse, including intravenous injection or oral consumption of tablets dissolved in liquids, nasal inhalation of crushed tablets and intentional swallowing of excessive numbers of tablets.

On February 26, 2007, we acquired all the rights to Avinza ® in the United States, its territories and Canada from Ligand Pharmaceuticals Incorporated (“Ligand”). Avinza ® is an extended release formulation of morphine and is indicated as a once-daily treatment for moderate to severe pain in patients who require continuous opioid therapy for an extended period of time.

Other

In October 2007, we sold our Rochester, Michigan sterile manufacturing facility, some of our legacy products that are manufactured there and the related contract manufacturing business to JHP Pharmaceuticals, LLC (“JHP”) for $91.7 million less selling costs of $5.4 million. This transaction resulted in a loss of $46.4 million. The companies also entered into a manufacturing and supply agreement pursuant to which JHP will provide to us certain filling and finishing manufacturing activities with respect to Thrombin-JMI ® . The sale did not include our stand-alone sterile penicillin production facility that is also located in Rochester, Michigan.

In September 2007, we provided Palatin Technologies, Inc. (“Palatin”) with notice of termination of our Collaborative Development and Marketing Agreement to jointly develop and commercialize Palatin’s bremelanotide compound, which was formerly known as PT-141, for the treatment of male and female sexual dysfunction. Our decision to terminate the agreement followed communications from representatives of the FDA of serious concerns about the lack of an acceptable benefit/risk ratio to support the progression of the proposed bremelanotide program into Phase III studies for erectile dysfunction (“ED”). After reviewing the data generated in the Phase I and II studies, the FDA questioned the overall efficacy results and the clinical benefit of this product in both the general and diabetic ED populations, and cited blood pressure increases as its greatest safety concern. The termination was effective in December 2007.

Industry

The pharmaceutical industry is a highly competitive global business composed of a variety of participants, including large and small branded pharmaceutical companies, specialty and niche-market pharmaceutical companies, biotechnology firms, large and small research and drug development organizations, and generic drug manufacturers. These participants compete on a number of bases, including technological innovation or novelty, clinical efficacy, safety, convenience or ease of administration and cost-effectiveness. In order to promote their products to physicians and consumers, industry participants devote considerable resources to advertising, marketing and sales force personnel, distribution mechanisms and relationships with medical and research centers, physicians and patient advocacy and support groups.

Meridian Auto-Injector Segment

Our Meridian Auto-Injector segment consists of our auto-injector business. An auto-injector is a pre-filled, pen-like device that allows a patient or caregiver to automatically inject a precise drug dosage quickly, easily, safely and reliably. Auto-injectors are a convenient, disposable, one-time use drug delivery system designed to improve the medical and economic value of injectable drug therapies. We pioneered the development and are a manufacturer of auto-injectors for the self-administration of injectable drugs. Our auto-injector products currently consist of a variety of acute care medicines.

The commercial pharmaceutical business of our Meridian segment consists of EpiPen ® , an auto-injector filled with epinephrine for the emergency treatment of anaphylaxis resulting from severe or allergic reactions to insect stings or bites, foods, drugs and other allergens, as well as idiopathic or exercise-induced anaphylaxis. We have a supply agreement with Dey, L.P., in which we granted Dey the exclusive right to market, distribute, and sell EpiPen ® worldwide. The supply agreement expires December 31, 2015.

In March 2006, we acquired substantially all of the assets of Allerex Laboratory LTD. The primary asset purchased from Allerex was the exclusive right to market and sell EpiPen ® throughout Canada. We also obtained from Dey, L.P., an extension of those exclusive rights to market and sell EpiPen ® in Canada through 2015.

Our Meridian Auto-Injector segment also includes pharmaceutical products that are presently sold primarily to the U.S. Department of Defense (“DoD”) under an Industrial Base Maintenance Contract which is terminable by the DoD at its convenience. These products include the nerve agent antidotes AtroPen ® and ComboPen ® , and the Antidote Treatment Nerve Agent Auto-injector, which we refer to as the “ATNAA.” AtroPen ® is an atropine-filled auto-injector and ComboPen ® consists of an atropine-filled auto-injector and a pralidoxime-filled auto-injector. The ATNAA utilizes a dual chambered auto-injector and injection process to administer atropine and pralidoxime, providing an improved, more efficient means of delivering these nerve agent antidotes. Other products sold to the DoD include a diazepam-filled auto-injector for the treatment of seizures and a morphine-filled auto-injector for pain management.

Royalties Segment

We have successfully developed two currently marketed adenosine-based products, Adenoscan ® and Adenocard ® , for which we receive royalty revenues. Adenoscan ® is a sterile, intravenous solution of adenosine administered intravenously as an adjunct to imaging agents used in cardiac stress testing of patients who are unable to exercise adequately. Adenocard ® is a sterile solution of adenosine administered intravenously in emergency situations to convert certain irregular heart rhythms to normal sinus rhythms. Specifically, we are party to an agreement under which Astellas Pharma US, Inc. (“Astellas”) manufactures and markets Adenoscan ® and Adenocard ® in the United States and Canada in exchange for royalties through the duration of the patents. We have licensed exclusive rights to other third-party pharmaceutical companies to manufacture and market Adenoscan ® and Adenocard ® in certain countries other than the United States and Canada in exchange for royalties.

Royalties received by us from sales of Adenoscan ® and Adenocard ® outside of the United States and Canada are shared equally with Astellas. Astellas, on its own behalf and ours, obtained a license to additional intellectual property rights for intravenous adenosine in cardiac imaging and the right to use intravenous adenosine as a cardioprotectant in combination with thrombolytic therapy, balloon angioplasty and coronary bypass surgery. For additional information on our royalty agreements, please see the section below entitled “Intellectual Property.”

Sales and Marketing

Our commercial operations organization, which includes sales and marketing, is based in Bridgewater, New Jersey. We have a sales force consisting of over 600 employees in the United States and Puerto Rico. We distribute our branded pharmaceutical products primarily through wholesale pharmaceutical distributors. These products are ordinarily dispensed to the public through pharmacies by prescription. Our marketing and sales promotions for branded pharmaceutical products principally target general/family practitioners, internal medicine physicians, neurologists, pain specialists, surgeons and hospitals through detailing and sampling to encourage physicians to prescribe our products. The sales force is supported by telemarketing and direct mail, as well as through advertising in trade publications and representation at regional and national medical conventions. We identify and target physicians through data available from IMS America, Ltd., a supplier of prescriber prescription data. The marketing and distribution of these products in foreign countries generally requires the prior registration of the products in those countries. We generally seek to enter into distribution agreements with companies with established foreign marketing and distribution capabilities since we do not have a distribution network in place for distribution outside the United States and Puerto Rico.

Similar to other pharmaceutical companies, our principal customers are wholesale pharmaceutical distributors. The wholesale distributor network for pharmaceutical products has in recent years been subject to increasing consolidation, which has increased our, and other industry participants’, customer concentration. In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred. For the year ended December 31, 2007, approximately 75% of our gross sales were attributable to three key wholesalers: McKesson Corporation (35%), Cardinal/Bindley (27%), and Amerisource Bergen Corporation (13%).

