Sciele Pharm (SCRX) - Description of business

Sciele Pharma, Inc. (the “Company”) is a pharmaceutical company specializing in sales, marketing and development of branded prescription products focused on Cardiovascular/Diabetes and Women’s Health. The Company’s Cardiovascular/Diabetes products treat patients with high cholesterol, hypertension, high tryglycerides, angina, and type 2 diabetes. Its Women’s Health products are designed to improve the health and well-being of women of all ages, including expectant and nursing mothers and their babies. Headquartered in Atlanta, Georgia, and founded in 1992, Sciele Pharma employs approximately 800 people. The Company’s success is based on placing the needs of patients first, improving health and quality of life, and implementing its business platform—an Entrepreneurial Spirit, Innovation, Speed of Execution, Simplicity and Teamwork. Our key marketed products include:

	Cardiology/Diabetes				Women’s Health
Altoprev		OptiNate
Fortamet		Ostiva
Nitrolingual		Ponstel
Triglide		Prenate Elite
Sular		Zovirax

Our current operating plan focuses on maximizing the sales of our existing product portfolio. We also plan to accelerate growth by launching line extensions to our current products and by acquiring or licensing approved products or late stage development products and other businesses. We plan to focus on products that complement our Cardiovascular, Diabetes and Women’s Health categories that will allow us to leverage our existing sales force infrastructure as well as additional therapeutic areas which complement our existing sales structure.

We currently market and sell 16 products, 10 of which are actively promoted and accounted for approximately 95% of our total sales for the year ended December 31, 2006. We promote our products through our nationwide sales and marketing force of approximately 600 sales representatives, targeting high-prescribing primary care physicians, endocrinologists, cardiologists, obstetricians and gynecologists.

We were incorporated in Delaware in July 1992 as the surviving corporation of a merger between Century Pharmaceutical Corporation and Horizon Pharmaceutical Corporation. In June of 2006, the stockholders of First Horizon Pharmaceutical Corporation approved changing the name from First Horizon Pharmaceutical Corporation to Sciele Pharma, Inc. The name change became effective on June 15, 2006. Our principal office is located at 5 Concourse Parkway, Suite 1800, Atlanta, Georgia 30328, and our telephone number is (770) 442-9707. Our corporate internet address is www.sciele.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We do not intend for the information contained on our website to be a part of this Annual Report.

Products

Most of our products treat recurring or chronic conditions or disorders which involve repeated use over an extended period of time. Our current key products include:

Product				Year of Our Introduction		Product Use
Nitrolingual Pumpspray (nitroglycerin sublingual spray)		2000		Acute relief of an attack or prophylaxis of angina pectoris due to coronary artery disease
Ponstel Capsules (mefenamic acid)		2000		Primary dysmenorrhea in patients ³ 14 years of age
Sular (nisoldipine) Tablets		2002		Hypertension
Prenate Elite		2004		Prenatal vitamin
Fortamet (metformin HCl) Tablets		2005		Adjunct to diet and exercise in lowering blood glucose in Type 2 Diabetes patients
Altoprev (lovastatin extended release) Tablets		2005		Cholesterol reduction and coronary heart disease
Triglide (fenofibrate) Tablets		2005		Primary hypercholesterolemia and mixed dyslipidemia
OptiNate		2005		Prenatal vitamin with omega 3
Ostiva		2006		Nutrional support for healthy bones
Zovirax		2006		Topical herpes medication

Sular

In March 2002, we acquired exclusive U.S. rights to distribute and sell the antihypertensive prescription medication Sular from AstraZeneca and Bayer Healthcare. We also entered into a long-term manufacturing, supply and distribution agreement with Sular’s manufacturer, Bayer. Sular is a once-a-day treatment for hypertension that competes in the market for antihypertensive prescription medications.

We believe that Sular offers certain advantages over other antihypertensive medications based upon its proven efficacy and safety, and its demonstrated ability to provide twenty-four hour blood pressure control as compared to other branded antihypertensives.

Nisoldipine, the active ingredient in Sular, belongs to a group of medicines called calcium channel blockers. Calcium channel blockers prevent calcium from entering certain types of muscle cells. Because the muscle cells need calcium to contract, calcium channel blockers prevent the cells from contracting and cause them to relax. Nisoldipine selectively relaxes the muscles of small arteries causing them to dilate but has little or no effect on muscles or the veins of the heart.

Fortamet and Altoprev

In March 2005, we licensed and purchased certain rights to the type 2 diabetes prescription medication Fortamet and the cholesterol lowering medication Altoprev from Andrx Laboratories, which was acquired in 2006 by Watson Laboratories. As part of the transaction, we acquired the worldwide rights to sell Fortamet and Altoprev. We also entered into a long-term manufacturing and supply agreement with Andrx Laboratories for the manufacture and supply of Fortamet and Altoprev.

Fortamet is a patented, once-a-day extended-release tablet used in the management of type 2 diabetes. It contains metformin HCl, which is an oral anti-hyperglycemic drug that has the effect of lowering blood glucose. We believe that Fortamet is advantageous in the market because of its 1000mg once-a-day extended release metformin formulation. Like all metformins, Fortamet has a blackbox warning (a warning designed to advise people of potential serious risks) associated with lactic acidosis.

Altoprev is a patented once-a-day treatment for high cholesterol. It consists of a lovastatin extended-release tablet containing a cholesterol lowering agent. We believe that Altoprev is advantageous in the market because it offers once-a-day administration in multiple starting doses (20mg, 40mg or 60mg). Moreover, Altoprev’s extended release delivery system allows lower peak levels of lovastatin acid plasma concentrations.

Triglide

We obtained exclusive U.S. marketing rights in 2004 to a novel fenofibrate formulation that employs one of SkyePharma’s proprietary solubilization technologies, which we labeled Triglide. In May 2005, we announced that the U.S. Food and Drug Administration had approved Triglide as an oral treatment for lipid disorders such as elevated triglycerides. Triglide is being manufactured and supplied by SkyePharma. Triglide is a fenofibrate manufactured using SkyePharma’s IDD-P technology.

