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Article by DailyStocks_admin    (09-03-08 05:04 AM)

Filed with the SEC from Aug 21 to Aug 27:

Alpharma (ALO)
Mario Gabelli's Gamco Investors (GBL) owns 2,109,740 shares (5.05%), after buying 291,400 from June 30 to Aug. 25 at $21.60 to $35.07 a share.

BUSINESS OVERVIEW

GENERAL


Alpharma is a global specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products for humans and animals. The Company markets two branded pharmaceutical prescription products that are manufactured by third-parties, an extended release morphine sulfate pain medication sold under the trademark KADIAN, in the U.S. and a topical non-steroidal anti-inflammatory ("NSAID") patch product sold in the U.S., beginning in January 2008, under the trademark FLECTOR. The Company manufactures and markets a line of fermentation-based active pharmaceutical ingredients and one chemically synthesized active pharmaceutical ingredient (collectively "APIs") that are used primarily by third parties in the manufacture of finished dose products. The Company manufactures and markets animal health products, consisting primarily of medicated feed additives ("MFAs") and water soluble therapeutics for production animals, principally poultry, cattle and swine.

The Company presently conducts business in more than 80 countries and has approximately 2,000 employees in over 20 countries. For the year ended December 31, 2007, the Company reported revenues of approximately $722.4 million.

On February 6, 2008, the Company announced that it had entered into an agreement to sell its Active Pharmaceutical Ingredients business to certain investment funds managed by 3i, a global private equity and venture capital company. The transaction is expected to close in the second quarter of 2008, pending regulatory approvals and other customary closing conditions.

Formation

The Company is incorporated in Delaware. The Company was originally organized as A.L. Laboratories, Inc., a wholly owned subsidiary of Apothekernes Laboratorium A.S., a Norwegian healthcare company (the predecessor company to A.L. Industrier ASA; formerly Alpharma's controlling stockholder). In 1994, the Company acquired the complementary human pharmaceutical and animal health business of its parent company and subsequently changed its name to Alpharma Inc. to operate worldwide as one corporate entity .

Repurchase of Class B Shares; Elimination of Controlling Stockholder

Until December 28, 2006, A.L. Industrier ASA ("Industrier") beneficially owned all of the outstanding shares of the Company's Class B common stock, or approximately 22% of the Company's total common stock as of such date. Through its ownership of the Class B common stock, Industrier had voting power that provided it with effective control of the Company. On December 28, 2006, two of the Company's wholly owned subsidiaries purchased 100% (11,872,897 shares) of the outstanding shares of the Company's Class B common stock from Industrier at a price of $25.50 per share. Including related fees, the cost of the repurchase was approximately $307.4 million, which was paid using available cash on hand. Following the Class B share repurchase, control of the Company now rests in the holders of the Class A shares acting by the majority applicable under Delaware law and the Company's charter documents.

Discontinued Operations

On December 19, 2005, the Company sold its worldwide human generics pharmaceutical business (the "Generics Business"), excluding ParMed Pharmaceuticals Inc. ("ParMed"), its generics pharmaceutical telemarketing distribution unit, to Actavis Group hf ("Actavis") for cash in the amount of $810 million. The form of this transaction included the sale of all of the Company's subsidiaries that were, as of the closing of the transaction, engaged solely in the Generics Business and a transfer of the assets and liabilities related to the Generics Business from those subsidiaries of the Company that, as of the closing of the transaction, engaged in both the Generics Business and other businesses of the Company.

As a result of the Generics Business transaction, substantially all of the material liabilities (including without limitation, claims, lawsuits and other contingent liabilities) of the Generics Business were transferred to Actavis or entities owned by Actavis. The Company made certain representations and warranties to Actavis regarding the Generics Business as a part of the transaction, and subject to certain limitations, agreed to indemnify Actavis to the extent that such representations and warranties were incorrect. In addition, the Company retained liability for certain specified liabilities which the Company believes are not, in the aggregate, material to the Company and may be held responsible for certain liabilities of the Generics Business transferred to Actavis in the event that Actavis fails to or is unable to satisfy such liabilities. The financial statements contained in this 10-K Report present the Generics Business as a discontinued operation.

On March 31, 2006, the Company sold ParMed, its generics pharmaceutical telemarketing distribution business, to Cardinal Health for cash in the amount of $40.1 million. ParMed is presented in the financial statements contained in this 10-K Report, as a discontinued operation.

As such, throughout this 10-K Report, "Discontinued Operations" refers to the Generics Business and ParMed. For further information on the Discontinued Operations, see the discussion of Discontinued Operations in Item 7 of this 10-K Report, and see Note 3 to the Consolidated Financial Statements included in Item 8 of this 10-K Report.

Management and Financial Reporting Structure

The Company operates in the human and animal pharmaceuticals industries and has three businesses within these industries: Pharmaceuticals, Active Pharmaceutical Ingredients ("API") and Animal Health ("AH").

NARRATIVE DESCRIPTION OF BUSINESS

PHARMACEUTICALS ("Pharmaceuticals")

Pharmaceuticals is focused primarily on the prescription pain management market in the United States. It markets two branded pharmaceutical prescription products, an extended release morphine sulfate pain medication sold in the U.S. under the trademark KADIAN and a NSAID patch product sold in the U.S. beginning in January 2008, under the trademark FLECTOR. Both drugs are manufactured by third parties. For the year ended December 31, 2007, Pharmaceuticals had product sales, consisting solely of KADIAN, of approximately $167.7 million and an operating loss of approximately $61.5 million, which includes a $60.0 million upfront payment to IDEA for the exclusive U.S. license rights to ketoprofen in TRANSFERSOME gel. KADIAN accounted for approximately 23% of the Company's total revenues in 2007 and all of Pharmaceuticals' revenues.

Product Lines. KADIAN is an extended release morphine sulfate product that, until June 2006, F.H. Faulding & Co. Limited (now integrated with Mayne Group Limited) licensed to Pharmaceuticals pursuant to a perpetual, royalty-free license. During the second quarter of 2006, Mayne Nickless Limited assigned the patent rights to Pharmaceuticals. In October, 2006, the Company received FDA approval for KADIAN 80 mg dosage strength and launched this line extension in the fourth quarter of 2006. In February 2007, the Company received FDA approval for KADIAN 200 mg dosage strength and launched this line extension during the second quarter of 2007. In February 2007, the Company also received FDA approval for KADIAN 10 mg dosage strength and launched this line extension during the third quarter of 2007.

FLECTOR Patch is the first prescription topical NSAID approved by the FDA in the U.S. Patent-protected FLECTOR Patch delivers anti-inflammatory and analgesic effects of diclofenac epolamine and is indicated for the topical treatment of acute pain due to minor strains, sprains, and contusions. During the third quarter of 2007, the Company obtained exclusive license and distribution rights from Institut Biochimique SA ("IBSA"), a privately-owned, global pharmaceutical company headquartered in Lugano, Switzerland, to market FLECTOR Patch in the United States. The Company launched FLECTOR Patch in the U.S. in January 2008.

As part of the agreement entered into with IBSA in the third quarter of 2007, the Company also received exclusive U.S. license and distribution rights to TIROSINT gel capsules containing levothyroxine sodium for thyroid hormone replacement therapy, approved by the FDA in 2006. TIROSINT gel capsules are indicated for use as replacement or supplemental therapy in congenital or acquired hypothyroidism of any etiology, the treatment or prevention of various types of euthyroid goiters, and as an adjunct to surgery and radioiodine therapy in the management of thyroptropin-dependent well differentiated thyroid cancer. The Company is evaluating the optimum means to commercialize the product.

In March 2007, the Company entered into an exclusive development and license agreement with Tris Pharm, Inc. ("Tris"), a privately owned specialty pharmaceutical company, pursuant to which the Company gained access to Tris' novel and proprietary drug delivery platform for sustained release products. The Company is evaluating this technology to develop certain products that would be complementary to KADIAN.

The Company's Pharmaceuticals business is actively working on the development of new pain products which, if successful, would include a technology designed to deter abuse. During the fourth quarter of 2007, Pharmaceuticals reported positive results from its Phase III double-blind, randomized, placebo-controlled pivotal efficacy trial for EMBEDA, its investigational abuse deterrent extended-release morphine product. The trial of over 500 patients demonstrated that EMBEDA delivered statistically significant pain relief versus placebo. Pharmaceuticals is targeting the filing of a New Drug Application (NDA) in the first quarter of 2008 for EMBEDA. The Company expects significant research and development investment in 2008 in support of its abuse-deterrent opioid product development programs as well as investment in support for the launch and optimized commercialization of FLECTOR Patch. See "Research, Product Development and Technical Activities" and "Risk Factor - The Company's products and future products are based on technologies in areas where third parties hold numerous patents".

In response to a general inquiry by the FDA regarding alcohol interaction with opioids, the Company conducted in vivo studies to evaluate the interaction of alcohol consumption with KADIAN. The results indicated that the concomitant use of tested levels of alcohol with KADIAN has no significant impact on mean morphine blood levels. The Company provided this data to the FDA. Based upon its review, in February 2007 the FDA indicated that the KADIAN label did not require any further modifications. Pharmaceuticals has conducted a study to evaluate the interaction of alcohol consumption with EMBEDA and will provide this data to the FDA as part of its NDA filing.