Manufacturing

Our manufacturing facilities are located in Bristol, Tennessee; Rochester, Michigan; Middleton, Wisconsin; St. Petersburg, Florida; and St. Louis, Missouri. These facilities have manufacturing, packaging, laboratory, office and warehouse space. We are licensed by the Drug Enforcement Agency, which we refer to as the “DEA,” a division of the Department of Justice, to procure and produce controlled substances. We manufacture certain of our own branded pharmaceutical products. In 2007, we maintained an operational excellence program utilizing Six Sigma and lean manufacturing techniques to identify and execute cost-saving and process-improvement initiatives.

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion should be read in conjunction with the other parts of this report, including the audited consolidated financial statements and related notes. Historical results and percentage relationships set forth in the statement of income, including trends that might appear, are not necessarily indicative of future operations. Please see the “Risk Factors” and “Forward-Looking Statements” sections for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

Our Business

We are a vertically integrated pharmaceutical company that performs basic research and develops, manufactures, markets and sells branded prescription pharmaceutical products. To capitalize on opportunities in the pharmaceutical industry, we seek to develop, in-license, acquire or obtain commercialization rights to novel branded prescription pharmaceutical products in attractive markets.

Our corporate strategy is focused on specialty-driven markets, particularly neuroscience, hospital and acute care. We believe each of our targeted markets has significant market potential and our organization is aligned accordingly. We work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and product life-cycle management. We also work to achieve organic growth through the successful development of new branded pharmaceutical products. Additionally, we seek to achieve growth through the acquisition or in-licensing of novel branded pharmaceutical products in various stages of development and technologies that have significant market potential that complement our neuroscience, hospital and acute care medicine platforms. We may also seek company acquisitions which add products or products in development, technologies or sales and marketing capabilities in our target markets or that otherwise complement our operations.

Utilizing our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in developing and commercializing innovative, clinically-differentiated therapies and technologies in our target, specialty-driven markets.

Our business consists of five segments which include branded pharmaceuticals, Meridian Auto-Injector, royalties, contract manufacturing, and other. Our branded pharmaceutical products are divided into the following categories:


• neuroscience (including Skelaxin ® , Avinza ® and Sonata ® ),

• hospital (including Thrombin-JMI ® and Synercid ® ),

• acute care (including Bicillin ® and Intal ® ), and

• legacy products (including Altace ® , Levoxyl ® and Cytomel ® ).

Our Meridian Auto-Injector segment includes EpiPen ® , a commercial product, and nerve gas antidotes which we provide to the U.S. Military. Our royalties segment relates to revenues we derive from successfully developed products that we have licensed to third parties.

Executive Summary

During 2007, we took many steps to better position us for long-term growth. With the unexpected early entry of generic competition for Altace ® , we accelerated the implementation of our planned strategic shift to focus on specialty-driven markets where we have core capabilities and assets. We also expanded our portfolio of marketed products and development pipeline and advanced projects in our development pipeline, with an emphasis in these markets.

Accelerated Strategic Shift

Following the Circuit Court’s decision in September 2007 invalidating our Altace ® patent, we conducted an extensive examination of our company and developed a restructuring initiative designed to accelerate a previously planned strategic shift emphasizing our focus on specialty-driven markets where we have core capabilities and assets, specifically the neuroscience, hospital and acute care markets. This initiative included a reduction in personnel, staff leverage, expense reductions and additional controls over spending, reorganization of sales teams and a realignment of research and development priorities. Pursuant to this initiative, we terminated approximately 20% of our workforce, primarily through a reduction in our sales force. We have incurred total costs of approximately $65.0 million associated with this initiative. We estimate that the 2008 selling, general and administrative expense savings from these actions will range from $75.0 million to $90.0 million.

New Generic Competition

In December 2007, a third party launched a generic substitute for our Altace ® capsules. This followed the decision of the U.S. Circuit Court of Appeals for the Federal Circuit (the “Circuit Court”) in September 2007 which declared invalid U.S. Patent No. 5,061,722 (the “722 Patent”) that covered our Altace ® product, overruling the decision of the U.S. District Court for the Eastern District of Virginia (the “District Court”), which had upheld the validity of the patent. We filed with the Circuit Court a petition for rehearing and rehearing en banc , but this petition was denied in December 2007. The Circuit Court issued the mandate to the District Court on December 10, 2007, beginning the 180-day Hatch-Waxman exclusive marketing period for the first generic competitor that has entered the market. Following this 180-day period of exclusivity, we anticipate additional competitors will enter the market. We launched a tablet formulation of Altace ® in February 2008.

Expanded Product Portfolio and Development Pipeline

Neuroscience

On February 26, 2007, we acquired all the rights to Avinza ® in the United States, its territories and Canada from Ligand Pharmaceuticals Incorporated (“Ligand”). Avinza ® is an extended release formulation of morphine and is indicated as a once-daily treatment for moderate to severe pain in patients who require continuous opioid therapy for an extended period of time.

In October 2007, we entered into a License, Development and Commercialization Agreement with Acura Pharmaceuticals, Inc. (“Acura”) to develop and commercialize certain immediate release opioid analgesic products utilizing Acura’s proprietary Aversion ® (abuse-deterrent/abuse-re sistant) Technology in the United States, Canada and Mexico. The agreement provides us with an exclusive license for Acurox tm (oxycodone HCl, niacin and a unique combination of other ingredients) tablets, and another undisclosed immediate release opioid product utilizing Acura’s Aversion ® Technology. In addition, the agreement provides us with an option to license all future opioid analgesic products developed utilizing Acura’s Aversion ® Technology. Acurox TM tablets are intended to effectively treat moderate to moderately severe pain while discouraging common methods of abuse, including intravenous injection or oral consumption of tablets dissolved in liquids, nasal inhalation of crushed tablets and intentional swallowing of excessive numbers of tablets.

The agreement with Acura, which provides us with a wide range of immediate release opioids utilizing the Aversion ® Technology platform, complements our collaborative agreement with Pain Therapeutics, Inc. to develop and commercialize Remoxy tm and other extended release, long-acting opioid painkillers that are also designed to resist common methods of abuse.

Hospital

Our product Thrombin-JMI ® is the market leading topical hemostat used to control bleeding during surgery. To better meet the needs of our customers and in anticipation of the recent entry of two new competitors, we introduced new Thrombin-JMI ® based products in 2007, broadening the range of delivery options.

In January 2007, we obtained an exclusive license to the hemostatic products designed by Vascular Solutions, Inc. for use outside catheterization and electrophysiology laboratories. This license includes products which we market as Thrombi-Pad tm (3x3 hemostatic pad) , the only composite of Thrombin-JMI ® and gauze pad, offering healthcare professionals in the emergency department a convenient option to achieve active hemostasis at bleeding sites where they would typically use trauma dressing , and Thrombi-Gel ® (thrombin/gelatin foam hemostat) which provides a convenient topical hemostat option. The license also includes a product we expect to market as Thrombi-Paste tm , which is currently in development. Each of these products includes Thrombin-JMI ® as a component.

In June 2007, the U.S. Food and Drug Administration (“FDA”) approved our Thrombin-JMI ® Epistaxis Kit, a new intranasal spray delivery device for Thrombin-JMI ® for use to aid in stopping epistaxes (nosebleeds). The kit offers healthcare professionals in the emergency department and trauma center a convenient new option to achieve fast, active hemostasis during epistaxes. We began marketing the Thrombin-JMI ® Epistaxis Kit in the United States in the third quarter of 2007.