Nitrolingual

In February 2000, we began marketing Nitrolingual, a product for which we acquired exclusive distribution rights in the U.S. from Pohl-Boskamp. Nitrolingual is sold in 200 and 60 dose bottles. In October 2004, the distribution agreement was renewed and was then amended in 2005. The amended agreement expires in January 2010 and may be renewed thereafter for subsequent two-year renewal periods.

Nitrolingual is an oral spray of nitroglycerin used for the acute relief or prevention of chest pain associated with angina pectoris that results from coronary artery disease. Pohl-Boskamp holds a patent that expires in 2010 on the formulation of Nitrolingual that we license on an exclusive basis. The primary competitor to Nitrolingual is nitroglycerin, which is generally prescribed in tablet form. Unlike nitroglycerin tablets, which begin to lose their potency immediately upon opening the bottle, Nitrolingual maintains its potency for two years from the date of manufacture. Each metered dose of Nitrolingual provides consistent delivery of nitroglycerin. Also, Nitrolingual has advantages over nitroglycerin tablets pertaining to storage and handling.

Prenate Elite and OptiNate

Prescription prenatal vitamins are generally recommended before, during and after pregnancy so that the mother and the fetus receive adequate amounts of essential vitamins and minerals. In April 2004, we launched Prenate Elite, an extension of our Prenate line. Prenate Elite is a prescription multivitamin/multimineral nutritional supplement indicated for use in improving the nutritional status of women throughout pregnancy and in the postnatal period. It contains 16 key vitamins and minerals, together with a single milligram of folate in a combination of folic acid and metafolin. Folic acid, a water-soluble B vitamin, has been shown to help prevent serious birth defects in babies.

We introduced OptiNate in March 2005, as a line extension to our Prenate line. OptiNate is a prescription multivitamin/multimineral nutritional supplement indicated for use in improving the nutritional status of women throughout pregnancy and in the postnatal period. It contains 16 key vitamins and minerals together with a single milligram of folate in a combination of folic acid, metafolin and omega-3 fatty acids. Omega-3 fatty acids such as those found in OptiNate can be especially beneficial to a

baby’s brain and eye development. We believe OptiNate has an advantage in the market because its omega-3 fatty acid capsule is a prescription prenatal vitamin with an all-natural vegetarian sourced capsule.

Zovirax

In December 2006, we entered into a promotional agreement, which has an initial term of five years, with an affiliate of Biovail Corporation to provide promotional support for Zovirax in the United States. Zovirax is a topical form of the drug acyclovir, which is used in the treatment of type I (cold sores) and type II (genital) herpes simplex viruses.

Ponstel

In April 2000, we acquired exclusive U.S. rights to market, distribute and sell Ponstel from Pfizer, formerly Warner-Lambert Company. Ponstel is used for the relief of mild to moderate pain for patients 14 years of age and older if therapy will be for less than one week and for primary dysmenorrhea, which is pain associated with menstruation. One class of frequently prescribed pain relievers is nonsteroidal anti-inflammatory drugs, or NSAIDs. Ponstel is a well known NSAID for treating dysmenorrhea and we believe that its advantages are its non-addictive qualities, low stomach-related side effects and efficacy. Like all NSAIDs, Ponstel has a blackbox warning associated with cardiovascular thrombotic events, myocardial infarction, and stroke.

Ostiva

In July 2006, we acquired exclusive U.S. rights to market, distribute and sell Ostiva from PamLab, LLC. Ostiva is an oral prescription nutritional supplement formulation with Metafolin, calcium, magnesium, vitamins B6, B12 and vitamin D that gives women nutritional support to help maintain healthy bones. Together with regular exercise, a healthy diet, and enough calcium, Ostiva can help women take action to reduce the risk of osteporosis. Ostiva may be used in conjuction with other products that may require dietary supplementation such as bisposphonates.

Ostiva offers a nutritional foundation for maintaining bone health. It contains Metafolin, an active form of folate, which can aid in reducing elevated homocysteine levels and, by doing so, may lead to healthier bones. Ostiva also contains calcium, which can contribute to the development of healthy bones; vitamin D, which helps enhance the absorption of calcium within the body; and magnesium and vitamins B6 and B12, which may contribute to maintaining bone health and reducing the risk of osteoporosis.

Other Products

In December 2001, we acquired U.S. rights to Furadantin from Dura Pharmaceuticals, an affiliate of Elan Pharmaceuticals. Furadantin is indicated for the treatment of urinary tract infections and is prescribed primarily by pediatricians. Furadantin is a product well-suited for children because it is formulated in liquid suspension form and has a fruit-flavored taste. Furadantin contains nitrofurantoin, which has little bacterial resistance.

In June 2000, we acquired worldwide rights to market, distribute and sell Cognex from Pfizer, as well as rights to a new unapproved controlled release version of Cognex called Cognex CR. Cognex is indicated for the treatment of mild to moderate dementia associated with Alzheimer’s disease. Alzheimer’s disease is a progressive, degenerative disease that attacks the brain and results in impaired memory, cognition and behavior.

In January 1999, we acquired exclusive U.S. rights to Robinul and Robinul Forte, which is a higher-strength dosage of Robinul, from Wyeth. Both Robinul and Robinul Forte belong to a class of drugs known as anticholinergics that reduce the motion of the gastrointestinal tract and decrease stomach

secretions. The FDA has approved both products for use as a therapy in conjunction with other therapeutics in the treatment of peptic ulcers. In the first quarter of 2005, in an effort to combat generic competition, we engaged a third party to handle the authorized generic distribution of Robinul and Robinul Forte, and we ceased actively promoting the Robinul line.

We sell Zoto-HC ear drops for the treatment of swimmer’s ear infections and Zebutal capsules for the treatment of tension headaches.

Regulatory Classification

Sular, Furadantin, Cognex, Ponstel, Triglide, Altoprev, Fortamet, Nitrolingual, Zovirax, Robinul and Robinul Forte have FDA approved New Drug Applications (NDAs). The FDA also approved an abbreviated NDA for Zebutal. Prenate Elite, Ostiva and OptiNate, which are prescription vitamins, Tanafed DP, Tanafed DMX and Zoto-HC do not have approved NDAs.