In addition to the abuse-deterrent technology described above, the Company expanded and enhanced its Pharmaceuticals' product pipeline in 2007 by licensing the exclusive U.S. rights to ketoprofen in TRANSFERSOME gel, a prescription topical NSAID in Phase III clinical development, from IDEA, a biopharmaceutical company headquartered in Munich, Germany. This license includes access to IDEA's innovative TRANSFERSOME technology platform that delivers drugs locally to targeted areas. The Company is targeting a product launch in 2011. See "Risk Factors - The Company depends on development, manufacture and marketing of new products for its future success" and "The Company could have difficulties in developing and integrating strategic alliances, co-development opportunities and other relationships".

Facilities. KADIAN capsules are manufactured under a toll manufacturing agreement with Actavis Elizabeth LLC ("Actavis"), successor to Purepac Pharmaceutical Co., the former subsidiary of the Company purchased by Actavis as a part of the Company's sale of the Generics Business. The Company is in the process of securing a second source for the manufacture of KADIAN. Actavis is, at present, its sole supplier. FLECTOR Patch is supplied to the Company by IBSA. The product is manufactured for IBSA by Teikoku Seiyaku Co. Ltd., a third party contract manufacturer located in Japan. Pharmaceuticals' headquarters are currently located in Piscataway and Bridgewater, New Jersey.

Competition. Pharmaceuticals operates in a highly competitive, price-sensitive market. Pharmaceuticals' products compete with pain management products manufactured by generics pharmaceutical manufacturers and worldwide research-based brand drug companies. As the Company expands its Pharmaceuticals portfolio product line, it expects to encounter continued competition. Pharmaceuticals' principal competitors include: King Pharmaceuticals Inc., Purdue Frederick, Endo Pharmaceuticals, and Pfizer, Inc.

Sales, Distribution and Customers. The Company has a sales organization for Pharmaceuticals products comprised of its own internal sales force and a contract sales force. Pharmaceuticals has employed a sales force of approximately 400 sales representatives (although the actual number of representatives will vary from time to time based upon resignations and other normal personnel actions), an increase from approximately 190 sales representatives in 2006. The Company also contracts with Ventiv Commercial Services, LLC, a sales organization, for the services of approximately 130 contract sales representatives (full time and part time representatives) to market the FLECTOR Patch. Pharmaceuticals focuses its sales and marketing efforts on the pain specialists who are likely to be the most active writers of prescriptions for KADIAN and focuses on pain specialists, primary care physicians, orthopedic surgeons, and sports medicine physicians for its marketing efforts for FLECTOR Patch. Pharmaceuticals predominately sells its pharmaceutical products to major wholesalers. The Company has entered into distribution service agreements with certain of these companies.

ACTIVE PHARMACEUTICAL INGREDIENTS ("API")

The Company's API business develops, manufactures and markets a line of fermentation-based active pharmaceutical ingredients and one chemically synthesized active pharmaceutical ingredient that are used, primarily by third parties, in the manufacture of finished dose pharmaceutical products.

The Company's API business benefits from over four decades of experience in the use and development of fermentation and purification technology. For the year ended December 31, 2007, API had product sales of approximately $187.6 million and operating income of approximately $34.0 million.

On February 6, 2008, the Company announced that it entered into an agreement to sell its API business to certain investment funds managed by 3i, a global private equity and venture capital company, for $395 million in cash. The final purchase price is subject to adjustment based on the closing net cash balance and working capital of the business. The transaction is expected to close in the second quarter of 2008, pending regulatory approvals and other customary closing conditions.

Product Lines. The Company's API business markets and sells 14 APIs, primarily antibiotics. These APIs constitute the active substances in certain pharmaceuticals for the treatment of some skin, throat, intestinal and systemic infections. The Company is a leading producer of bacitracin, polymyxin, and vancomycin, all of which are important pharmaceutical-grade antibiotics. The Company's API business also manufactures other antibiotic active substances such as tobramycin, colistin and colistin methanesulfonate, and amphotericin B, a parenteral grade antifungal. The primary applications for the API products are injectable and specialized topical and human surgical finished product applications. API owns European marketing authorizations for vancomycin vial and capsule finished products that are manufactured (using the Company's vancomycin) and distributed for the Company by third parties.

The Company has several growth initiatives related to API. API has initiated a program of new product launches (commercial sales of product) that began in 2005 with the launch of tobramycin and continued with the launch of fluticasone and teicoplanin in non-regulated markets in the third quarter of 2006, mupirocin acid in the fourth quarter of 2006 and mometasone in the fourth quarter of 2007.

In the second quarter of 2006, API reached agreement with Hisun Pharmaceutical Co., Ltd., a Chinese supplier, that, subject to regulatory approvals, is expected to enable the Company to expand the manufacturing capacity of one of its current major products, vancomycin, over the next several years. During the third quarter of 2006, the Company commenced the sale of vancomycin manufactured at the Hisun facility into limited markets, and began enhancing the site's manufacturing processes in preparation for regulatory approvals. In 2007, API finalized its collaboration with Hisun pursuant to which Hisun commenced the construction of a new plant located in Taizhou, China for the manufacturing of vancomycin. The Taizhou plant, subject to the regulatory approval process, will be owned and operated by the Company and will incorporate certain technology purchased from Hisun, in addition to certain API technology. The new facility is expected to be completed in the first half of 2008.

Another of API's main expansion initiatives is forward integration into the injectable finished product form of several of its APIs. The Company is in the process of expanding its Copenhagen facility to meet capacity requirements for this new initiative. Potential sources for additional new products are API's internal research and development, co-development projects with third parties, partnerships and in-licensing. See "Risk Factors - The Company depends on development, manufacture and marketing of new products for its future success" and "The Company could have difficulties in developing and integrating strategic alliances, co-development opportunities and other relationships".

In February 2003, the Company's API business implemented a significant price increase for two of its products in certain geographical markets and, during 2005 and 2006, commenced reducing the prices of such products. The Company anticipates that further price reductions are possible on both of these products.

Facilities. The Company manufactures its API products in its plants in Oslo, Norway, which also manufactures products for AH, Copenhagen, Denmark and Budapest, Hungary. During 2008, it intends to manufacture certain of its products in its new Taizhou, China plant. Each plant includes fermentation, specialized recovery and purification equipment. To support the production of vancomycin, the Company substantially expanded its production capacity at its Copenhagen facility and, in 1998, acquired its facility in Budapest, Hungary. An expansion of manufacturing processes and capacity at the Budapest facility was substantially completed in 2004. The expansion of the Budapest facility cost a total of approximately $9 million and doubled the capacity of the facility for vancomycin and established capacity for the production of three additional products in the facility. The Company completed two expansion projects at its Copenhagen facility in 2004 for an aggregate cost of approximately $32 million. One of these projects significantly increased the capacity of the Copenhagen facility for vancomycin. Additionally, in the fourth quarter of 2007, the Company substantially completed, for a cost of approximately $21 million through December 31, 2007, the expansion of its Copenhagen facility to accommodate API's initiative to expand into the injectable finished product form of several of its APIs. Also, in the second quarter of 2006, API reached agreement with Hisun Pharmaceutical Co., Ltd., a Chinese supplier, that, subject to regulatory approvals, is expected to enable the Company to expand the manufacturing capacity of one of its current major products, vancomycin, over the next several years. As of December 31, 2007, the Company has incurred costs of approximately $10 million for this project. The Oslo, Copenhagen and Budapest facilities have been classified as acceptable by the FDA as manufacturers of certain sterile and non-sterile bulk antibiotics. Such FDA classification, subject to compliance with applicable FDA rules, allows imports of the products manufactured at these facilities into the U.S. market and into most European markets. See "Information Applicable To All Business Segments - Environmental Compliance" for a discussion of environmental matters related to the Copenhagen, Oslo and Budapest facilities and "Government Regulation - FDA Compliance" for a discussion of the Company's FDA inspection results at the same three facilities .

Competition. In sales to large and small customers, price, quality and service are the determining factors. The Company believes that its fermentation and purification expertise and established reputation provide it with a significant advantage in these antibiotic products. Competition has increased in recent years on certain of its products, most notably from Asian-based companies. The Company believes API's principal competitors are: Abbott Laboratories, Bristol-Myers Squibb Company, Zheijiang Medicine Co Ltd Xinchang, Sandoz (LEK), Teva (Biogal), World Yanghen, Shanghai Pioneed and Livzon - Fuzhou.

Geographic Markets. The Company's API business sells its products in the U.S. and other areas of the world. For the year ended December 31, 2007, sales in North America of API products represented approximately 47% of the Company's API business' total revenues.

Sales, Distribution and Customers. Sales of API products are dependent on finished product sales, which are under the control of the Company's customers. Sales of bulk antibiotic products are made to relatively few large customers, primarily pharmaceutical companies making generics and branded finished pharmaceutical products. The Company distributes and sells its API products in North America and Europe using its own sales force. Sales of the Company's API products in other parts of the world are made primarily through local agents and distributors.

ANIMAL HEALTH ("AH")

The Company's AH business is a global leader in the development, registration, manufacturing and marketing of medicated feed additives ("MFAs") and water soluble therapeutics for poultry, cattle and swine. For the year ended December 31, 2007, AH had product sales of approximately $367.1 million and operating income of approximately $72.6 million.