Beginning in 2008, Thrombin-JMI ® , our bovine thrombin, has new competition from human thrombin and recombinant human thrombin. Omrix Biopharmaceuticals, Inc.’s Biologics Licensing Application (“BLA”) for its human thrombin product was approved in September 2007. Zymogenetics, Inc. received approval of its BLA for recombinant human thrombin in January 2008. The presence of competing products in the marketplace may reduce net sales of Thrombin-JMI materially.
Our Research and Development Projects

Our current research and development pipeline includes several products in Phase III and late Phase II clinical trials, including immediate release and long-acting opioid products utilizing abuse-deterrent/abuse-res istant platform technologies pursuant to our collaborations with Pain Therapeutics and Acura.

Remoxy tm and CorVue tm have completed Phase III clinical trials. Remoxy tm , a novel formulation of extended release, long-acting oxycodone for the treatment of moderate to severe chronic pain, is designed to resist common methods of abuse, such as crushing, heating, or dissolution in alcohol, that are reported with respect to currently available formulations of long-acting oxycodone. In December 2007, we, together with Pain Therapeutics, announced positive results from the pivotal Phase III clinical trial for Remoxy tm . This trial met its primary endpoint, pain relief versus placebo, as prospectively defined by the FDA during the Special Protocal Assessment process. Pain Therapeutics plans to file a New Drug Application for Remoxy tm with the FDA in the second quarter of 2008.

CorVue tm (binodenoson) is a pharmacologic cardiac stress imaging agent intended to provide a reduced side effects profile compared to the currently approved product Adenoscan ® . We received positive results from our Phase III clinical trials for CorVue tm and expect to file an NDA by early 2009.

Our products in Phase III of development include Acurox tm and Vanquix tm . Acurox tm tablets are intended to effectively treat moderate to moderately severe acute pain while deterring or resisting common methods of prescription drug abuse, including intravenous injection or oral consumption of tablets dissolved in liquids, nasal inhalation of crushed tablets and intentional swallowing of excessive numbers of tablets. In early 2007, Acurox tm tablets successfully completed a Special Protocol Assessment with the FDA. As a result, the pivotal Phase III clinical trial with Acurox tm tablets in patients with moderate to severe pain commenced in September 2007 and we expect to report results in the second half of 2008.

Vanquix tm is our diazepam-filled auto-injector that is currently under development as the only therapy of its kind for the treatment of acute, repetitive epileptic seizures.

Our Phase II compounds include Sonedenoson, formerly MRE-0094, an adenosine A2a receptor agonist for the topical treatment of chronic, neuropathic, diabetic foot ulcers, and T-62, an adenosine A1 allosteric enhancer that we are developing for the treatment of neuropathic pain. The Phase II clinical trial for Sonedenoson did not meet its primary endpoint. We are continuing to evaluate the data from this trial. We expect enrollment of patients in the Phase II clinical trial for T-62 to begin in the middle of 2008.

Rochester, Michigan Sterile Manufacturing Facility

In October 2007, we sold our Rochester, Michigan sterile manufacturing facility, some of our legacy products that are manufactured there and the related contract manufacturing business to JHP Pharmaceuticals, LLC (“JHP”) for $91.7 million, less selling costs of $5.4 million. This transaction resulted in a loss of $46.4 million. The companies also entered into a manufacturing and supply agreement pursuant to which JHP will provide to us certain filling and finishing manufacturing activities with respect to Thrombin-JMI ® . The sale did not include our stand-alone sterile penicillin production facility that is also located in Rochester, Michigan.

Medicaid rebate expense was lower in 2006 than in 2005 primarily due to the Federal government shifting persons who were covered by the Medicaid Program to the Medicare Part D Program. During January 2006, the Medicare Prescription Drug Improvement and Modernization Act became effective, which provides outpatient prescription drug coverage to senior citizens and certain disabled citizens in the United States. We have contracts with organizations that administer the Medicare Part D Program, which require us to pay rebates based on contractual pricing and actual utilization under the plans. Initial enrollment in the Medicare Part D Program was open through the middle of the second quarter of 2006.

As part of our ongoing efforts to facilitate improved management of wholesale inventory levels of our branded pharmaceutical products, we have entered into inventory management and data services agreements with each of our three key wholesale customers and other wholesale customers. These agreements provide wholesalers incentives to manage inventory levels and provide timely and accurate data with respect to inventory levels held, and valuable data regarding sales and marketplace activity. We rely on the timeliness and accuracy of the data that each customer provides to us on a regular basis pursuant to these agreements. If our wholesalers fail to provide us with timely and accurate data in accordance with the agreements, our estimates for certain reserves included in our financial statements could be materially and adversely affected.

Based on inventory data provided by our key customers under the IMAs, we believe that wholesale inventory levels of Altace ® , Skelaxin ® , Thrombin-JMI ® , Avinza ® and Sonata ® , as of December 31, 2007, are at or below normalized levels. We estimate that the wholesale and retail inventories of our products as of December 31, 2007 represent gross sales of approximately $150.0 million to $160.0 million.

Accrual for Rebates, including Administrative Fees

During the third quarter of 2005, we began reporting to the Centers for Medicare and Medicaid Services using a refined calculation to compute our Average Manufacturer’s Price (“AMP”) and Best Price. In addition, during the third quarter of 2005, we recalculated rebates due with respect to prior quarters utilizing the refined AMP and Best Price Calculations. As a result of this updated information, during the third quarter of 2005, we decreased our reserve for estimated Medicaid and other government pricing program obligations and increased net sales from branded pharmaceutical products by approximately $21.0 million, approximately $8.0 million of which related to years prior to 2005. This does not include the adjustment to sales classified as discontinued operations. As a result of the increase in net sales, the co-promotion expense related to net sales of Altace ® increased by approximately $6.0 million, approximately $4.0 million of which related to years prior to 2005. The effect of this change in estimate on operating income was, therefore, approximately $15.0 million, approximately $4.0 million of which related to years prior to 2005.

During the first quarter of 2006, we paid approximately $129.3 million related to (i) the settlement agreements with the Office of Inspector General of the United States Department of Health and Human Services (“HHS/OIG”) and the Department of Veterans Affairs, to resolve the governmental investigations related to our underpayment of rebates owed to Medicaid and other governmental pricing programs during the period from 1994 to 2002 and (ii) similar state settlement agreements. For a discussion regarding this settlement, please see “Settlement of Governmental Pricing Investigation” included in Note 19, “Commitments and Contingencies,” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.” Of the $129.3 million paid in the first quarter of 2006, approximately $64.0 million reduced the rebate accrual and is reflected in “Rebates paid” in the table above.

In addition, during the first quarter of 2006, we delayed our regular periodic Medicaid rebate payments as a result of prior overpayments. During the second quarter of 2006, we began reducing our payments for Medicaid rebates to utilize overpayments made to the government related to Medicaid during the government pricing investigation in 2003, 2004 and 2005. During the period of the investigation, we made actual Medicaid payments in excess of estimated expense to avoid any underpayments to the government. As a result of refining the AMP and Best Price calculations in the third quarter of 2005, we discontinued the practice of making payments in excess of the amounts expensed. We expect to recover the remaining overpayments to the government and will continue to reduce cash payments in the future until this overpayment is fully recovered. For a discussion regarding this investigation, please see Note 19, “Commitments and Contingencies”, in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.” In 2007 and 2006, the utilization of overpayments reduced our rebate payments by approximately $6.5 million and $25.0 million, respectively. The utilization of the overpayment has therefore reduced “Rebates paid” in the table above.