Research and Development

Our research and development efforts are currently focused primarily on developing line extensions to our current products. Research and development expenses consist primarily of costs incurred to develop formulations, engage contract research organizations to conduct clinical studies, test products under development and engage medical and regulatory consultants. We expense all research and development costs as incurred. Research and development costs were $1.5 million, $4.1 million and $16.6 million for the years ended December 31, 2004, 2005 and 2006, respectively.

Research and development expense increased $12.5 million to $16.6 million for the year ended December 31, 2006, compared to $4.1 million for the year ended December 31, 2005. This increase is primarily related to greater activity in lifecycle management initiatives for our products, including the new Sular formulation and the glycopyrrolate formulation, which is targeting chronic moderate to severe drooling in pediatric patients, as well as management’s increased emphasis on development. From 2004 through 2006, research and development expenses also included the development of branded products. Historically, research and development expenses for branded product activities included, among other things, costs related to personnel, overhead, professional services, filing fees and raw materials, but primarily included the cost of laboratory services, clinical investigators and clinical research organizations that were responsible for conducting the clinical trials required to support a product application with the FDA and preparing NDAs. Research and development expenses are periodically evaluated to take into consideration, among other things, our level of profitability and cash flows. Additionally, we recognized $1.1 million in research and development stock-based compensation for the year ended December 31, 2006. There were no stock-based compensation expenses recognized in research and development for the years ended December 31, 2005 or 2004.

Sales and Marketing

To maximize the effectiveness of our selling efforts, our sales force targets high-prescribing primary care physicians and select specialty physicians. Our sales force seeks to develop professional relationships with these physicians and respond to their needs as well as their patients’ needs. Since 2004, we have expanded our sales and marketing force from approximately 360 to approximately 600 professionals nationwide. In January 2006, we created a separate specialty sales force to call on OBGYN professionals exclusively.

We sell our products to pharmaceutical wholesalers (who in turn distribute to pharmacies), chain drug stores, other retail merchandisers, hospitals and, on a limited basis, directly to pharmacies. For the years ended December 31, 2004, 2005 and 2006, sales to our top three pharmaceutical wholesalers accounted for approximately 78%, 63% and 69%, respectively, of all of our sales. The following wholesalers each accounted for 10% or more of all of our sales for the years ended December 31, 2004, 2005 and

2006: McKesson Corporation (31%, 30% and 34%, respectively), Cardinal Health, Inc. (25%, 23% and 24%, respectively), and AmerisourceBergen Corporation (22%, 10% and 11%, respectively).

The Company has two main types of arrangements with wholesalers of its products: (a) ordinary course arrangements with health benefit providers, such as managed care contractors and pharmacy benefit managers (“Standard Arrangements”), and (b) Inventory Management Agreements (“IMAs”). Pursuant to those arrangements, the Company provides discounts to various health benefit providers nationwide for purchases of the Company’s products, although such providers have no obligation to order any products at any time and the Company is under no obligation to offer or provide the discounts. The Company has utilized such Standard Arrangements for several years and expects to continue to do so in the future. The Company’s three IMAs were entered into in 2003 with three national drug wholesale companies—McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen Corporation. Pursuant to our IMAs, we provide purchase price discounts for purchases of our products in order to provide incentives for such companies to stabilize and manage their inventory levels, which in turn allows us to better stabilize and control our inventory pipeline. Each IMA may be terminated by either party upon 60 days prior written notice.

In December 2004, we entered into a new Distribution and IMA with Cardinal Health continuing our existing relationship with Cardinal Health. Under the agreement, Cardinal Health, among other things, provides us with certain distribution and inventory management services, including accounts receivable management, customer service support, consolidated deliveries to providers, and contract and chargeback administration. This agreement calls for Cardinal Health to maintain the inventory levels specified in the agreement. In order to minimize product shortages and maximize product availability, Cardinal Health agreed to institute an automated balancing system on our products and optimize ordering during backorder situations or limited product availability. We have the right to cancel any order exceeding certain levels of products sold. The agreement also provides that Cardinal Health prepares and provides to the Company inventory and sales reports detailing the status and movement of our products in Cardinal Health’s inventory, monitors customer order patterns, provides event management services, and provides support for new product launches. In January 2006, we amended our agreement with Cardinal. The amended agreement enables us to take advantage of a centralized purchasing location. Under the amended agreement, certain of Cardinal’s purchasing and inventory requirements were revised as was Cardinal’s rights to make limited purchases of our products at prices in effect prior to any announced price increases.

In December 2004, we entered into an amendment to our IMA with McKesson Corporation. Among other terms and conditions, the amendment provides that McKesson maintain specified inventory levels. The amendment also provides that McKesson prepare, and provide to us, inventory reports detailing the status and movement of our products in McKesson’s inventory. The amendment acknowledges that the agreement by McKesson to provide the reports and to maintain certain inventory levels is in consideration for providing McKesson with economic relief from price increases instituted by the Company. Except as modified by the amendment, the terms and conditions, including any contractual obligations to provide services, of the agreement underlying and amended by the amendment remain in full force and effect. In December 2005, we further amended our IMA with McKesson. The amended agreement enables us to take advantage of a centralized purchasing location. Under the amended agreement, certain of McKesson’s purchasing and inventory requirements were revised as was McKesson’s rights to make limited purchases of the Company’s products at prices in effect prior to any announced price increases.

In January 2006, we entered into an IMA with AmerisourceBergen Drug Corporation which replaced our then-current IMA, dated June 2003. Under the agreement, AmerisourceBergen, among other things, provides us with certain inventory management services. This agreement calls for AmerisourceBergen to maintain the inventory levels specified in the agreement. In order to minimize product shortages and maximize product availability, AmerisourceBergen agreed to institute an automated balancing system on our products and optimize ordering during backorder situations or limited product availability.

We have the right to cancel any order exceeding certain levels of products sold. The agreement also provides that AmerisourceBergen prepares and provides to the Company, inventory and sales reports detailing the status and movement of our products in AmerisourceBergen’s inventory, monitors customer order patterns, provides event management services, and provides support for new product launches.

We have a group of sales professionals that focuses exclusively on building relationships and contracting with managed-care organizations that can be leveraged across markets. We continue to strengthen this group to gain access to formularies and develop long-term working relationships with managed care organizations.