Product Lines. The Company's principal animal health business is based on a portfolio of anti-infective animal health products that are added to the feed and water of livestock and poultry. This market is comprised of three primary categories: antibiotics, anticoccidials and antibacterials.

Antibiotics . The Company's MFAs and water-soluble products are used to prevent and/or treat diseases and maintain health in poultry, swine and cattle. The Company is the world's largest supplier of bacitracin and chlortetracycline for use in animal feeds. The Company's major AH antibiotic products include:

ALBAC, a bacitracin-based MFA used to prevent and/or treat diseases, maintain health and/or improve feed efficiency in poultry, cattle and swine;

BMD, a bacitracin-based MFA used to prevent and/or treat diseases, maintain health and/or improve feed efficiency in poultry, cattle and swine; and

CHLORMAX and CHLORMAX-combination products, and AUREOMYCIN and AUREOMYCIN-combination products, which are feed-grade antibiotics containing chlortetracycline used in combination with an antibacterial to prevent and/or treat diseases, maintain health and/or improve feed efficiency in poultry, cattle and swine. AH's class of products containing chlortetracycline (CTC products) accounts for approximately 16% of the Company's total revenues.

Anticoccidials . These products are used to prevent coccidiosis, a condition caused by an intestinal parasite that affects growth in poultry and cattle. The Company is a leading supplier of anticoccidials and the Company's major products include:

BIO-COX and CYGRO, MFAs used to prevent and control coccidiosis in poultry;

BOVATEC and AVATEC, MFAs used to prevent and control coccidiosis in cattle and poultry and to maintain health and improve feed efficiency in cattle;

DECCOX, an MFA used to prevent and control coccidiosis in poultry, cattle and calves;

ROBENZ and CYCOSTAT, used to prevent coccidiosis in poultry and rabbits; and

ROFENAID, used to control disease in poultry.

Antibacterials . These products are used to prevent disease in poultry and swine. The Company is a leading supplier of antibacterials for use in animal feeds. The Company's major products include:

3-NITRO, an MFA used to treat disease and improve feed efficiency in poultry and swine; see "Legal Proceedings - Chicken Litter Litigation"; and

HISTOSTAT, an MFA used to prevent disease in chickens and turkeys.

In addition to the Company's antibiotic, anticoccidial and antibacterial products, it also sells water soluble vitamins, minerals and electrolytes that are used as nutritional supplements for poultry, swine and cattle.

AH's main expansion initiatives focus on new products from research and development activities, the purchase of businesses or individual products from third parties, co-development and in-licensing and expanding the geographic reach of its current product line with new registrations in new jurisdictions. See "Risk Factors - The Company depends on development, manufacture and marketing of new products for its future success" and "Risk Factors - The Company could have difficulties in developing and integrating strategic alliances, co-development opportunities and other relationships".

Animal drugs must be reviewed and receive registration from the FDA for marketing in the United States and approval or registration by similar regulatory agencies in other countries. Regulatory approvals for products to be used in food producing animals are complex due to the possible impact on humans.

Approval also must be granted in the U.S. for the use of an animal drug in combination with other animal drugs in feeds. Such combination approval generally requires the cooperation of other manufacturers to consent to authorize the FDA to refer to such manufacturer's New Animal Drug Application (or NADA) in support of the Company's regulatory submissions. This consent is necessary to obtain approval from the FDA for more than one animal drug to be included in a given animal drug animal feed at the same time. To date, the Company has been successful in obtaining the cooperation of third parties to seek combination approval for many of its products. Generally, the Company does not enter into written agreements with other manufacturers and does not pay any money to other manufacturers to obtain such consent. These combination clearances significantly extend the reach and potential market share of the Company's products and provide a considerable competitive advantage. Presently, the Company has sponsored a total of approximately 100 combination approvals in the U.S.

Acquisitions and Divestitures .

In September 2004, in order to relieve itself of future obligations for certain payments, the Company entered into an agreement with Natinco N.V., the licensor of certain technology related to REPORCIN, a product intended to improve meat quality, which substantially limited the geographic area in which the Company can market the product. While at the time of its 1999 purchase of the rights to manufacture and market REPORCIN, it was the Company's intent to build a global market for the product, sales were not material to the AH business and the Company discontinued sales, terminated its license and sold its remaining inventory in the fourth quarter of 2007. In July 2004, the Company sold assets relating to its Aquatic Animal Health Business to the senior management of the business for approximately $4.4 million. In connection with this transaction, AH received a final earn-out payment in December 2006 of approximately $1.9 million. Additionally, in March 2004, the Company sold its AH distribution company to IVS Animal Health Inc. for approximately $17.0 million.

In April 2007, the Company acquired the assets of Shenzhou Tongde Pharmaceutical Co. Ltd ("Tongde") in Shenzhou City, China. Tongde was historically a manufacturer and supplier of zinc bacitracin for AH. Following the acquisition, AH has continued to sell zinc bacitracin to Tongde's customer base while also exporting the product to other markets. In June 2007, the Company acquired certain assets of Yantai JinHai Pharmaceutical Co. Ltd. located in Yantai City, Shandong Province, including product registrations that AH plans to use to expand its Asian product offering. AH intends to use this site to blend products it currently produces in its U.S. facilities and sells in Asia. The purchase of these assets for approximately $6.9 million has provided supply chain flexibility and has expanded the Company's regulatory base in Asia.

CEO BACKGROUND

Dean Mitchell
President, Chief Executive Officer and Director

President and Chief Executive Officer since July 2006. President, MGI, GP October 2005 to June 2006. President and Chief Executive Officer Guilford Pharmaceuticals Inc. December 2004 to October 2005. President, International Pharmaceuticals; President, U.S. Primary Care; and Vice President, Bristol-Myers Squibb Company September 2001 to October 2005.


Stefan Aigner,
Executive Vice President, Corporate and Business Development

Executive Vice President, Corporate and Business Development since December 2006. Co-Founder, Inspirion Pharmaceuticals February 2006 to November 2006. Co-Founder; Executive Vice President, Business Development and Medical/Scientific Affairs; and Member of Executive Committee, Reliant Pharmaceuticals May 1999 to January 2006.


Jeffrey S. Campbell
Executive Vice President and Chief Financial Officer

Chief Financial Officer since April 2007; Interim Chief Financial Officer September 2006 to April 2007; Vice President, Finance April 2005 to September 2006; Vice President and Controller October 2002 to April 2005. Assistant Corporate Controller, Ingersoll Rand Company September 1998 to October 2002.


Carl-Aake Carlsson
Executive Vice President and President, API

President of API since January 2005; President of Pharmaceuticals and API from December 2003 to January 2005; President of Human Pharmaceuticals International from September 2001 to December 2003; President of International Pharmaceuticals from January 2000 to September 2001; Senior Vice President, Finance and Strategy Development of International Pharmaceuticals Division 1995 to 2000.


Thomas J. Spellman III
Executive Vice President, Chief Legal Officer and Secretary

Executive Vice President, Chief Legal Officer and Secretary since June 2007. Held various senior positions at Johnson & Johnson from September 2000 to June 2007 including Assistant General Counsel September 2005 to June 2007.


Ronald N. Warner, PhD
Executive Vice President and President, Pharmaceuticals

President, Pharmaceuticals and Executive Vice President since January 2005; Executive Vice President, Human Scientific Affairs, Compliance and Intellectual Property January 2004 to January 2005; Executive Vice President, Human Scientific Affairs and Intellectual Property February 2003 to January 2004; Vice President, Global Scientific Affairs, Human Pharmaceuticals December 2002 to February 2003. Vice President and General Manager, ESI Lederle 2001 to 2002; Vice President, Research and Development, ESI Lederle 1995 to 2001.


Peter M. Watts
Executive Vice President, HR and Communications

Executive Vice President, Human Resources and Communications since January 2007. Senior Vice President, Human Resources and Employee Services, Scholastic Corporation December 2005 to January 2007. Principal, KKJ Consulting, LLC October 2002 to December 2005. Vice President, Human Resources, Novartis Pharmaceuticals Corporation October 2000 to October 2002. Vice President, Human Resources, Warner-Lambert 1997 to 2000


Carol A. Wrenn
Executive Vice President and President, Animal Health

President, Animal Health since November 2001. Held various executive positions at Honeywell International Inc. formerly known as AlliedSignal Inc. from 1984 to October 2001 including Business Director for Honeywell's Refrigerants, Fluorine Products Division October 2000 to October 2001; Commercial Director and Managing Director for that division's European operations April 1997 to October 2000.


MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Alpharma Inc. ("Alpharma" or the "Company") is a global specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products for humans and animals. The Company markets two branded pharmaceutical prescription products that are contract manufactured by third-parties: a pain medication sold under the trademark KADIAN ® , in the U.S., and a prescription topical non-steroidal anti-inflammatory ("NSAID") patch product marketed in the U.S., beginning in January 2008, under the trademark FLECTOR. Alpharma manufactures and markets a line of fermentation-based active pharmaceutical ingredients and one chemically synthesized active pharmaceutical ingredient (collectively "APIs") that are used primarily by third parties in the manufacture of finished dose pharmaceutical products. The Company manufactures and markets animal health products consisting of medicated feed additives ("MFAs") and water soluble therapeutics for production animals; principally, poultry, cattle and swine. The Company presently conducts business in more than 80 countries and has approximately 2,000 employees in over 20 countries.