During the third quarter of 2006, we reduced our Medicaid rebate expense and increased net sales from branded pharmaceutical products by approximately $9.3 million due to the determination that a liability established in 2005 for a government pricing program for military dependents and retirees was no longer probable.

Accrual for Returns

Our calculation for returns reserves is based on historical sales and return rates over the period during which customers have a right of return. We also consider current wholesale and retail inventory levels of our products. Based on data received from our inventory management agreements with our three key wholesale customers, there was a significant reduction of wholesale inventory levels of our products during the first quarter of 2005. This reduction resulted in a change in estimate during the first quarter of 2005 that decreased the reserve for returns by approximately $20.0 million and increased net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. During the second quarter of 2005, we decreased our reserve for returns by approximately $5.0 million and increased our net sales from branded pharmaceuticals, excluding the adjustment for sales classified as discontinued operations, by the same amount as a result of an additional reduction in wholesale inventory levels of our branded products. These adjustments are reflected in the table above as a reduction in the current provision.

During the third quarter of 2005, our actual returns of branded pharmaceutical products continued to decrease significantly compared to actual returns during the quarterly periods in 2004 and the first quarter of 2005. Additionally, based on data received pursuant to our inventory management agreements with key wholesale customers, we continued to experience normalized wholesale inventory levels of our branded pharmaceutical products during the third quarter of 2005. Accordingly, we believed that the rate of returns experienced during the second and third quarters of 2005 was more indicative of what we expected in future quarters and adjusted our returns reserve accordingly. This change in estimate resulted in a decrease of approximately $15.0 million in the returns reserve in the third quarter of 2005 and a corresponding increase in net sales from branded pharmaceutical products. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace ® increased by approximately $5.0 million. The effect of the change in estimate on operating income was, therefore, approximately $10.0 million.

Because actual returns related to sales in prior periods were lower than our original estimates, we recorded a decrease in our reserve for returns in each of the first quarter of 2007 and the first quarter of 2006. During the first quarter of 2007, we decreased our reserve for returns by approximately $8.0 million and increased our net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. The effect of the change in estimate on first quarter 2007 operating income was an increase of approximately $5.0 million. During the first quarter of 2006, we decreased our reserve for returns by approximately $8.0 million and increased our net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. The effect of the change in estimate on first quarter 2006 operating income was an increase of approximately $6.0 million. The “Accrual for Returns” table above reflects these adjustments as a reduction in the current provision.

Sales of Key Products

Altace ®

Net sales of Altace ® decreased in 2007 from 2006 primarily due to decreases in prescriptions, partially offset by price increases taken in the fourth quarter of 2006 and the third quarter and fourth quarters of 2007. Total prescriptions for Altace ® decreased approximately 7.1% in 2007 compared to the same period of the prior year according to IMS America, Ltd. (“IMS”) monthly prescription data.

In December 2007, a third party entered the market with a generic substitute for Altace ® capsules. Additional third parties will likely enter the market with their own generic substitutes for Altace ® capsules in 2008. As a result of the entry of generic competition, we expect net sales of Altace ® will decline significantly during 2008. We launched a tablet formulation of Altace ® in February 2008. For a discussion regarding the generic competition for Altace ® , please see Note 19, “Commitments and Contingencies” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.”

Net sales of Altace ® were higher in 2006 than in 2005 primarily due to higher unit sales in 2006 as a result of the effects of wholesale inventory reductions of Altace ® in 2005 and a price increase taken in the fourth quarter of 2005 partially offset by a decrease in prescriptions in 2006 compared to 2005. In addition, net sales during 2005 reflect a reduction in reserves for returns and rebates as discussed above. Total prescriptions for Altace ® decreased approximately 2.2% in 2006 from 2005 according to IMS monthly prescription data.

Skelaxin ®

Net sales of Skelaxin ® increased in 2007 from 2006 primarily due to a price increase taken in the fourth quarter of 2006. During 2006, net sales of Skelaxin ® benefited from a reduction in the rebate reserve for a government pricing program for military dependents and retirees. During 2007, net sales of Skelaxin ® benefited from a favorable change in estimate in the products reserve for returns as discussed above. Total prescriptions for Skelaxin ® decreased approximately 1.6% in 2007 compared to 2006, according to IMS monthly prescription data. We do not anticipate that net sales of Skelaxin ® in 2008 will increase at the same rate experienced in 2007.

Net sales of Skelaxin ® increased in 2006 from 2005 primarily due to a price increase taken in the fourth quarter of 2005, higher unit sales in 2006 as a result of the effect of wholesale inventory reductions of Skelaxin ® in 2005 and a reduction in government rebates partially offset by a decline in prescriptions in 2006 compared to 2005. In addition, net sales during 2005 reflect a reduction in reserves for returns and rebates as discussed above. Total prescriptions for Skelaxin ® decreased approximately 2.1% in 2006 from 2005 according to IMS monthly prescription data.

For a discussion regarding the risk of potential generic competition for Skelaxin ® , please see Note 19 “Commitments and Contingencies” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.”

Thrombin-JMI ®

Net sales of Thrombin-JMI ® increased in 2007 compared to 2006 primarily due to a price increase taken in the fourth quarter of 2006. A competing product entered the market in the fourth quarter of 2007 and another entered the market in the first quarter of 2008. It is likely that net sales of Thrombin-JMI ® will decrease as a result of the entry of these competing products.

Net sales of Thrombin-JMI ® increased in 2006 compared to 2005 primarily due to increases in wholesale inventory levels, a price increase taken in the second half of 2005 and an increase in demand by end users, partially offset by an increase in chargebacks during 2006 compared to 2005.

Avinza ®

We acquired all rights to Avinza ® in the United States, its territories and Canada on February 26, 2007. Net sales of Avinza ® in 2007 reflect sales occurring from February 26, 2007 through December 31, 2007. Total prescriptions for Avinza ® decreased approximately 16.4% in 2007 compared to 2006 according to IMS monthly prescription data. Due to an increase in promotion of Avinza ® , we do not believe prescriptions in 2008 for this product will decline from the level of prescriptions experienced in the fourth quarter of 2007 and we believe they may increase slightly.

For a discussion regarding the risk of potential generic competition for Avinza ® , please see Note 19, “Commitments and Contingencies” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.”

Levoxyl ®

Net sales of Levoxyl ® decreased in 2007 compared to 2006 primarily due to a decrease in prescriptions in 2007 as a result of generic competition partially offset by the effect of an increase in wholesale inventory levels during 2007. During 2006, net sales of Levoxyl ® benefited from a favorable change in estimate of approximately $7.0 million in the product’s reserve for Medicaid rebates as a result of the government pricing investigation settlement, partially offset by a decrease in wholesale inventory levels. This benefit was substantially offset by increases in Medicaid rebate reserves for other products as a result of the settlement. Total prescriptions for Levoxyl ® were approximately 12.4% lower in 2007 compared to 2006 according to IMS monthly prescription data.

Net sales of Levoxyl ® decreased in 2006 compared to 2005 primarily due to a decrease in prescriptions in 2006, partially offset by price increases taken in the fourth quarter of 2005 and changes in wholesale inventory levels. During 2005, net sales of Levoxyl ® benefited from the reduction in the reserve for returns described above and a reduction in the reserve for rebates. As noted above, 2006 net sales of Levoxyl ® benefited from a favorable change in estimate related to Medicaid rebates. Total prescriptions for Levoxyl ® were approximately 16.0% lower in 2006 than in 2005 according to IMS monthly prescription data.