The percentage of total sales contributed by product lines for the prior three years is as set forth below.

		For the Year Ended December 31(1)
		2006		2005		2004
Cardiovascular/Diabetes			76	%			67	%			50	%
Women’s Health			19	%			22	%			15	%
Non Promoted			5	%			11	%			35	%

(1)           Percentages for the years ended December 31, 2004 and 2005 are based on sales during those years of the products we promoted in 2006.

We operate in one reportable business segment and in one primary georgraphical area, the U.S., with international sales representing less than one percent of total sales. Additional information on segment reporting and georgraphical areas is included in Note 1 to our Consolidated Financial Statements under the caption “Summary of Significant Accounting Policies.”

Third-Party Agreements

Sular

In March 2002, we acquired exclusive U.S. rights to distribute and sell Sular from AstraZeneca PLC and Bayer Healthcare AG (“Bayer”). We paid $184.3 million in cash, including $0.6 million in acquisition costs, plus the assumption of liabilities of $1.9 million related to the return of product shipped prior to the acquisition date. In December 2002, we increased our estimates for assumed liabilities by $0.7 million. Under the asset purchase agreement, we acquired the regulatory approval to sell Sular in the U.S., current inventory, licensing rights to certain intellectual property, marketing materials for the promotion, advertising and marketing of Sular in the U.S., study materials relating to clinical studies of Sular, and certain of AstraZeneca’s contracts relating to the marketing, sale and distribution of Sular. We were required to pay AstraZeneca up to an additional $20.0 million upon achievement of certain sales milestones through February 2005. As of December 31, 2004, we calculated that we owed AstraZeneca $5.0 million for reaching these milestones which we paid in March 2005. We do not owe nor did we make any other milestone payments to AstraZeneca.

In March 2002, we also entered into a ten-year agreement with Bayer which appoints us as the exclusive party to sell and distribute Sular in the U.S., provides us with the rights to sell Sular under certain patents and other technical information owned by Bayer, assigns us the Sular trademark, and provides for the manufacture and supply of Sular to us. We pay Bayer for the manufacture and supply of Sular on a unit basis. We were required to pay Bayer an additional $10.0 million upon the achievement of a certain sales milestone for Sular if a sales threshold is achieved during the ten year term of the agreement. In December 2005, we amended our agreement with Bayer to modify the applicable milestones and increase protection from foreign exchange rate fluctuations. In January 2006 we paid $5.0 million to Bayer under the amended agreement. In July 2006, the Company’s attained sales of Sular requiring a final $5.0 million milestone payment to Bayer, which was made in October 2006. We do not owe nor did we make any other milestone payments to Bayer.

Fortamet and Altoprev

In March 2005, we licensed and purchased certain rights to the type 2 diabetes prescription medication Fortamet and the cholesterol medication Altoprev from Andrx Laboratories. We paid $50.0 million for Fortamet at closing and have paid $35.0 million for Altoprev, a portion of which is subject to Andrx’s continuing ability to satisfy certain manufacturing service levels. We (i) purchased the Fortamet and Altoprev trademarks, worldwide marketing rights to Fortamet and Altoprev, certain Fortamet inventory, and marketing materials for the promotion, advertising and marketing of Fortamet and Altoprev, (ii) assumed certain of Andrx’s contracts relating to the sale of Fortamet and Altoprev and (iii) will pay Andrx a percentage of the net revenues associated with Fortamet and Altoprev on an ongoing basis. We also entered into an exclusive license agreement for the intellectual property regulatory approvals to sell Fortamet and Altoprev in the United States.

In March 2005, we also entered into a long-term manufacturing and supply agreement appointing Andrx as the manufacturer of Fortamet and Altoprev. The terms of the agreement require us to pay Andrx for the manufacture of Fortamet and Altoprev on a per unit basis for a ten year term, subject to Andrx’s ability to terminate as of the conclusion of the fifth year. The unit price may adjust based on changes in the cost of the active pharmaceutical ingredients as well as changes in an annual inflationary index.

Triglide

In May 2004, we entered into an agreement with SkyePharma granting us the exclusive license for a term of at least 15 years to market and distribute a fenofibrate product in the U.S. that was approved by the FDA in May 2005. We have since commenced marketing and distribution of this product, labeled Triglide. We have also obtained the right of first refusal to negotiate a license to develop and commercialize a future cardiovascular product utilizing the SkyePharma delivery technology. We paid $20.0 million to SkyePharma for these rights. We utilize our sales force to market the product and pay SkyePharma 25% of the product’s net sales which includes cost of goods sold. Further, SkyePharma was obligated to contribute $2.5 million toward our sales and marketing efforts and provided us with free product samples for the year ended December 31, 2005, and was required to provide up to an additional $2.5 million in 2006. Over the term of the agreement, upon our achievement of certain sales levels, SkyePharma can receive up to $30.0 million in additional milestone payments.

In January 2005, we amended the agreement with SkyePharma. This amendment provided for SkyePharma to deliver the fenofibrate product so that we could launch the product in the thirdquarter of 2005. To provide additional assistance with our launch of the product, SkyePharma agreed to provide additional marketing support. In January 2006, we further amended our agreement with SkyePharma. In this amended agreement, SkyePharma increased its contribution toward our sales and marketing efforts from $5.0 million to $11.3 million and the parties further defined their obligations with respect to the payment for samples.

Nitrolingual

In July 1999, we acquired exclusive U.S. rights to distribute, market and sell Nitrolingual from Pohl-Boskamp beginning in February 2000. This agreement was amended, effective July 2005. The amended agreement expires in January 2010, but may be renewed for additional two year periods. We must also pay a royalty on net sales of the product. Also, Pohl-Boskamp can terminate our distribution agreement for Nitrolingual if a company with a product competitive with Nitrolingual acquires direct or indirect influence or control over us. Our agreement with Pohl-Boskamp prohibits us from selling other products which are indicated for the relief of angina pectoris.

Prenate Elite and OptiNate

In August 2001, we purchased the Prenate line of prescription prenatal vitamins from Sanofi-Synthelabo. We acquired all of Sanofi-Synthelabo’s regulatory permits and licenses and contract rights related to Prenate. The purchase price for the acquired assets was $52.5 million in cash plus the assumption of certain liabilities and payment for product inventory, subject to post-closing adjustments.