For the year ended December 31, 2007, the Company reported revenues of approximately $722.4 million.

In September 2007, the Company's affiliate, Alpharma Pharmaceuticals LLC, closed on two license and distribution agreements with Institut Biochimique SA ("IBSA") to distribute and market two FDA approved products in the United States: the FLECTOR Patch and TIROSINT gel capsules (See Note 5).

In October 2007, the Company's affiliate, Alpharma Ireland Limited ("Alpharma Ireland"), closed on an agreement with IDEA AG, to license the exclusive U.S. rights to ketoprofen in TRANSFERSOME gel, a prescription topical non-steroidal anti-inflammatory drug ("NSAID") in clinical development (See Note 5).

Subsequent event

In February 2008, the Company announced that it has entered into an agreement to sell its API business to certain investment funds managed by 3i, a global private equity and venture capital company, for $395 million in cash. The final purchase price is subject to adjustment based on the closing net cash balance and working capital of the business and is expected to generate net proceeds, after taxes, fees, and expenses, of approximately $365 million. The Company will record a gain upon closing of the transaction, which is expected in the second quarter of 2008 (See Note 25).

Repurchase of Class B Shares; Elimination of Controlling Stockholder

Until December 28, 2006, A.L. Industrier ASA ("A.L. Industrier") beneficially owned all of the outstanding shares of the Company's Class B common stock, or approximately 22% of the Company's total common stock as of such date. Through its ownership of the Class B common stock, Industrier had voting power that provided it with effective control of the Company. On December 28, 2006, the Company purchased 100% (11,872,897 shares) of the outstanding shares of the Company's Class B common stock from Industrier at a price of $25.50 per share. Including related fees, the cost of the repurchase was approximately $307.4 million, which was paid using available cash on hand. Following the Class B share repurchase, control of the Company now rests in the holders of the Class A shares acting by the majority applicable under Delaware law and the Company's charter documents.

Discontinued Operations

On December 19, 2005, the Company sold its worldwide human generic pharmaceutical business (the "Generics Business"), excluding ParMed Pharmaceuticals Inc. ("ParMed"), its generic pharmaceutical telemarketing distribution unit, to Actavis Group hf ("Actavis") for cash in the amount of $810 million. On March 31, 2006, the Company sold ParMed for cash in the amount of $40.1 million.

The Generics Business and ParMed (collectively, the "Discontinued Operations"), are classified as discontinued operations in the Company's financial statements for the three years ended December 31, 2007. See Discontinued Operations and Note 3 to the consolidated financial statements for further discussion and analysis.

Continuing Operations

The main factors affecting the Pharmaceuticals business are :


Pharmaceuticals is focused primarily on the pain management market in the United States. It markets two branded pharmaceutical prescription products, a pain medication sold in the U.S. under the trademark KADIAN and a prescription topical non-steroidal anti-inflammatory ("NSAID") patch product marketed in the U.S., beginning in January 2008, under the trademark FLECTOR. Both drugs are manufactured by third parties. For the year ended December 31, 2007, Pharmaceuticals had product sales, consisting solely of KADIAN, of approximately $167.7 million and an operating loss of approximately $61.5 million. Included in this loss was a research and development charge of $60 million related to the initial upfront payment to IDEA AG for the exclusive U.S. rights to ketoprofen in TRANSFERSOME gel, an NSAID in clinical development. KADIAN accounted for approximately 23% of the Company's total revenues in 2007.

Pharmaceuticals realizes significant gross profit margins on its sales of KADIAN, but competes in a highly competitive market, and is subject to potential challenges from generic equivalents. The Company's business plan includes significant investments in research and development spending to broaden its product pipeline. This includes investments associated with the development of next-generation opioid pain products which include technology designed to deter abuse and potential milestone payments to IDEA AG for ketoprofen in TRANSFERSOME gel, a prescription topical NSAID in clinical development. In connection with its January 2008 launch of the FLECTOR Patch, Pharmaceuticals has made significant investments in sales and marketing in support of an expanded sales force and promotional activities.

The main factors affecting the Active Pharmaceutical Ingredients (API) business are:


API markets globally API's (primarily antibiotics) that are generally used by third parties in the manufacture of finished dose pharmaceutical products. API realizes strong gross profit margins and has experienced and expects continuing increased global competition on its products and associated pricing pressures. For the year ended December 31, 2007, API had product sales of $187.6 million and operating income of $34.0 million.

In the second quarter of 2006, API reached agreement with Hisun Pharmaceutical Co., Ltd., a Chinese supplier, that, subject to regulatory approvals, is expected to enable the Company to expand the manufacturing capacity of one of its current major products, vancomycin, over the next several years. During the third quarter of 2006, the Company commenced the sale of vancomycin manufactured at the Hisun facility into limited markets, and began enhancing the site's manufacturing processes in preparation for regulatory approvals. In 2007 API finalized its collaboration with Hisun pursuant to which Hisun commenced the construction of a new plant located in Taizhou, China for the manufacturing of vancomycin that, subject to the regulatory approval process, will be owned and operated by the Company and will incorporate certain technology purchased from Hisun, in addition to certain API technology. The new facility is expected to be completed in the first half of 2008. Another of API's main expansion initiatives is forward integration into the injectable finished product form of several of its APIs. In the fourth quarter of 2007, the Company substantially completed the expansion of its Copenhagen facility to accommodate API's initiative to expand into the injectable finished product form of several of its APIs.

As previously discussed, in February 2008, the Company announced that it has entered into an agreement to sell its API business to certain investment funds managed by 3i, a global private equity and venture capital company (See Note 25).


The main factors affecting the Animal Health (AH) business are:


The Company's AH business is a global leader in the development, registration, manufacturing and marketing of medicated feed additives ("MFAs") and water soluble therapeutics for food producing animals; including poultry, cattle, and swine. Agricultural markets have historically had low growth rates. In addition, demand for the Company's products has been and could be reduced by bans or restrictions on the use of antibiotics used in food-producing animals. AH has increased its revenues and profitability through expanding and enhanced market positions, new products, new indications for existing products, and cost-reduction and other productivity improvement initiatives. Material increases in production costs, including commodity prices (e.g. corn and soy), may have a negative effect on the gross profits of the business. For the year ended December 31, 2007, AH had product sales of $367.1 million and operating income of $72.6 million.

The following summarizes significant events and transactions for the past three years:

2007

● In November 2007, the Company announced positive results of the pivotal Phase III clinical trials for its abuse-deterrent extended release opioid (EMBEDA).

● In October 2007, the Company closed its agreement with IDEA AG, a privately held biopharmaceutical company with headquarters in Munich, Germany, to license the exclusive United States rights to ketoprofen in TRANSFERSOME gel, a prescription topical NSAID in clinical development.

● In September 2007, the Company closed on two license and distribution agreements with IBSA, a privately-owned, global pharmaceutical company headquartered in Lugano, Switzerland. The agreements provide the Company with the exclusive license and distribution rights to market: 1) the FLECTOR Patch and 2) TIROSINT (synthetic levothyroxine sodium) gel capsules, in the United States.

● In July 2007, the Company completed an agreement with Zhejiang Hisun Pharmaceutical Co., Ltd ("Hisun") that, over the next several years, will enable the Company to expand its capacity to manufacture one of its major active pharmaceutical ingredients, vancomycin, subject to the receipt of required FDA and European regulatory approvals.

● In June 2007, the Company acquired certain assets of Yantai JinHai Pharmaceutical Co. Ltd. located in Yantai City, Shandong Province, China and plans to utilize this site to blend products it currently produces in its U.S. facilities and sells in Asia.

● In April 2007, the Company announced it acquired assets of Shenzhou Tongde Pharmaceutical Co. Ltd in Shenzhou City, China for the manufacture of zinc bacitracin that will be marketed by the company's Animal Health business.

● In April 2007, Pharmaceuticals' 10mg. strength of KADIAN was approved by the FDA, and was subsequently launched in September 2007.

● In April 2007, the Company's Corporate offices moved from Fort Lee, NJ to Bridgewater, NJ

● In March 2007, the Company entered into an exclusive development and licensing agreement with Tris Pharma, Inc. ("Tris"), a privately owned specialty pharmaceutical company engaged in the research and development of drug delivery technologies.

● In March 2007, the Company issued $300.0 million of Convertible Senior Notes, due March 15, 2027. The net proceeds from the issuance of $292.8 million, after deducting expenses, are being used to fund business development transactions and for general corporate purposes.

● In February 2007, Pharmaceuticals' 200mg. strength of KADIAN was approved by the FDA, and was subsequently launched in April 2007.

2006

● In December 2006, the Company acquired all of the outstanding Class B shares for $307.4 million.

● In December 2006, the Company froze its Norwegian and U.S. pension plans, replacing them with enhanced defined contribution plans, and realizing a net pre-tax curtailment gain of $7.5 million.

● In the fourth quarter of 2006, Company's Pharmaceuticals business initiated its pivotal Phase III clinical trials for its abuse-deterrent extended release opioid.

● In September 2006, the Company announced positive results from a Phase II multi-dose clinical efficacy and pharmacokinetic trial for its abuse-deterrent, extended release opioid.

● In June 2006, the Company's API business announced that it had reached an agreement with a Chinese manufacturer to expand its capacity to manufacture vancomycin.

● In March 2006, the Company sold ParMed, its generic pharmaceutical telemarketing business, to Cardinal Health Inc. for $40.1 million.