Sonata ®

Net sales of Sonata ® were lower in 2007 than in 2006 primarily due to a decrease in prescriptions partially offset by a price increase taken in the fourth quarter of 2006. Total prescriptions for Sonata ® decreased approximately 20.4% compared to 2006 according to IMS monthly prescription data. The decrease in prescriptions during 2007 was primarily due to new competitors that entered the market in 2005 and a decrease in our promotional efforts. We believe net sales of Sonata ® will decline significantly in future periods due to the anticipated market entry of a generic substitute in the second quarter of 2008.

Net sales of Sonata ® were higher in 2006 than in 2005 primarily due to higher unit sales as a result of wholesale inventory reductions of Sonata ® in 2005 and price increases taken in the fourth quarter of 2005 and the third quarter of 2006, partially offset by a decrease in prescriptions during 2006 compared to 2005. Total prescriptions for Sonata ® decreased approximately 19.6% in 2006 from 2005 according to IMS monthly prescription data. The decrease in prescriptions during 2006 was primarily due to new competitors that entered the market in 2005.

Other

Net sales of other branded pharmaceutical products were higher in 2007 compared to 2006 primarily due to an increase in net sales of Bicillin ® and price increases which were partially offset by decreases in prescriptions. We completed construction of facilities to produce Bicillin ® at our Rochester, Michigan location, began commercial production in the fourth quarter of 2006, and replenished wholesale inventories of the product during the first quarter of 2007. Our other branded pharmaceutical products are not promoted through our sales force and prescriptions for many of these products are declining. We completed the sale of several of our other branded pharmaceutical products to JHP Pharmaceuticals LLC on October 1, 2007. Considering all of these factors, we anticipate net sales of other branded pharmaceutical products will significantly decrease in 2008.

Net sales of other branded pharmaceutical products were higher in 2006 compared to 2005 primarily due to the effects of wholesale inventory reductions in 2005 and price increases which were partially offset by decreases in prescriptions.

Cost of Revenues

Cost of revenues from branded pharmaceutical products increased in 2007 from 2006 primarily due to an increase in royalties associated with Skelaxin ® and Avinza ® and the effects of special items in 2007 associated with Altace ® as discussed below.

Cost of revenues from branded pharmaceutical products increased in 2006 from 2005 primarily due to an increase in royalties associated with Skelaxin ® , the cost of revenues associated with higher unit sales of branded pharmaceutical products in 2006 compared to 2005, and differences in special items which benefited 2005 compared to 2006 as discussed below.

Special items are those particular material income or expense items that our management believes are not related to our ongoing, underlying business, are not recurring, or are not generally predictable. These items include, but are not limited to, merger and restructuring expenses; non-capitalized expenses associated with acquisitions, such as in-process research and development charges and inventory valuation adjustment charges; charges resulting from the early extinguishments of debt; asset impairment charges; expenses of drug recalls; and gains and losses resulting from the divestiture of assets. We believe the identification of special items enhances an analysis of our ongoing, underlying business and an analysis of our financial results when comparing those results to that of a previous or subsequent like period. However, it should be noted that the determination of whether to classify an item as a special item involves judgments by us.

Special items affecting cost of revenues from branded pharmaceuticals during 2007, 2006 and 2005 included the following:


• An inventory valuation allowance that resulted in a charge of $78.8 million for inventories associated with Altace ® in 2007. For additional information please see Note 8, “Inventory,” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.”

• A charge of $25.4 million primarily associated with minimum purchase requirements under a supply agreement to purchase raw material inventory associated with Altace ® in 2007. For additional information please see Note 8, “Inventory,” in Part IV, Item 15(a)(1), “Exhibits and Financial Statement Schedules.”

• A contract termination that resulted in a charge of $3.8 million in 2007.

• A benefit of approximately $6.1 million resulting from the termination of purchase commitments for some of our smaller products which reduced our cost of revenues from branded pharmaceutical products in 2005.

• Product returned as a result of a Levoxyl ® voluntary recall was less than originally estimated. Accordingly, cost of revenues from branded pharmaceutical products in 2005 was reduced by approximately $2.5 million.

We anticipate cost of revenues will decrease in 2008 compared to 2007 due to the launch of a generic substitute for Altace ® in December 2007 by a third party.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following discussion contains certain forward-looking statements that reflect management’s current views of future events and operations. This discussion should be read in conjunction with the following: (a) “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 and in Part II, Item 1A of this report, which are supplemented by the discussion which follows; (b) our audited consolidated financial statements and related notes which are included in our Annual Report on Form 10-K for the year ended December 31, 2007; and (c) our unaudited consolidated financial statements and related notes which are included in this report on Form 10-Q. Please see the sections entitled “Risk Factors” and “A Warning About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.


I. OVERVIEW

Our Business

We are a vertically integrated pharmaceutical company that performs basic research and develops, manufactures, markets and sells branded prescription pharmaceutical products. To capitalize on opportunities in the pharmaceutical industry, we seek to develop, in-license, acquire or obtain commercialization rights to novel branded prescription pharmaceutical products in attractive markets.

Our corporate strategy is focused on specialty-driven markets, particularly neuroscience, hospital and acute care. We believe each of our targeted markets has significant market potential and our organization is aligned accordingly. We work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and product life-cycle management. We also work to achieve organic growth through the successful development of new branded pharmaceutical products. Additionally, we seek to achieve growth through the acquisition or in-licensing of novel branded pharmaceutical products in various stages of development and technologies that have significant market potential that complement our neuroscience, hospital and acute care medicine platforms. We may also seek company acquisitions which add products or products in development, technologies or sales and marketing capabilities in our target markets or that otherwise complement our operations.

Utilizing our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in developing and commercializing innovative, clinically-differentiated therapies and technologies in our target, specialty-driven markets.

Our business consists of five segments: branded pharmaceuticals, Meridian Auto-Injector, royalties, contract manufacturing and other. Our branded pharmaceutical products are divided into the following categories:


• neuroscience (including Skelaxin ® , Avinza ® and Sonata ® ),

• hospital (including Thrombin-JMI ® and Synercid ® ),

• acute care (including Bicillin ® and Intal ® ), and

• legacy products (including Altace ® , Levoxyl ® and Cytomel ® ).

Our Meridian Auto-Injector segment includes EpiPen ® , a commercial product, and nerve gas antidotes which we provide to the U.S. military. Our royalties segment relates to revenues we derive from successfully developed products that we have licensed to third parties.

Recent Developments

Tender Offer to Acquire Alpharma

On September 12, 2008, we commenced a tender offer, through a wholly–owned subsidiary, to acquire all of the outstanding shares of Class A Common Stock of Alpharma Inc. for $37 per share in cash. This price represents a total equity value of approximately $1.6 billion and an enterprise value of approximately $1.4 billion. On September 26, 2008, Alpharma’s Board of Directors recommended that Alpharma’s stockholders reject the offer and not tender their shares to us. The tender offer was originally scheduled to expire at 5:00 pm, New York City time, on Friday, October 10, 2008. We subsequently extended the tender offer until 5:00 pm, New York City time, on November 21, 2008.