The manufacturing agreement with Patheon, Inc., which manufactures Prenate Elite, was initially entered into with Sanofi-Synthelabo, Inc. in October 1999 and had a term of five years. We finalized a new manufacturing agreement with Patheon for Prenate Elite in 2005 which expires in January 2009. OptiNate is manufactured by Patheon and other third-parties.

Ponstel

In April 2000, we acquired exclusive rights to market, distribute and sell Ponstel in the U.S. from Pfizer. In December 2000, we signed an agreement with Westward Pharmaceuticals to manufacture Ponstel. Westward began supplying the product to us in the second quarter of 2003.This agreement was renewed for an additional one-year term in 2006 and expires in April 2008.

We must purchase all of our requirements for Ponstel from Westward and are subject to minimum purchase requirements. We must pay Westward a price for Ponstel based on a multiple of Westward’s direct cost of goods sold in the manufacture and supply of the product.

Ostiva

In July 2006, we acquired exclusive U.S. rights to market, distribute and sell Ostiva from PamLab. Ostiva is an oral prescription nutritional supplement formulation with Metafolin, calcium, magnesium, vitamins B6, B12 and D that gives women nutritional support to help maintain healthy bones. Together with regular exercise, a healthy diet, and enough calcium, Ostiva can help women take action to reduce the risk of osteporosis. Ostiva may be used in conjuction with other products that may require dietary supplementation such as bisposphonates. The intangible asset recorded in connection with the acquisition is expected to be amortized over a period of eight years.

Zovirax

In December 2006, we entered into a promotional agreement, which has an initial term of five years, with an affiliate of Biovail Corporation to provide promotional support for Zovirax in the United States. Zovirax is a topical form of the drug acyclovir, which is used in the treatment of type I (cold sores) and type II (genital) herpes simplex viruses. The intangible asset recorded in connection with the contract acquisition cost is expected to be amortized over a period of five years.

Other Products

Generally, our other products are manufactured under manufacturing and supply agreements, which require that we purchase all of our requirements for these products from the manufacturers which are a party to these agreements, including specified minimum purchase quantities of the product for each year. Except for agreements regarding our Zoto-HC products, these agreements generally state that the product supplier will provide products only to us.

Furadantin.    In December 2001, we acquired the U.S. rights to Furadantin from Elan Pharmaceutical, Inc. The purchase price for the acquired assets was approximately $15.8 million in cash. Under the agreement, we acquired the assets relating to Furadantin, including the NDA, trademark and related inventory.

In December 2001, we also entered into a supply agreement with Elan Pharmaceutical to manufacture and supply Furadantin to us through May 2003. In August 2002, we entered into a manufacturing agreement with OSG Norwich Pharmaceuticals to manufacture Furadantin for us. OSG became qualified to manufacture the product in November 2003. Beginning January 2004, we were required to purchase a minimum amount of inventory annually from OSG Norwich Pharmaceutical. This agreement expires in August 2007 and we intend to renew this agreement for an additional two-year term.

In May 2003, we entered into a supply agreement with Vinchem to supply us the active ingredient in Furadantin. This agreement expires May 2010 and is renewable for successive one-year terms.

Cognex.    In 2000, we acquired worldwide rights to market, distribute and sell Cognex as well as rights to a new unapproved version of Cognex called Cognex CR from Pfizer. We paid $3.5 million in cash for Cognex. We must pay Pfizer up to $1.5 million in additional purchase price if we obtain FDA approval to market Cognex CR in the U.S. At this time, we are preliminarily exploring opportunities to develop and seek FDA approval to market Cognex CR. In the event that we voluntarily stop selling Cognex for 60 days or more, other than for reasons outside our control, the Federal Trade Commission may order that Cognex revert back to Pfizer and be divested to another purchaser. Westward Pharmaceuticals supplies Cognex. This agreement expires March 2008, but may be renewed for an additional two-year term. We are seeking a new supplier for the active ingredient in Cognex. Based on our current sales projections, we believe that we have adequate supplies of the active ingredient in Cognex for the foreseeable future. However, if sales exceed our current projections or if we are unable to locate a new supplier of the active ingredient in Cognex, our ability to sell Cognex would be limited and our net income would be reduced.

Robinul and Robinul Forte.    In January 1999, we acquired exclusive rights in the U.S. to Robinul and Robinul Forte tablets from Wyeth. We must pay royalties on net sales under our license agreement with Wyeth. We entered into agreements with Mikart, in April 1999 and January 2001, for Mikart to become qualified under applicable regulations to manufacture and supply our requirements for Robinul. Mikart was approved by the FDA to manufacture Robinul in December 2001, and began supplying the Robinul products to us in December 2001. Under these agreements, Mikart will manufacture the products for five years from the time Mikart became a qualified manufacturer plus renewal terms of one year until either party elects not to renew. The agreement with Mikart requires that we purchase certain designated minimum quantities.

In January 2002, we entered into a license agreement with Wyeth-Ayerst Canada Inc. and Whitehall-Robins Inc. under which we acquired rights to manufacture, have manufactured for us, market and sell Robinul and Robinul Forte in Canada. If we begin to sell Robinul in Canada, we will pay Wyeth-Ayerst Canada a royalty on net sales of Robinul in Canada.

Products Under Development

We seek to maximize the value of drugs by developing new patentable formulations, using new delivery methods and seeking regulatory approval for new indications. Through the use of these distinct formulations and patent-protected delivery systems, we plan to create a marketing advantage over competing drugs. Some of these development projects include line extensions which allow us to extend the life cycles of our products. We expect the strength of extensive literature-based clinical data on the active ingredients in our products under development, current acceptance and usage of the active ingredients in these products by healthcare professionals and the safety profile of the active ingredients in approved products will reduce development costs and risks associated with FDA approval. Although we have increased our development infrastructure, we typically contract with third parties to formulate, develop and manufacture materials needed for clinical trials and to perform scale-up work. We select third-party contractors that we believe have the capability to commercially manufacture the products. By selecting qualified third parties capable of both developing formulations and providing full-scale manufacturing

services, we believe we will be able to shorten development and scale-up times necessary for production. The key advantage to this approach is that the third-party contractor will have the equipment, operational parameters and validated testing procedures already in place for the commercial manufacture of our products.