● In March 2006, the US asset-based loan agreement was amended and restated to reduce the facility to $75 million.

● In January 2006, the Company paid all of its outstanding debt using available cash, including proceeds from the sale of its Generics Business in December 2005.

2005

● In December 2005, the Company sold its global Generics Business to Actavis Group hf for $810 million.

● In December 2005, the Company gave notice to the Trustee's under both the Senior Notes and the Convertible Notes that it was irrevocably electing to redeem all such notes in accordance with the terms of the respective note indentures.

● In October 2005, the Company entered into a new $210 million US asset-based loan agreement. Proceeds from this new loan facility were used to pay off and cancel all outstanding amounts due under the Company's 2001 U.S. Bank Credit Facility.

● In the fourth quarter of 2005, the Company reversed its deferred tax valuation allowance given its current and expected profitability, resulting in a tax benefit of $52.1 million.

● The Company repatriated cash in 2005 under the provisions of the American Jobs Creation Act of 2004. The 2005 tax provision includes approximately $28.6 million related to this cash repatriation.

Results of Continuing Operations 2007 vs. 2006

(Except as specifically noted, all comparisons of results of operations refer to continuing operations)

Total revenue increased $68.6 million, or 10.5%, for the year ended December 31, 2007 compared to 2006. In comparison to 2006, foreign exchange favorably impacted revenues in 2007 by $11.2 million. Operating income was $0.7 million in 2007 compared to $95.6 million in 2006. Diluted earnings per share was $(0.32) in 2007 compared to $1.11 in 2006. Results for the year ended December 31, 2007, included an October 2007 payment of $60.0 million to IDEA AG for the exclusive United States rights to ketoprofen in TRANSFERSOME gel. Results for the year ended December 31, 2006, included the payment of a call premium of $18.9 million and the write-off of deferred loan costs of $0.5 million, associated with the repayment of the Company's outstanding debt in January 2006. The results for 2006 also included a net pre-tax curtailment gain from the freezing of a Norwegian and a U.S. pension plan of $7.5 million.

Revenues:

Pharmaceuticals revenues, consisting solely of KADIAN, increased $29.5 million, or 21.3%, to $167.7 million in 2007 compared to $138.2 million in 2006. The revenue growth was principally attributable to increased volumes ($17.7 million) driven by growth in prescriptions, higher year-over-year pricing ($7.3 million), and the launch of additional dosage strengths (new line extensions) of KADIAN ($4.5 million). In preparation for the January 2008 launch of the FLECTOR Patch, the Company commenced shipment of the product to certain distributors in December 2007. As a result, at December 31, 2007, the Company recorded deferred revenue of approximately $3.0 million related to the FLECTOR Patch shipments. The Company expects to begin recognizing revenues related to its shipments of the FLECTOR Patch in the first quarter of 2008, utilizing prescription and other accumulated data as a basis for its estimation of the revenues to be recognized.

Revenues in API increased $18.9 million, or 11.2%, to $187.6 million compared to $168.7 million in 2006. A small portion of API revenues are denominated in currencies other than the U.S. dollar. Translation of these revenues into the U.S. dollar increased API revenues by approximately $4.4 million in comparison to 2006. Excluding the year-over-year effects of currency, API revenues increased 8.6% versus the prior year. The revenue increase was primarily attributable to increased volumes, principally related to vancomycin.

AH revenues increased $20.2 million or 5.8%, to $367.1 million in 2007 versus $346.9 million in 2006. Translation of revenues into the U.S. dollar increased AH revenues by approximately $6.8 million in comparison to 2006. Excluding the year-over-year effects of currency, AH revenues increased 3.9% versus prior year. The increase in revenues was due primarily to higher sales in U.S. poultry and livestock of approximately $5.6 million, as well as increased revenues in the European and Latin American markets of approximately $7.8 million.





Gross Profit:

On a Company-wide basis gross profit increased $27.5 million in 2007 compared to 2006. As a percentage of sales, gross profit was 56.7% in 2007, versus 58.4% in 2006, with the decline principally attributable to the unfavorable effects of currency, lower year-over-year pricing in API, and higher production costs in API and AH, primarily for raw materials partially offset by higher gross profits in Pharmaceuticals.



Operating Expenses:

On a consolidated basis, selling, general and administrative ("SG&A") expenses increased $21.9 million in 2007 as compared to 2006. Foreign exchange had an unfavorable impact of $6.4 million on the year-over-year change in SG&A expenses. The remainder of the dollar increase principally relates to the expansion of the Pharmaceuticals sales force and related marketing expenses in preparation for the January 2008 launch of the FLECTOR Patch, as well as additional operational infrastructure to support increased revenues and growth initiatives in all three businesses. These increases were partially offset by lower corporate and unallocated expenses. As a percentage of revenues, SG&A expense was 37.6% in 2007 versus 38.2% in 2006.

Research and development expenses increased $95.8 million compared to 2006, due primarily to the $60.0 million upfront payment to IDEA, and spending related to clinical trials related to abuse-deterrent opioid product development programs in Pharmaceuticals. As a percentage of revenues, R&D expenses amounted to 19.4% (or 11.1%, excluding the $60.0 million upfront payment to IDEA) in 2007 compared to 6.8% in 2006.

Asset impairments and other (income) expense amounted to income of $3.5 million in 2007 compared to income of $8.3 million in 2006. The income in 2007 pertains to facility exit cost adjustments and asset sales related to previously closed AH facilities. The income in 2006 primarily consists of a net curtailment gain of $7.5 million from the freezing of Norwegian and U.S. pension plans.

Tax Provision:

The Company's effective tax rate ("ETR") is dependent on many factors including: a.) the impact of enacted tax laws in jurisdictions in which the Company operates; b.) the amount of earnings by jurisdiction, due to varying tax rates in each country; and c.) the Company's ability to utilize various tax losses and credits.

The tax provision for continuing operations for the year ended December 31, 2007 was $22.9 million. The Company's financial results include the $60.0 million up front payment made from Alpharma Ireland to IDEA in October 2007 (see Note 5). In connection with this payment, and other expenses incurred by Alpharma Ireland, the Company recorded a deferred tax asset of $7.6 million, representing the future potential tax benefits associated with these amounts. The Company recorded a corresponding full valuation allowance for this deferred tax asset, as Alpharma Ireland is a start-up operation for a product in development, and the Company has no basis to conclude it is more likely than not that these deferred tax assets will be realized.

The tax provision for continuing operations for the year ended December 31, 2006 was $32.5 million.

In July 2006, the Financial Accounting Standards Board issued FIN 48, Accounting for Uncertainty in Income Taxes, which became effective for the Company, January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The impact of the Company's reassessment of its tax positions in accordance with FIN 48 did not have a material impact on results of operations, financial condition or liquidity.

Discontinued Operations:

On March 31, 2006, the Company completed the sale of its generic pharmaceutical telemarketing distribution business, ParMed, for cash in the amount of $40.1 million. The net after-tax gain on the sale of $19.2 million, is reported in 2006 results from discontinued operations, as a component of gains from disposals. In addition, included in income from discontinued operations for the year ended December 31, 2006, are the operating results, net of tax, of ParMed for the three months ended March 31, 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

We are a global specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products for humans and animals. Our businesses are organized in two business segments, Pharmaceuticals and Animal Health ("AH"). We currently market two branded human pharmaceutical prescription products that are manufactured by third parties: an extended release morphine sulfate pain medication sold in the United States under the trademark KADIAN and a topical non-steroidal anti-inflammatory ("NSAID") patch product marketed in the United States under the trademark FLECTOR. We manufacture and market animal health products, consisting primarily of medicated feed additives ("MFAs") and water soluble therapeutics for production animals; principally, poultry, cattle and swine.

On February 6, 2008, we entered into a definitive agreement to sell our Active Pharmaceutical Ingredients ("API") business to certain investment funds managed by 3i, a global private equity and venture capital company, for $395.0 million. The transaction included the sale of manufacturing facilities in: Copenhagen, Denmark; Oslo, Norway; Budapest, Hungary; and Taizhou, China. The API business employed approximately 700 people, substantially all of whom were transferred with the business. The API sale closing occurred on April 1, 2008, with the transaction effective as of the close of business March 31, 2008.

The financial statements have been presented for all periods to classify the API business as a discontinued operation. We have reclassified the December 31, 2007 assets and liabilities of API as held for sale in the Consolidated Balance Sheet presented in Item 1 of this Quarterly Report on Form 10-Q.

In October 2007, our affiliate, Alpharma Ireland Limited, closed on an agreement with IDEA AG ("IDEA"), to license the exclusive U.S. rights to ketoprofen in TRANSFERSOME gel, a prescription topical NSAID in Phase III clinical development. See Note 4 to our unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

In September 2007, our affiliate, Alpharma Pharmaceuticals, closed on two license and distribution agreements with Institut Biochimique SA ("IBSA") to market two FDA approved products in the United States: the FLECTOR Patch and TIROSINT gel capsules. See Note 4 to our unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Discontinued Operations

Effective March 31, 2008, we completed the sale of our API business and have classified the current year financial results, and reclassified the historical financial results of API, as results from discontinued operations. Reported financial results for API for the six months ended June 30, 2008 and 2007 are summarized below. Results in 2008 include the period from January 1, 2008 through March 31, 2008, the effective date of the transaction.