Alpharma is a branded specialty pharmaceutical company with a growing branded pharmaceutical franchise in the U.S. pain market with its Kadian ® capsules (morphine sulfate extended-release), Flector ® Patch (diclofenac epolamine topical patch) 1.3%, and a pipeline of new pain medicines led by Embeda tm , a formulation of long-acting morphine that is designed to provide controlled pain relief and deter common methods of abuse. Alpharma is also a provider of feed additives for poultry and livestock.

We believe the combination of our company and Alpharma would create a stronger foundation for sustainable, long term growth enabling us to better address the changes facing the healthcare industry. For example, we believe such a combination would deliver compelling benefits such as greater scale and commercialization capabilities, enabling the combined company to maximize the potential of its currently marketed products. These enhanced capabilities are also beneficial to the successful launch of new products, such as Remoxy ® and Acurox ® Tablets, and Alpharma’s Embeda tm . These products are focused on the treatment of pain and are designed to resist or deter common methods of abuse that are associated with currently available products. These products are also complementary, as Remoxy ® is a unique long-acting formulation of oral oxycodone, Acurox ® Tablets is a short-acting, immediate-release formulation of oxycodone HCI, niacin and functional inactive ingredients, and Embeda tm , as previously mentioned, is a long-acting formulation of morphine. Another key benefit of the proposed combination is that it would provide greater diversification to our business. Much like our Meridian Auto-Injector segment, which manufactures EpiPen ® , the addition of Alpharma’s Animal Health division has the potential to be an additional source of cash flow to fuel future strategic initiatives.

On September 26, 2008, we received a Request for Additional Information and Documentary Material (a “Second Request”) from the U.S. Federal Trade Commission (“FTC”) in connection with its review of the tender offer. The effect of the Second Request is to extend the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, until 10 days after we have substantially complied with the request, unless that period is extended voluntarily by us or terminated sooner by the FTC. We are cooperating fully with the FTC.

On October 3, 2008, we and Alpharma entered into a confidentiality agreement allowing us access to certain non-public information regarding Alpharma and we commenced our review of the information on October 4, 2008. The confidentiality agreement does not restrict our ability to conduct the tender offer or a consent solicitation.

Remoxy ®

On June 10, 2008, the New Drug Application (“NDA”) for Remoxy ® was submitted to the U.S. Food and Drug Administration (“FDA”). The Remoxy ® NDA was accepted and granted priority review by the FDA. The FDA typically grants priority review to drug candidates that have the potential to demonstrate significant improvements compared to marketed products. The FDA goal for completing review of a drug with Priority Review status is six months from the date the application was submitted. An FDA advisory committee is scheduled to discuss Remoxy ® at a public meeting on November 13, 2008. We are preparing to begin marketing Remoxy ® in the first quarter of 2009 pending approval of the NDA by the FDA.

In August 2008, we and Pain Therapeutics presented the final data set of a previously announced pivotal Phase III study of Remoxy ® . The final data confirm that Remoxy ® provides effective around-the-clock analgesia within a patented formulation designed to resist common methods of misuse and abuse. The companies also presented results of a previously unpublished alcohol interaction study. In this study, human volunteers consumed Remoxy ® 40 mg with up to eight ounces of 80-proof alcohol to simulate the amount of alcohol consumed in a ‘binge drinking’ session. Results confirm that Remoxy ® ’s formulation resists dissolution in alcohol.

Remoxy ® , a unique long-acting formulation of oral oxycodone for moderate to severe chronic pain, uses extraction-resistant technology, a unique physical barrier that is designed to provide controlled pain relief and resist common methods used to extract the opioid more rapidly than intended as can occur with currently available products. Common methods used to cause a rapid extraction of the opioid include crushing, chewing, or dissolution in alcohol. These methods are typically used to cause failure of the controlled release dosage form, resulting in “dose dumping” of oxycodone, or the immediate release of the active drug.

Purdue Pharma L.P. (“Purdue”) submitted an NDA for a reformulated version of its long-acting oxycodone product. Purdue claims that the reformulated product is less susceptible to some common methods of abuse than its currently marketed formulation. If approved, this product would compete with Remoxy ® , as would a number of other products. An FDA advisory committee considered some aspects of Purdue’s NDA at a public meeting in early May 2008 and expressed a variety of concerns. We are uncertain as to whether or when the FDA will approve Purdue’s reformulated product. In June 2008, Purdue submitted a Citizen Petition with the FDA, which Purdue supplemented in October 2008, in an apparent effort to challenge the Remoxy ® NDA filing.

Acurox ® Tablets

In October 2008, we, together with Acura Pharmaceuticals, Inc., reported top-line results from a Phase II assessment of the abuse liability potential of Acurox ® (oxycodone HCl/niacin) Tablets in 30 subjects with a history of opioid abuse. The Phase II results demonstrate that Acurox ® Tablets are disliked compared to oxycodone HCl tablets alone when excess doses are swallowed. As previously reported, in June 2008, we and Acura reported positive top-line results from the pivotal Phase III clinical trial evaluating Acurox ® Tablets. The Phase III study met its primary endpoint, pain relief compared to placebo, as prospectively defined by the FDA during the Special Protocol Assessment. We and Acura expect to submit a New Drug Application for Acurox ® Tablets to the FDA by the end of 2008.

Acurox ® Tablets, a short-acting, immediate-release tablet, is a composition of oxycodone HCl, niacin and functional inactive ingredients and is intended to relieve moderate to severe pain while resisting or deterring common methods of prescription drug misuse and abuse, including intravenous injection of dissolved tablets, nasal snorting of crushed tablets and intentional swallowing of excessive numbers of tablets. The properties that potentially enable the product to resist or deter common methods of misuse and abuse are provided by Acura’s proprietary Aversion ® Technology.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2008 and 2007

Gross sales were lower in the third quarter of 2008 compared to the third quarter of 2007 and in the first nine months of 2008 compared to the first nine months of 2007 primarily due to a decrease in gross sales of Altace ® , partially offset by increases in gross sales of Avinza ® , which we acquired on February 26, 2007, and the Meridian Auto-Injector segment. During December 2007 a competitor entered the market with a generic substitute for Altace ® and additional generic competitors entered the market in June 2008.

Based on inventory data provided to us by our customers, we believe that wholesale inventory levels of our key products, Skelaxin ® , Thrombin-JMI ® , Altace ® , Avinza ® , and Levoxyl ® are at or below normalized levels as of September 30, 2008. We estimate that wholesale and retail inventories of our products as of September 30, 2008 represent gross sales of approximately $115.0 million to $125.0 million.


A competitor entered the market with a generic substitute for Altace ® during December 2007 and additional competitors entered the market in June 2008. As a result of this competition, sales of Altace ® and utilization of Altace ® by rebate-eligible customers decreased in each quarter of 2008. The significant decrease in utilization of Altace ® by rebate-eligible customers has significantly decreased the “current provision related to sales made in the current period” in the table above. As Altace ® sales continue to decline, we expect rebate payments to continue to exceed the current provision as shown in the table above. Rebate payments are made to rebate eligible customers approximately one quarter after the utilization. When Altace ® sales stabilize, we anticipate our rebate payments will more closely approximate our current provision for rebates. For a discussion regarding Altace ® net sales, please see “Altace ® ” within the “Sales of Key Products” section below.