Manufacturers and Single Source Suppliers

We use third-party manufacturers for the production of our products for development and commercial purposes. Given the availability of excess capacity for manufacturing in the marketplace and the lower cost of outsourcing, we intend to continue to outsource our manufacturing for the near term. Some of our products are currently available only from sole or limited suppliers. These third-party manufactured products include products that have historically accounted for a significant portion of our revenues.

We are dependent on third parties for the supply of the raw materials necessary to develop and manufacture our products, including the active and inactive pharmaceutical ingredients used in our products. We are required to identify the supplier of all the raw materials for our products in the drug applications that we file with the FDA. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the FDA, which would likely interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist.

In addition, we obtain a significant portion of our raw materials from non-U.S.-based suppliers. Arrangements with international raw material suppliers are subject to, among other things, FDA regulation, various import duties, foreign currency risk and other government clearances. Acts of governments outside the U.S. may affect the price or availability of raw materials needed for the development or manufacture of our products. In addition, any changes in patent laws in jurisdictions outside the U.S. may make it increasingly difficult to obtain raw materials for research and development prior to the expiration of the applicable U.S. or foreign patents.

Under some of our agreements, the manufacturers or other third parties own rights to the products that we have under our marketing licenses. We have not entered into agreements for alternative manufacturing sources for any of our products. Further, under some of our agreements, we are required to purchase a minimum amount of raw materials and/or order a minimum amount of manufactured products. Generally, we must pay a shortfall penalty if we do not meet our minimum requirements.

Trademarks

Because of the large number of products on the market which compete with our products, we believe that our product brand names are an important factor in establishing product recognition. We have applied to have registered “Sciele Pharma” as a trademark in the U.S.

Our products are sold under a variety of brands for which we own U.S. registered trademarks, including Sular (and an associated design), Triglide, Fortamet, Altoprev, Prenate, Optinate, DHA 200 (and an associated design), Prenate Elite, Ponstel, Furadantin (and an associated design), Zoto-HC (and an associated design) and Zebutal. We own the U.S. rights to the Cognex trademark and its international counterparts. We also have filed U.S. trademark applications for Ostiva. Further, we have been licensed rights to use the trademarks Nitrolingual, Zovirax and Robinul from Pohl-Boskamp, Biovail and Wyeth, respectively. Maintenance of our trademarks requires that we enforce our rights by preventing infringement by third parties.

Patents

We consider the protection afforded by patents important to our business. We intend to seek patent protection in the U.S. and selected foreign countries where deemed appropriate for products we develop. There can be no assurances that any patents will result from our patent applications, that any patents that may be issued for any of the products we sell will protect the intellectual property associated with the products or that any issued patents will not be challenged by third parties. In addition, if we do not avoid infringement of the intellectual property rights of others, we may have to seek additional licenses to sell our products, defend infringement actions or challenge the validity of the intellectual property in court, all of which could be expensive and time consuming.

Sular

Pursuant to our distributorship agreement with Bayer, we are afforded patent protection arising from Bayer’s patent covering the composition of Sular’s coat core tablet. This patent expires in 2008. The expiration of this Bayer patent could result in the introduction of additional competition, which could cause a material decline in the sale and price of Sular. Pursuant to our May 2006 agreement with SkyePharma, we have an exclusive license to the patent rights associated with SkyePharma’s Geomatrix technology in connection with a potential Sular line extension.

Fortamet and Altoprev

Pursuant to a license agreement with Andrx entered into in March 2005, we have an exclusive worldwide license to the patent rights associated with Fortamet and Altoprev. The patents expire in March of 2020.

Triglide

Pursuant to our 2004 agreement with SkyePharma, we have an exclusive license to the patent rights associated with Triglide in the United States. The related patent expires in 2021.

Nitrolingual

By virtue of our distribution agreement with Pohl-Boskamp for Nitrolingual, we are afforded patent protection arising from Pohl-Boskamp’s U.S. patent relating to the product. This patent expires in 2010.

Prenate, OptiNate and Ostiva

Pursuant to an agreement with our metafolin supplier, we have licensed certain patent rights associated with reduced folates. The patents expire from 2017 through 2020.

Other Products

Cognex.    We own certain patent rights relating to the use of an active ingredient in Cognex to treat conditions associated with Alzheimer’s disease. The U.S. patents expire from 2008 through 2013.

Competition

The market for drugs is highly competitive with many established manufacturers, suppliers and distributors actively engaged in all phases of the business. We believe that competition in the sale of our products is based primarily on efficacy, reimbursement coverage, brand awareness, availability, product safety, and price. Our brand name pharmaceutical products may be subject to competition from alternate therapies during the period of patent protection and thereafter from generic or other competitive products. All of our products compete with generic and/or other competitive products in the marketplace.

Competing in the branded product business requires us to identify and quickly bring to market new products embodying technological innovations. Successful marketing of branded products depends primarily on the ability to communicate the efficacy, safety and value to healthcare professionals in private practice, group practices and managed care organizations. We anticipate that our branded product offerings will support our existing lines of therapeutic focus. Based upon business conditions and other factors, we regularly reexamine our business strategies and may from time to time reallocate our resources from one therapeutic area to another, withdraw from a therapeutic area or add an additional therapeutic area in order to maximize our overall growth opportunities.

Some of our products compete with one or more products marketed by very large pharmaceutical companies which have much greater financial resources for marketing, selling and developing their products. Our competitors in branded products include but are not limited to the major brand name manufacturers of pharmaceuticals such as Pfizer, Inc., Merck & Co., Inc., Abbott Laboratories, Inc., KV Pharmaceuticals Co., AstraZeneca PLC and Teva Pharmaceuticals Inc Ltd. Based on total assets, annual revenues and market capitalization, we are considerably smaller than these and other national competitors in the branded product area.These competitors, as well as others, have been in business for a longer period of time, have a greater number of products on the market and have greater financial and other resources than we do. If we directly compete with them for the same markets and/or products, their financial and market strength could prevent us from capturing a meaningful share of those markets.