In the first quarter of 2008, we recorded an estimated net after-tax gain on the sale of the API business of $209.5 million. The final purchase price, and therefore the gain, is subject to adjustment based on the closing net cash balance and working capital of the business, as defined in the divestiture agreement. The estimated net after-tax gain for the three months ended June 30, 2008, includes a net loss of $6.5 million, principally related to adjustments to previously recorded gains on sales of discontinued operations. These adjustments are primarily attributable to foreign exchange and certain transaction-related costs and adjustments.

See Note 3 to our unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Results of Continuing Operations - Three months ended June 30, 2008

Total revenues increased 25.4% for the quarter ended June 30, 2008, compared to the same quarter of 2007. We reported a second quarter 2008 operating loss of $(5.2) million compared to $6.9 million of operating income in 2007. Diluted (loss) per share was $(0.02) for the three months ended June 30, 2008, compared to diluted earnings per share of $0.13 for the three months ended June 30, 2007.

Revenues:

Pharmaceuticals revenues ncreased $38.7 million, or 90.8%, to $81.3 million in the second quarter of 2008, compared to $42.6 million in the second quarter of 2007. The revenue growth was principally attributable to the January 2008 launch of the FLECTOR Patch. Second quarter 2008 FLECTOR Patch revenues totaled $37.7 million, primarily reflecting second quarter prescription demand, as well as additional stocking of the distribution channel. The remainder,

$1.0 million, of the year-over-year increase in Pharmaceutical revenues relates to sales of KADIAN Capsules which was primarily attributable to increased prescription demand.


AH revenues decreased $4.9 million, or 5.4%, to $85.6 million in the second quarter of 2008, compared to $90.5 million in the second quarter of 2007. Translation of revenues into U.S. dollars increased AH revenues by approximately $2.8 million compared to the second quarter of 2007. Excluding the year-over-year effects of currency, AH revenues decreased 8.5% versus the prior year. Second quarter Animal Health revenues reflect the adverse effects that significantly rising commodity costs are having on our customers. This resulted in decreased demand for our U.S. livestock products in the second quarter of 2008. This decline in U.S. livestock product revenues was partially offset by increased international market sales in the European, Asian and Latin American regions.


Gross Profit:


On a consolidated basis, gross profit in the second quarter of 2008 increased $25.1 million compared to the second quarter of 2007. As a percentage of revenue, overall gross profit margin was 64.7% in the second quarter of 2008, versus 62.2% in the second quarter of 2007. The year-over-year increase in gross profit margin is attributable to the higher revenue growth from our higher gross margin Pharmaceuticals business.


Operating Expenses:


On a consolidated basis, selling, general and administrative ("SG&A") expenses in the second quarter of 2008 increased $35.5 million, compared to the second quarter of 2007. As a percentage of revenues, SG&A expense increased to 57.5% in the second quarter of 2008, from 45.5% in the second quarter of 2007. The increase principally relates to the sales force expansion and other investments required in our Pharmaceuticals business to support the January 2008 launch of the FLECTOR Patch and the growing business.

Research and development expenses increased $0.8 million in the second quarter of 2008 compared to 2007. As a percentage of revenue, R&D expense decreased to 10.2% in the second quarter of 2008 versus 12.3% in the second quarter of 2007, primarily due to increased sales in the second quarter of 2008 versus the same period of 2007.

Asset impairments and other (income) expense amounted to $1.0 of income million in the second quarter of 2007, and consisted of facility exit cost adjustments and asset sales related to previously closed AH facilities.

Interest income:

Interest income for the quarter ended June 30, 2008 decreased by $0.5 million as compared to the three months ended June 30, 2007, due to lower interest rates on cash investments, partially offset by higher cash and cash equivalent balances on hand.

Interest expense:

Interest expense increased by $0.4 million for the quarter ended June 30, 2008, as compared to the second quarter of 2007, primarily attributable to interest on outstanding borrowings under our China Credit facility in the second quarter of 2008. See Note 9 to our unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Tax Provision

Our effective tax rate ("ETR") is dependent on many factors including: a) the impact of enacted tax laws in jurisdictions in which we operate; b) the amount of earnings by jurisdiction, due to varying tax rates in each country; and c) our ability to utilize various tax losses and credits.

The tax provision (benefit) for continuing operations for the three months ended June 30, 2008 was a benefit of $1.6 million on a pre-tax loss of $2.4 million.

Results of Continuing Operations - Six months ended June 30, 2008

Total revenues increased 29.0% for the first six months of 2008 compared to the same period of 2007. We reported an operating loss of $47.5 million for the first six months of 2008, compared to $11.3 million of operating income in 2007. Diluted loss per share was $0.92 for the six months ended June 30, 2008, compared to diluted earnings per share of $0.21 for the six months ended June 30, 2007. Results for the six months ended June 30, 2008 include $37.0 million of research and development expense associated with the achievement, in March 2008, of the first and second progress milestones related to the clinical advancement of ketoprofen in TRANSFERSOME gel.

Pharmaceuticals revenues increased $70.2 million, or 91.1%, to $147.3 million in the first six months of 2008, compared to $77.1 million in the first six months of 2007. The revenue growth was principally attributable to the January 2008 launch of the FLECTOR Patch. FLECTOR Patch revenues totaled $62.0 million for the first six months of 2008. The remainder, $8.2

million, of the year-over-year increase in Pharmaceutical revenues relates to sales of KADIAN Capsules driven by higher year-over-year pricing and increased volumes.


AH revenues increased $2.8 million, or 1.6%, to $177.1 million in the first six months of 2008, compared to $174.3 million in the first six months of 2007. Translation of revenue into U.S. dollars increased AH revenue by approximately $5.1 million compared to the first six months of 2007. Excluding the year-over-year effects of currency, AH revenue decreased 1.3% versus the prior year. The decrease in revenue primarily reflects lower year-over-year sales in the U.S. livestock markets, partially offset by increased international market sales in the European, Asian and Latin American regions.


Gross Profit:


On a consolidated basis, gross profit in the first six months of 2008 increased $51.9 million compared to the first six months of 2007. As a percentage of revenue, overall gross profit margin was 63.9% in the first six months of 2008, versus 61.7% in the first six months of 2007. The year-over-year increase in gross profit margin is attributable to the higher revenue growth from our higher gross margin Pharmaceuticals business.


Operating Expenses:


On a consolidated basis, selling, general and administrative ("SG&A") expenses in the first six months of 2008 increased $70.6 million, compared to the first six months of 2007. As a percentage of revenues, SG&A expense increased to 57.4% in the first six months of 2008, from 46.0% in the comparable period of 2007. The increase principally relates to the sales force expansion and other investments required in our Pharmaceuticals business to support the January 2008 launch of the FLECTOR Patch and the growing business.

Research and development expenses increased $37.1 million in the first six months of 2008 compared to 2007, due to the $37.0 million of research and development expense in the Pharmaceuticals business associated with the achievement, in March 2008, of the first and second progress milestones related to the clinical advancement of ketoprofen in TRANSFERSOME gel. Excluding the $37.0 million in progress milestones, R&D expense was 9.6% of revenues in the first six months of 2008, compared to 12.4% for the first six months of 2007. The decline in R&D expense as a percentage of revenues reflects increased revenues in the first six months of 2008, versus the same period of 2007.

Asset impairments and other (income) expense amounted to $3.1 million of income in the first half of 2007, and consisted of facility exit cost adjustments and asset sales related to previously closed AH facilities.

CONF CALL

Jack Howarth

Thanks, Kelly. Good morning, everyone. Welcome to Alpharma's second quarter 2008 conference call. For today's call, we've provided a PowerPoint presentation to go along with our comments, and that's available on our website at www.alpharma.com. When you go to the website, click on the tab for Investor Support. In that section on the left, you'll see the tab for this presentation.

On the call with me today, our President and Chief Executive Officer, Dean Mitchell; and Executive Vice President and Chief Financial Officer, Jeff Campbell.

Going on to slide one, before we begin, it's important to note that in the course of this conference call, we will make certain statements relating to future events or future business performance which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Our Safe Harbor statement as set forth in our SEC filings and in the accompanying slide presentation covers these remarks. The company recommends that investors review information in its SEC filings related to important potential risks and uncertainties including its Annual Report on Form 10-K for the year ended December 31, 2007.

In an effort to provide investors with additional information regarding Alpharma's financial results, as determined by US Generally Accepted Accounting Principles, or GAAP. The company has also provided certain non-GAAP information which management utilizes in its analysis of its business, and which it believes also provides useful information to investors.

This information includes earnings before interest, taxes, depreciation and amortization and free cash flow, which is operating cash flow, less capital expenditures and purchased intangibles. The company discloses this information to assist investors in understanding the impact of these items on the company's financial results, and the earnings generated by operations that the company believes can be more meaningfully compared with prior periods and forecasts. A reconciliation of reported to adjusted results for continuing operations for the three and six-month ended period June 30, 2008 and 2007, is attached to our earnings release.

On slide two, we've laid out an agenda for today's call. Dean will begin the call with some overview comments; Jeff will then review the financial results for the quarter; and Dean will make some closing comments on the outlook for our business.

With that, I'll turn the call over to Dean.

Dean Mitchell

Thanks, Jack. Good morning, everyone, and thanks for joining us this morning. Earlier today we reported second quarter results, which I'll provide an overview of, and then Jeff will go into more detail on the financial aspects of our results.