Our calculation for Medicaid, Medicare and commercial rebate reserves are based on estimates of utilization by rebate-eligible customers, estimates of the level of inventory of our products in the distribution channel that remain potentially subject to those rebates, and the terms of our rebate obligations. During the first quarter of 2008, we estimated the effect that the initial generic substitute would have on Altace ® utilization by rebate-eligible customers. Actual Altace ® rebates for the first quarter were lower than originally anticipated, resulting in a change in estimate during the second quarter of 2008. This change in estimate resulted in a decrease in rebate expense of approximately $5.0 million and a corresponding increase in Altace ® net sales in the second quarter of 2008 and is included in the “current provision related to sales made in prior periods” in the table above. As a result of this increase in net sales, the co-promotion expense related to net sales of Altace ® in the second quarter of 2008 increased by approximately $1.0 million. Accordingly, the effect of the change in estimate on second quarter 2008 operating income was an increase of approximately $4.0 million, fully offsetting the effect of the estimate in the first quarter of 2008.

Sales of Key Products

Skelaxin ®

Net sales of Skelaxin ® increased in the third quarter and first nine months of 2008 from the third quarter and first nine months of 2007 primarily due to a price increase taken in the fourth quarter of 2007 and decreases in wholesale inventory levels during 2007, partially offset by a decrease in prescriptions. During the first nine months of 2007, net sales of Skelaxin ® benefited from a favorable change in estimate during the first quarter of 2007 in the product’s reserve for returns as discussed above. Due to increased competition, total prescriptions for Skelaxin ® decreased approximately 13.6% and 11.2% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year according to IMS Health Incorporated (“IMS”) monthly prescription data. We believe 2008 Skelaxin ® net sales will approximate 2007 net sales.

For a discussion regarding the risk of potential generic competition for Skelaxin ® , please see Note 8, “Commitments and Contingencies,” in Part I, Item 1, “Financial Statements.”

Thrombin-JMI ®

Net sales of Thrombin-JMI ® decreased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to price concessions. A competing product entered the market in the fourth quarter of 2007 and another entered the market in the first quarter of 2008. We believe net sales of Thrombin-JMI ® will continue to decrease due to additional price concessions as a result of these competing products.

Altace ®

Net sales of Altace ® decreased significantly in the third quarter and first nine months of 2008 from the third quarter and first nine months of 2007 primarily due to a competitor entering the market in December 2007 and additional competitors entering the market in June 2008 with generic substitutes for Altace ® capsules. During the third quarter of 2008, net sales of Altace ® benefited by approximately $4.0 million as a result of a reduction in the reserve for rebates due to changes in wholesale inventory channels and actual rebate payments for the second quarter of 2008 being lower than originally estimated. As a result of the entry of generic competition, we expect net sales of Altace ® to continue to decline in the future. Total prescriptions for Altace ® decreased approximately 88.3% and 69.0% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year, according to IMS monthly prescription data.

For a discussion regarding generic competition for Altace ® , please see Note 8, “Commitments and Contingencies” in Part I, Item 1, “Financial Statements.”

Avinza ®

We acquired all rights to Avinza ® in the United States, its territories and Canada on February 26, 2007. Net sales of Avinza ® increased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to a price increase taken in the fourth quarter of 2007 and an increase in prescriptions. Net sales of Avinza ® in the first nine months of 2007 reflect sales occurring from February 26, 2007 through September 30, 2007. Total prescriptions for Avinza ® increased approximately 8.4% and 2.6% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year according to IMS monthly prescription data.

On March 24, 2008, we received a letter from the United States Food and Drug Administration, Division of Drug Marketing, Advertising, and Communications (“DDMAC”) regarding promotional material for Avinza ® that was created and submitted to the DDMAC by Ligand Pharmaceuticals (the company from which we acquired Avinza ® ). The letter expressed concern with the balance of the described risks and benefits associated with the use of the product and the justification for certain statements made in the promotional material. King discontinued the use of promotional materials created by Ligand prior to receiving the letter and has communicated this to DDMAC. In addition, DDMAC has requested support for certain statements included in Avinza ® promotional materials currently used by King. King has responded to this request and has requested a meeting with DDMAC to discuss this matter.

For a discussion regarding the risk of potential generic competition for Avinza ® , please see Note 8, “Commitments and Contingencies” in Part I, Item 1, “Financial Statements.”

Levoxyl ®

Net sales of Levoxyl ® decreased in the third quarter of 2008 and first nine months of 2008 compared to the same periods in the prior year primarily due to a decrease in prescriptions in 2008 as a result of generic competition, partially offset by a price increase taken in the fourth quarter of 2007. In addition, net sales of Levoxyl ® decreased in the first nine months of 2008 compared to the first nine months of 2007 as a result of decreases in the wholesale inventory levels in the first quarter 2008. Total prescriptions for Levoxyl ® decreased approximately 7.1% and 4.6% in the third quarter of 2008 and the first nine months of 2008, respectively, compared to the same periods of the prior year according to IMS monthly prescription data.

Other

The branded pharmaceutical products included in other branded pharmaceutical products are not promoted through our sales force and prescriptions for many of our products included in this category are declining. Net sales of other branded pharmaceutical products were lower in the third quarter and first nine months of 2008 compared to the third quarter and first nine months of 2007 primarily due to the sale of several of our other branded pharmaceutical products to JHP Pharmaceuticals LLC (“JHP”) on October 1, 2007, and lower net sales of Sonata ® and Bicillin ® .

Net sales of Sonata ® were lower in the third quarter and the first nine months of 2008 compared to the same periods in the prior year primarily due to competition entering the market with generic substitutes for Sonata ® . The composition of matter patent covering Sonata ® expired in June 2008, at which time several competitors entered the market with generic substitutes.

We completed construction of facilities to produce Bicillin ® at our Rochester, Michigan location, began commercial production in the fourth quarter of 2006 and replenished wholesale inventories of the product during the first quarter of 2007. As a result of this replenishment, we believe that net sales of Bicillin ® in 2007 exceeded demand. Prior to the first quarter of 2007, Bicillin ® was in short supply. We believe net sales of other branded pharmaceutical products will continue to decline.

Cost of Revenues

Cost of revenues from branded pharmaceutical products decreased in the third quarter and first nine months of 2008 compared to the third quarter and first nine months of 2007 primarily due to lower unit sales of Altace ® and the sale of several of our other branded pharmaceutical products to JHP, partially offset by an increase in unit sales of Avinza ® due to the acquisition of this product on February 26, 2007.

Special items are those particular material income or expense items that our management believes are not related to our ongoing, underlying business, are not recurring, or are not generally predictable. These items include, but are not limited to, merger and restructuring expenses; non-capitalized expenses associated with acquisitions, such as in-process research and development charges and inventory valuation adjustment charges; charges resulting from the early extinguishments of debt; asset impairment charges; expenses of drug recalls; and gains and losses resulting from the divestiture of assets. We believe the identification of special items enhances an analysis of our ongoing, underlying business and an analysis of our financial results when comparing those results to that of a previous or subsequent like period. However, it should be noted that the determination of whether to classify an item as a special item involves judgments by us.

Special items affecting cost of revenues from branded pharmaceutical products included the following:


• A charge of $2.6 million in the in the second quarter of 2008 primarily associated with minimum purchase requirements under a supply agreement to purchase raw materials associated with Altace ® .

• A charge of $3.8 million in the second quarter of 2007 related to the termination of certain contracts.