We also compete with other pharmaceutical companies for product line acquisitions as well as for new products and acquisitions of other companies. These competitors include Forest Laboratories, Inc., Medicis Pharmaceutical Corporation, King Pharmaceuticals, Inc., Shire Pharmaceuticals Group plc, Abbott Laboratories, Inc., Barr Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc., Reliant Pharmaceutical, LLC, and other companies that acquire branded products from other pharmaceutical companies. These companies may have greater resources and abilities than we have.

Government Regulation

According to the Federal Food, Drug, and Cosmetic Act (“FDC Act”), new drugs are subject to pre-market approval by the FDA. Applicable federal law will govern the development of new products, indications and/or line extensions; some of which may require the submission of an NDA or a supplemental NDA (“sNDA”) (or an abbreviated NDA (“ANDA”) if applicable), and approval by the FDA.

The steps required for approval of an NDA or sNDA may include:

·        extensive pre-clinical toxicology and pharmacology studies,

·        submission to the FDA of an investigational new drug application (“IND”), which must become effective before human clinical trials can be commenced,

·        a series of preliminary clinical studies to demonstrate safety (Phase I) and optimal dosing and pharmacologic effects (Phase II),

·        adequate and well-controlled human clinical trials (Phase III) to establish the safety and effectiveness of the product,

·        submission of an NDA or an sNDA to the FDA (typically six to eighteen month internal FDA review cycle),

·        presentation of the NDA data to an FDA Advisory Panel for its recommendation, and

·        FDA approval of the NDA or sNDA prior to any commercial sale or shipment of the product.

Pre-clinical studies generally include laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological animal studies to assess quality and safety and provide a basis for design of the human clinical trials. An applicant submits the results of the pre-clinical studies with chemistry, manufacturing and control information and pharmacology and toxicology data in support of the proposed clinical study design to the FDA as a part of an IND and for review by the FDA prior to the commencement of human clinical trials. Unless the FDA determines otherwise, the IND will become effective 30 days following its receipt by the FDA. However, the FDA may place an IND on “clinical hold” until the applicant generates and supplies the FDA with additional data, which prohibits the applicant from commencing the proposed clinical trials until the “clinical hold” has been removed by the FDA.

Clinical trials involve the administration of the IND to humans under the clinical study protocols that were submitted to the FDA as part of the IND. The conduct of the clinical trials is subject to extensive regulation including compliance with good clinical practices, obtaining informed patient consents, sponsor monitoring and auditing of the clinical, laboratory and product manufacturing sites as well as review and approval of each study by an Institutional Review Board. Clinical trials are typically conducted in three sequential Phases, although Phases may overlap. In Phase I, the investigational new drug usually is administered to 20-50 healthy human subjects and is tested for safety. Phase II usually involves studies in a limited patient population (50-200 patients) to:

·        determine the initial effectiveness of the investigational new drug for specific indications,

·        determine dosage tolerance and optimal dosage, and

·        identify possible adverse effects and safety risks.

When an investigational new drug is found to be effective and to have an acceptable safety profile in its Phase II evaluation, Phase III trials are undertaken to further evaluate clinical effectiveness and to further test for safety within an expanded patient population of usually 200 or more patients. The FDA reviews both the clinical plans and the results of the trials and may require the study to be discontinued at any time if there are significant safety issues or lack of efficacy. In some cases, the FDA can request Phase IV clinical studies to be conducted as a condition of approval of the NDA, although the Phase IV studies will be conducted within a designated time period following NDA approval. These studies can be designed to obtain additional safety and efficacy data, detect new uses for or abuses of a drug, or determine effectiveness for labeled indications under conditions of widespread usage. These studies can involve significant additional expenses, and failure to perform these Phase IV studies within the FDA-stated timeframe can result in the FDA withdrawing the NDA approval.

Once the FDA has approved an NDA, the holder of the NDA may request changes to the product or manufacturing process through a supplement to the original NDA, termed an sNDA. The format, content and procedures applicable to NDA supplements are generally the same as those for NDAs. However, the information required to be provided to the FDA in a supplement is only that which is needed to support the requested change. If the NDA or sNDA is based on new clinical investigations that are essential to the approval of the application, other than bioavailability studies, it may qualify for a three-year period of marketing exclusivity, distinct from any applicable patent protection that may exist. In such a case, the FDA may accept for filing, but will not approve a generic product for three years from the date of that application’s approval. The FDA may also require user fees in excess of $0.3 million for prescription drug NDAs or sNDAs. Supplements proposing to include a new indication for use in pediatric populations are not subject to user fees unless the supplement contains clinical data.

Another form of an NDA is the so-called “505(b)(2)” NDA, which applicants submit pursuant to Section 505(b)(2) of the FDC Act. This type of NDA permits an applicant to cross-reference to safety and effectiveness studies that the applicant has not conducted or been granted a right of reference by the sponsor of the animal or human studies, submitted in a prior NDA or in the literature which utilized the

same drug. In addition, the FDA recommends a 505(b)(2) NDA for a modification, such as a new dosage form or drug delivery form, of a previously approved drug (but not that held by the 505(b)(2) applicant), which requires more than merely bioequivalence data. This 505(b)(2) NDA is similar to a full NDA, except that, under conditions prescribed by the FDA, it may be supported in whole or in part by one or more animal and human study investigations in the originator NDA or those published in scientific literature in lieu of the applicant’s clinical trials. This type of NDA application is submitted to market potential product line extensions or new uses of already-approved products. Payment of user fees may also be required by the FDA.

In addition, if we submit a 505(b)(2) NDA or ANDA, the FDA will require us to certify as to any patent which covers the drug for which we seek approval. If there is a patent in existence, we are required to make a certification commonly referred to as a “paragraph IV certification,” and to give notice to the patent holder of our intent to market the drug. If the patent holder makes an infringement claim within a specified time period, then the FDA will not approve our marketing application for 30 months or until the patent litigation is resolved, whichever occurs sooner. Furthermore, distinct from patent considerations, approval of a generic type of ANDA could be delayed because of the existence of five or three years of marketing non-patent exclusivity afforded by the FDA for the innovator drug or 180 days of non-patent exclusivity afforded to the first applicant to submit an ANDA with a paragraph IV certification. However, in certain proscribed cases, this non-patent exclusivity may not prevent the submission and approval of competitor ANDAs, and a patent holder can still sue for infringement under traditional patent law.