Moving to slide three, in the second quarter we reported revenue growth from continuing operations of 25% and an increase in gross profit of 30% versus the second quarter of 2007. Our pharmaceuticals business, once again had record quarterly revenues with growth of 91% in the quarter due in large part to the FLECTOR Patch, which had revenues of almost $38 million. In addition, KADIAN prescriptions increased 6.5% versus the second quarter of 2007 with revenues increasing to $43.6 million.

In the quarter, we once again continued to make significant investments in SG&A. The increase in SG&A was in large part related to doubling of the size of our sales force for the launch of the FLECTOR Patch, as well as advertising, promotion and other related costs to support the launch and growing the business.

Animal Health revenues declined 5% to $85.6 million for the quarter primarily attributable to reduced US livestock market sales. This was caused by a significant disconnect between high input costs and the prices of beef and pork in the market, leading to customers aggressively managing their production volumes.

These declines were partially offset by increased sales in international markets, where you know we're continuing to focus our expansion efforts. Also, operating margins were right around 13% for the quarter, which reflects both the reduced revenue, as well as the challenge of high input costs in the Animal Health business.

From a scorecard perspective, we received one approval for a new indication on an existing product, and received one approval to sell existing products in new geographic regions, a challenging quarter for the Animal Health business.

Finally, we reported diluted loss per share of $0.02, generated earnings before interest, tax depreciation and amortization of $7.4 million, and commenced the share repurchase program, all topics that Jeff will go into in further detail later on in the call.

Let's turn to slide four, and spend a few minutes on the FLECTOR Patch launch. This slide show the first six months of weekly total prescriptions since the mid-January launch. As you can see from the slope of the line, the past 10 weeks have been essentially flat and although the interest and feedback on the FLECTOR Patch continues to be quite positive, both from patients and physicians, we are focused on several key areas in our marketing efforts to further grow the brand.

Our primary focus is managed care coverage. As you know, obtaining formulary coverage generally takes between six and nine months of discussions, initially about the attributes of the product, followed by negotiations about formulary position and rebate levels. The initial strong ramp-up of FLECTOR Patch has caused a number of plans to increase their restrictions on usage of the product to improve their negotiating positions, which is again a fairly normal behavior.

We're now six months into the launch and are deep into the negotiation phase with many key plans and are anticipating news regarding additional coverage over the next several months. As you receive notification from the various plans, we intend to actively communicate these changes to formulary coverage and we believe these pull-through activities will help renew growth.

We also intend to communicate recent label enhancements. You'll recall that on June 4, the FDA approved labeling changes for the clinical pharmacology and clinical study section of packaging of FLECTOR Patch. These revised sections provide pharmacokinetic data from two studies. The first study demonstrated the low systemic level of diclofenac when administered topically through the FLECTOR Patch, compared to the administration of a single oral 50 milligram diclofenac sodium tablet.

The second study showed the low systemic level of diclofenac when the FLECTOR Patch is tested on healthy volunteers at rest or after undergoing moderate exercise. These studies, together with a low level of adverse events demonstrated in the clinical trial data and included in the product label, may help us to further differentiate the FLECTOR Patch.

We're also very aware of the launch of Voltaren Gel, another topical approach to the treatment of pain. Although this product has very different indications from FLECTOR Patch, and is helping to grow the market for topical pain therapy, there's no doubt that it's had an impact on our launch trajectory and has taken some business from us.

We believe that enhanced messaging in addition to label changes like the one I just mentioned will continue to be an important part of supporting the brand. There are a number of other initiatives we'll undertake to support the brand over the next several months and this represents just a sample of what we intend to do to return FLECTOR prescriptions to growth.

Moving on to slide five. You'll recall that last November, we announced positive results from the Phase III trial of our views to turn to extended release opioid EMBEDA. The primary end point was agreed with the FDA through the special protocol assessment process and the outcome of the Phase III trials was statistically significant. Results from this pivotal trial and the long-term safety trial indicated that adverse offense associated with EMBEDA were comparable to those associated with KADIAN.

We believe that the results from the EMBEDA clinical trial program, as well as the Euphoria Abatement Study showing the impact of EMBEDA and experienced opioid abuses will lead to an enhanced data set that will be considered for inclusion in the product label.

EMBEDA provides a pharmacological approach to abuse-deterrents, not just the tamper resistant approach, which should position us well for the regulatory review process. In terms of the submission we announced on June 30 for the resubmission of the new drug application for EMBEDA, after having withdrawn the application due to certain technical issues around data presentation which would have prevented a complete and timely evaluation by the FDA within a six-month priority review period.

These issues related to the way the data was presented, not the data itself, so we anticipate receiving a priority review when the FDA completes its initial review of the resubmission. Most importantly, we still continue to anticipate a first quarter 2009 launch of EMBEDA, potentially the first morphine-based abuse-deterrent product, which we believe, will offer patients with chronic pain and the physicians who treat pain a significant alternative in the opioid category.

Turning to slide six. During our last call, we indicated our ketoprofen in Transfersome gel licensing partner idea would be initiating two Phase III trials during the second quarter. Both of the trials commenced on schedule. The European trial in May and the US trial in June. The SPA went through two rounds of review by the FDA, an agreement on trial design of data management was reached.

However, the agency indicated that due to resource constraints, it might take more than 45 days to respond to our written comments; and subsequently we decided to begin the trials rather than wait for final documentation. For clarity purposes, this means that the two Phase III trials have been broadly agreed with the FDA, but are not being conducted under an SPA.

Two trials are structured as follows. The European trial will enroll 1320 patients in a 5-arm placebo-controlled trial which will last 12 weeks. The comparisons are 50-milligram active, 50-milligram placebo, 100-milligram active, 100-milligram placebo and celecoxib, all dosed twice daily.

The active arms are powered to show superiority to placebo, while the celecoxib arm is powered to show non-inferiority. This multi-arm study will evaluate ketoprofen in Transfersome gel as a viable alternative to the only marketed COX-2 inhibitor Celebrex.

The US study is a pivotal study in 400 osteoarthritis patients, also 12 weeks in duration, comparing 100-milligram dose twice daily to placebo. We believe these two studies will not only form the basis of our filing strategy with the US FDA, but also supplement IDEA's resubmission of their EMEA application which was withdrawn last week to wait for additional Phase III efficacy data.

Turning to slide seven, let me briefly review our second quarter 2008 scorecard. With respect to our second quarter results we delivered in line with our commitment to drive future growth, once again primarily due to the early success of FLECTOR Patch launch. For the second successive quarter, we announced record revenues for our pharmaceutical business. In addition to the launch of the FLECTOR Patch, KADIAN prescriptions have grown 6.5% versus the second quarter of 2007 which is indicative of the physician relationships being built by our expanded sales force prior to the launch of EMBEDA.

During the quarter, we also resubmitted our new drug application for EMBEDA having completed the electronic reformatting of the original submission.

The Animal Health business as you can see had a very challenging quarter. However, we continue to make gains in international markets and our operational effectiveness programs continue to produce results. We continue to review numerous business development opportunities in both of our businesses. And while there continue to be interesting assets available, we've maintained a high degree of financial discipline in our evaluations.

Finally, we repurchased 1.1 million shares of common stock at a cost of $26.4 million during the quarter, and 2.5 million shares to date at a cost of $59.5 million. So all-in-all, a busy and productive quarter.

With that, I'll turn it over to Jeff, who will take you through the details of the second quarter results.

Jeff Campbell

Thanks, Dean. Let's turn to slide eight, and I'll walk through the components of our earnings per share for the second quarter and the first six months of 2008. Starting with our continuing operations, we reported a second quarter loss per share of $0.02, compared to earnings per share of $0.13 in the second quarter of 2007.

As I will review in more detail in a few minutes, the second quarter 2008 loss is principally a result of the investments in selling, general and administrative expenses we are making in our pharmaceutical business in support of the FLECTOR Patch launch and the expansion of the franchise.

Our year-to-date results from continuing operations reflect the same factors, plus the impact of $37 million or approximately $0.85 of EPS, of R&D expenses related to the successful achievement in this year's first quarter of two progress milestones related to the development of ketoprofen in Transfersome gel.

Excluding the effects of these milestones, our continuing operations contributed a loss per share of $0.07 through the first six months of 2008, compared to earnings per share of $0.21 in the first half of 2007.

Moving to our results from discontinued operations, we completed the sale of the API business on April 1, with the transaction closing effective on March 31st. In connection with the closing, we recorded an estimated net after-tax gain on the sale in the first quarter of $209.5 million.

During the second quarter, we adjusted the estimated gain, principally related to foreign exchange, and also for certain transaction-related costs and true-ups. These adjustments totaled $6.5 million and constitute the net $0.15 loss from discontinued operations in the second quarter of 2008. As a consequence, results from discontinued operations for the six months ended June 30 include a net gain of approximately $203 million or $4.69 of EPS.

The remainder of my comments this morning will focus on our continuing operations, so let's move on to slide nine, and I'll review our second quarter financial performance in a bit more detail.

Revenues from continuing operations totaled $166.9 million, an increase of 25% over the second quarter of 2007. As Dean noted, the driver of this increase was our pharmaceuticals business which recorded a 91% year-over-year increase in revenues, primarily attributable to the FLECTOR Patch. This revenue growth in our pharmaceuticals business outpaced the second quarter decline in our Animal Health revenues, attributable to decreased demand for US livestock products.