• An inventory valuation allowance of $17.3 million for raw material inventory associated with Altace ® and a charge of $39.9 million for the write-down of prepaid raw material inventory associated with Altace ® in the third quarter of 2007. For additional information, please see Note 4, “Inventories,” in Item 1, “Financial Statements.”

• A charge of $24.6 million primarily associated with minimum purchase requirements under a supply agreement to purchase raw material inventory associated with Altace ® in the third quarter of 2007. For additional information, please see Note 4, “Inventories,” in Item 1, “Financial Statements.”

CONF CALL

James E. Green - Executive Vice President, Corporate Affairs

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us today to discuss our financial results for the third quarter ended September 30th, 2008.

Joining me today are Brian Markison, Chairman, President and Chief Executive Officer of King; Joe Squicciarino, King's Chief Financial Officer; and other members of our management team.

Initially, I will note that today's call is copyrighted material of King Pharmaceuticals and no portion of this call may be rebroadcast, published or otherwise disseminated without the company's prior express written consent. Also, reports and discussions during this conference call may contain forward-looking statements that reflect management's current view of future events and operations, including, but not limited to, statements pertaining to expectations regarding our product development pipeline, our plan to maximize the potential of our existing products, our future financial results and our strategy for long-term growth.

Forward-looking statements involve certain significant risks and uncertainties, and actual results may differ materially. Certain factors that may cause actual results to differ materially from the forward-looking statements are discussed in the company's press release issued this morning, November 6th, 2008, and in the Risk Factors section and other sections of the company's Form 10-K for the year ended December 31, 2007, and Form 10-Q for the quarter ended June 30, 2008, which are on file with the SEC.

King does not undertake to publicly update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized.

Under Generally Accepted Accounting Principles, known as GAAP, net earnings and diluted earnings per share include special items. In addition to our financial results determined in accordance with GAAP, King provides its net earnings and diluted earnings per share results excluding special items. These non-GAAP financial measures exclude special items, which our management considers to be those items that do not relate to the company's ongoing underlying business, are non-recurring or are not generally predictable. Examples of these are listed in the About Special Items section of our press release issued this morning.

We believe the identification of special items enhances the analysis of our company's ongoing underlying business and of our company's financial results when comparing results to those of a previous or subsequent like period. However, it should be noted that the determination of whether to classify an item as a special item involves judgments by our management.

The specifics of special items affecting the third quarter and reconciliation of non-GAAP financial measures to GAAP can be found in this morning's press release.

During the Q&A session which will follow our prepared remarks, we request that you limit your questions to our ongoing business, as we will not be taking any questions today with respect to the Alpharma tender offer.

Now, I will turn the call over to Brian Markison, Chairman, President and Chief Executive Officer of King. Brian?

Brian A. Markison - Chairman of the Board, President and Chief Executive Officer

Good morning, ladies and gentlemen, and thank you for joining us today.

We are pleased to report that during the quarter, our promoted branded products and our Meridian Auto-Injector business generated solid revenue and contributed strong cash flow. Additionally, we further advanced key research and development programs and launched our initiative to acquire Alpharma in order to substantially improve our prospects for long-term growth.

In August, the NDA for REMOXY was accepted and granted priority review by the FDA. We and our partner, Pain Therapeutics, are looking forward to reviewing the REMOXY NDA with the FDA Advisory Committee next Thursday. We're also diligently preparing to begin marketing REMOXY in early 2009, pending approval of the new drug application.

With respect to our short-acting opioid platform, last month, we and our partner, Acura Pharmaceuticals, reported encouraging data from a Phase II assessment of the abuse liability potential of ACUROX tablets. This complements the pivotal Phase III clinical trial that earlier this year met its primary endpoint as set forth in the Special Protocol Assessment with the FDA. As a result, we're on track to submit the ACUROX tablets NDA to the FDA by the end of this year.

The issue of misuse, abuse and diversion of opioid analgesics is recognized as a significant public health problem. Given this, we continue to believe that the market will shift to formulations that resist and/or deter common methods of abuse.

REMOXY and ACUROX represent important potential advances in meeting the pain management needs of patients and prescribers concerned with addressing the risks of prescription pain medicine misuse and abuse within our communities. As a result, we believe REMOXY, ACUROX and other potential products arising from our collaborations with Pain Therapeutics and Acura represent significant near-term and long-term revenue opportunities for our company.

As a reminder, we have the right to develop up to four long-acting products under the Pain Therapeutics collaboration and are currently developing three short-acting products under our agreement with Acura.

Our market research show that's a 5% share of the immediate and extended-release opioid market could translate into annual revenues of approximately $700 million at branded pricing.

Also, on September 12th, we commenced our tender offer for all of the outstanding common shares of Alpharma. As announced on October 6th, we have entered into a confidentiality agreement with Alpharma so we are limited in what we can say at this point in time. We continue to believe that combining Alpharma with our company would create a strong platform for sustainable long-term growth and we remain excited about the prospects of this potential transaction.

Now, I would like to turn the call over to Joe Squicciarino, our Chief Financial Officer for the purpose of reviewing our financial results for the third quarter in greater detail.

Joseph Squicciarino - Chief Financial Officer

Thank you, Brian and good morning everyone. Based on our third quarter results, we're on track to meet key financial goals that we established at the beginning of this year, particularly cash flow from operations of $400 million to $450 million and SG&A savings of $75 million to $90 million compared to last year.

With revenues totaling $388 million during the quarter, our cash flow from operations was $112 million during the quarter for a total of $350 million for the first nine months of this year. Net revenue from our branded pharmaceuticals segment totaled $302 million during the quarter, compared to $472 million in the same quarter of last year.

This decrease as you know was primarily due to the market entry of the first generic substitute for Altace in December 2007. However, we continue to see consistent performance from our key promoted products including Skelaxin, Thrombin-JMI and Avinza. In fact, Avinza total prescriptions increased in excess of 8% during the third quarter of 2008 compared to the third quarter of last year.

Total revenues during the quarter also include $68 million from our Meridian Auto-Injector business and Adenoscan royalties of $18 million. Revenue from our Meridian business benefited from higher unit sales of EpiPen and higher unit sales of other products to various government agencies.

Note that there is seasonality in EpiPen demand and as always variability from quarter to quarter in the timing of orders from various government agencies for our other auto-injector products. Accordingly, we did not expect our Meridian business to contribute revenue at this level in the fourth quarter.

Our gross margin excluding special items was approximately 74% in the third quarter and we continue to expect a full year gross margin of 75%. Total selling general and administrative expense excluding special items and our co-promotion fee for Altace was $100 million in the third quarter of 2008 compared to $135 million last year.

Depreciation and amortization excluding special items totaled $29 million in the third quarter. Research and development expense equaled $34 million. We are currently estimating that our full year 2008 R&D investment will approximate that of last year. Our effective tax rate for the third quarter was approximately 34%.

Moving to diluted earnings per share for the third quarter GAAP EPS was $0.34 while EPS excluding special items was $0.33.

In closing it is important to note that our unrestricted cash and cash equivalents totaled approximately $1.2 billion as of September 30, 2008 as cash from continuing operations for the third quarter totaled $112 million.

Now, I would like to turn the call back over to the operator for question and answers session. As Jim indicated at the start of this call, we will not be taking any questions today with respect to our proposed transaction with Alpharma and request that you limit your questions to our ongoing business. Operator?

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