Our gross profit increased by 30% to $108 million in the second quarter, and as a percentage of revenues, our gross profit was 64.6% in the second quarter of 2008 versus a gross profit percentage of 62.2% in last year's second quarter. The increase in the gross profit percent reflects the expansion in our higher margin pharmaceuticals business. SG&A totaled $96 million in the second quarter of 2008, an increase of $35.5 million compared to the second quarter of 2007.

The increase principally relates to our pharmaceuticals business and reflects more than doubling the size of our sales force and other investments to support the FLECTOR Patch launch and continued growth in this business. As a percentage of revenues, SG&A amounted to 57.5% in the second quarter of 2008 versus 45.5% in 2007. I'll comment a bit more on the second quarter investments in SG&A in a few minutes.

R&D expenses in the second quarter of 2008 increased slightly to just over $17 million, or 10% of revenues compared with 12% of revenues in 2007. These decline in R&D as a percentage of revenue reflects increased sales in 2008 and lower clinical R&D spending in our pharmaceuticals business in this year's second quarter versus last year.

Operating income declined to a loss of $5.2 million in the second quarter of 2008 compared to operating income of $6.9 million in 2007. This decline of about $12 million reflects the planned SG&A investments in pharmaceuticals partially offset by the increased gross profit on our higher second quarter 2008 revenues.

With that overview, please turn to slide 10 and I'll review the financial performance of our two continuing businesses. Pharmaceuticals revenues increased $38.7 million or 91% to $81 million in the second quarter of 2008. This growth is of course, principally driven by the launch of the FLECTOR Patch. Second quarter FLECTOR Patch prescriptions totaled 157,200.

Our average FLECTOR Patch script size has remained constant at about 45 patches or about three weeks of therapy. FLECTOR Patch second quarter net revenues totaled $37.7 million, approximately $29 million of these revenues relate to second quarter script demand, with the remainder principally attributable to additional stocking of the distribution channel.

We ended the second quarter at about our target level of one month of FLECTOR Patch inventory in the channel. Our average sales value per FLECTOR Patch script is almost $185 in the second quarter and on a year-to-date basis is a little under $180. We are in the midst of our managed care discussions and our net revenue value per script thus far does not reflect any significant commercial or Medicare Part D rebates.

Moving on to KADIAN. Compared with last year, second quarter KADIAN capsules revenues increased approximately $1 million, or about 2%. The revenue gain reflects increased prescriptions, up about 6% year-over-year and higher pricing. These increases were partially offset by higher Medicare Part D rebates and a different product dosage mix.

On a sequential basis, KADIAN's second quarter revenues increased approximately $2 million or 4% versus the first quarter of 2008 and prescriptions increased by 2.8%. Wholesaler inventories for KADIAN capsules remained almost level at the end of the first quarter at under 1.5 months on hand.

The second quarter 2008 operating loss of $5.1 million in the pharmaceuticals business reflects significant investments in selling, general and administrative expenses. These investments are in support, both of the launch of the FLECTOR Patch as well as the expansion of a more diversified and growing pharmaceuticals business.

With respect to the FLECTOR Patch, in addition to more than doubling the size of our sales force at the beginning of the year and engaging a contract sales organization, our second quarter results include continuing significant advertising and promotional spend. On a sequential basis, our pharmaceuticals SG&A spending increased over the first quarter.

In response to the current managed care positions and the competitive landscape, we accelerated certain promotional spending in the second quarter in support of the FLECTOR Patch. We are, of course, very mindful of the investments we are making in SG&A in the pharmaceuticals business and are looking to leverage the investments as we strive to drive further revenue growth in our two currently marketed products.

Moving to slide 11, I'll review our second quarter performance in the Animal Health business. Second quarter 2008 Animal Health revenues totaled $86 million, down 5% from the second quarter of last year. Excluding the favorable year-over-year effects of currency, Animal Health revenues were down about 8.5%, reflecting declines in sales of our US livestock products, partially offset by revenue gains in our international markets.

The decline in US livestock product revenues reflects the impacts that significantly increase commodity costs and challenging end-market pricing are having on our customers. This cost-price imbalance is impacting our customers' profitability and their purchasing behaviors. In the second quarter, this was most acute in our livestock business, where our sales were down significantly year-over-year.

The effects of declines in our US livestock business were partially offset by year-over-year revenue gains in all our major international markets reflecting the benefit of our geographic expansion initiatives. In addition, despite the effects of commodity costs, our US poultry business held up fairly well in the second quarter.

Our second quarter operating margin in the Animal Health business was 12.9% compared to 19% in the second quarter of 2007 or 17.9% in last year's second quarter after excluding the prior year benefit of certain asset sales and closed facility exit cost adjustments.

The year-over-year decrease in operating income and margins reflects the lower revenues, the effects that higher input costs are having on our product costs as well as increased research and development investment supporting the business' continuing new product development initiatives. These factors were partially offset by the favorable year-over-year effects of currency, pricing and productivity improvements.

The productivity programs in our Animal Health business continue to yield positive results. Despite revenue pressures in the first half and major commodity input costs increasing significantly. Animal Health gross profit margins have declined less than 100 basis points in the first half of 2008 in comparison to last year. Dean will comment a bit more on the market dynamics our Animal Health business is facing when he reviews our business outlook for the remainder of the year.

On slide 12, we have laid out certain other key financial data. We ended the quarter with a strong financial position. Our cash balance as of June 30 was $607 million, up $331 million from our cash balance at March 31. The increase is primarily attributable to the receipt of the sale proceeds from the API divestiture on the closing date, April 1. We continue to expect the net after-tax proceeds of this sale to approximate $365 million.

In addition, during the second quarter we paid $37 million in milestones to our partner in the development of ketoprofen in Transfersome gel, and also invested $26 million in our share repurchase program. I'll comment a bit more on that when I get to the next slide.

We ended the quarter with $306 million in debt consistent with our outstanding debt at March 31. As Dean noted, we continue to seek business development opportunities to invest our available cash as well as selectively repurchasing our common shares. At the bottom of the slide, we have included certain other financial metrics for our continuing operations.

Depreciation and amortization for continuing operations amounted to $10 million in the second quarter of 2008, compared to $8 million last year; and capital expenditures totaled $7 million in 2008, compared to $5 million in 2007. We continue to be very focused on cash generation, and in second quarter of 2008, we generated approximately $7 million of EBITDA from continuing operations, despite the significant investments we made throughout the quarter.

In addition, excluding the $37 million in milestone payments associated with the development of ketoprofen in Transfersome gel, our second quarter free cash flow from continuing operations was $18 million.

Now let's turn to slide 13 to review our share repurchase activity. In April this year, we announced the share repurchase program of up to $150 million. We commenced share repurchases under this program in May and through the end of the quarter had repurchased approximately 1.1 million shares for a total cost, including commissions of $26.4 million.

In addition, in July, we have repurchased an additional 1.14 million shares at a cost of $33.1 million. So on a program-to-date basis, we have repurchased 2.5 million shares at an average price of $23.54, and this represents approximately 6% of the company's common shares outstanding.

We will continue to evaluate the opportune time to repurchase additional shares under this program. The program does not obligate us to repurchase any particular number of shares and the program maybe suspended or discontinued at any time. As I noted before, we continue to seek business development opportunities to invest our available cash in both of our businesses and we will seek to balance our share repurchase activity with that objective.

Thanks for your attention, and I'll now turn the call back over to Dean.

Dean Mitchell

Thanks, Jeff. Let's turn to slide 14 in our review, our business outlook for the remainder of the year. During the first six months of 2008, we continued to execute against our growth strategy and our revenues from continuing operations were up just under 30%, slightly below our targeted full year revenue growth range of 30 to 35%.

As we discussed this morning, our pharmaceuticals business accounts for the vast majority of this revenue growth. Our second quarter revenues in our Animal Health business were clearly impacted by a combination of factors affecting our customers. Dramatic increases in commodity costs have an impact on our internal cost structure, but much more so they impact our customers' costs.

This increase in costs to our customers has not as of yet been accompanied with corresponding increases and end-market pricing. The resulting cost price imbalance has severely impacted the profitability of our customers and in turn impacted their purchasing behavior.

We saw the effects of this most acutely in our livestock business in the second quarter where demand for our products declined significantly. As a result on a year-on-year basis, our Animal Health revenues are up less than 2% over the prior year.

As we look to the second half of the year, it's certainly difficult to forecast the future direction of commodity costs and more importantly our customers' ability to realize pricing to offset some of their cost pressures is has yet to be seen. Accordingly, these factors and the uncertainty surrounding their future direction may continue to pressure our Animal Health business.

With that said, we and our customers collectively see the benefit of our products to the economics of their business and we've seen some encouraging signs of moderation and commodity costs and price adjustments in end markets over recent weeks. Overall, despite these challenges and uncertainties, we're maintaining our full-year outlook of 30% to 35% revenue growth from continuing operations and full year diluted earnings per share from continuing operations, excluding milestone payments to be in the range of $0.15 to $0.35.

This outlook reflects the diversity of our portfolio and a range of possible outcomes and business choices we can make as the remainder of the year unfolds. Thank you for your attention, and I'll now turn the call back to the operator, so we can address your questions.

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