The least burdensome application for new drug approval is the ANDA, which may apply to a new drug that is shown to be bioequivalent to a drug that was previously approved by the FDA for safety and effectiveness. An applicant may submit an ANDA for products that are the same as an approved originator drug regarding active ingredient(s), route of administration, dosage form, strength and conditions of use recommended on the labeling. The ANDA requires only bioequivalence data and other technical and manufacturing information, but typically no safety and effectiveness studies.

Even after obtaining regulatory approval, such approval may require post-marketing (Phase IV) testing and surveillance to monitor the safety of the product. In addition, the product approval may be withdrawn if compliance with regulatory standards is not maintained or if issues arise following initial marketing. At present, companies cannot export pharmaceutical products that cannot be lawfully sold in the U.S. unless certain statutorily prescribed conditions are met.

FDA regulations require that we report adverse events suffered by patients, submit new marketing and promotional materials, comply with regulations regarding product marketing, submit changes we plan to make to the product manufacturing or labeling and comply with recordkeeping requirements and requirements relating to the distribution of drug samples to physicians. Failure to comply with the FDA requirements may result in the manufacture, sales, marketing and distribution of our products being suspended, and we may be prevented from obtaining FDA approval of new products.

Our third-party manufacturers must adhere to FDA regulations relating to current good manufacturing practice (“cGMP”) regulations, which include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned and salvaged products. Ongoing compliance with cGMP procedures, labeling and other regulatory requirements is monitored through periodic inspections and market surveillance by state and federal agencies, including the FDA. It is also our obligation to periodically monitor the FDA compliance of our third-party manufacturers. Failure by our third-party manufacturers to comply with these rules could result in sanctions being imposed, including fines, injunctions, civil penalties, suspension or withdrawal of FDA approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Moreover, we rely upon our third-party manufacturers to

provide many of the documents that we use to comply with our FDA reporting requirements for all products we sell.

In addition, we are subject to fees under the Prescription Drug User Fee Act which applies to NDAs, new drug products and sNDAs for new uses, except that we may, in certain limited circumstances, qualify for a waiver of the fee for our first NDA. We will be responsible for paying these fees for NDAs, sNDAs and subsequent submissions, unless we receive approval from the FDA for a waiver, reduction or refund. We are also subject to regulation under other federal and state laws, including the Occupational Safety and Health Act and other environmental laws and regulations, national restrictions on technology transfer and import, export and customs regulations.

Whether or not we obtain FDA approval, we must obtain approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries prior to the commencement of clinical trials and subsequent marketing of such product in these countries. The approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval.

Orphan Drug Designation

In June 2006, the FDA granted the Company orphan drug designation for glycopyrrolate, which is being developed to treat chronic moderate to severe drooling in pediatric patients. We may request orphan drug status for some of our other products under development. Orphan drug designation may be granted to those products developed to treat diseases or conditions that affect fewer than 200,000 persons in the U.S. or that affect more than 200,000 persons in the U.S. and for which there is no reasonable expectation that the cost of developing and making a drug in the U.S. for such disease or condition will be recovered from sales in the U.S. of such drug. Under the law, the developer of an orphan drug may be entitled to seven years of market exclusivity following the approval of the product by the FDA, exemption from user fee payments to the FDA and a tax credit for the amount of money spent on human clinical trials. However, should there be a competitor with a similar molecular entity pursuing the same intended clinical use, we must be the first to receive FDA marketing approval in order to receive market exclusivity under the Orphan Drug Act. Although we may receive market exclusivity under the Orphan Drug Act, the FDA will allow the sale of a molecularly equivalent drug which is clinically superior to or a molecular entity different from another approved orphan drug, even if it is for the same indication, during the seven-year exclusive marketing period. It is also possible that a competitor may attempt to undermine any exclusivity provided to us by promoting a product for an off-label use that is the otherwise protected product. We cannot be certain that any of our products under development would ultimately receive orphan drug designation, or that the benefits currently provided by this designation, if we were to receive it, will not subsequently be amended or eliminated. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

Reimbursement

Our ability to market our products successfully depends in part on the extent to which reimbursement for the costs of the products will be available from government health administration authorities, private health insurers and managed care organizations in the U.S. and in any foreign markets where we may sell our products. Third-party payors, including Medicaid and Medicare Part D, can affect the pricing or relative attractiveness of our products by regulating the reimbursement they provide on our products and competing products. Insurance carriers may not reimburse healthcare providers for use of our products for new indications. Domestic and foreign government and third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new pharmaceutical products.

Third-party payors regularly challenge the pricing of medical products and services by substituting cheaper products on their approved lists. We face an increased risk of third-party payors substituting or competing with the drugs in our product portfolio. If third-party payors remove any of these products from their lists or choose not to pay for our product prescriptions, patients and pharmacies may not continue to choose our products.

Insurance

We maintain a product liability insurance policy. Our property and casualty insurance policy provides for payment for lost inventory in the event of loss from damage to our property as well as business interruption coverage.

Employees

We had 782 full-time employees as of December 31, 2006, including 625 sales employees in the field and 157 in management, marketing, finance and administration. We also maintain active independent contractor relationships with various individuals with whom we have consulting agreements. We believe our employee relations are good. None of our employees are subject to a collective bargaining agreement.

ITEM 1A.   RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information contained in this Report on Form 10-K. The risks and uncertainties described below are not the only ones we are facing and other risks and uncertainties may become important factors that affect us.

If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline.

Risks Related to Our Business

Our operating results are substantially dependent upon the contribution of Sular, which has been below our acquisition expectations since we acquired the product and which has adversely affected our operating results.

We acquired Sular in March 2002 and have not realized the sales growth for Sular that we anticipated when we acquired it. As a result, our growth has suffered. According to IMS Health’s Next Generation Prescription Services data, total Sular prescriptions increased 21.7% for the year ended December 31, 2006 compared to the year ended December 31, 2005. Although we have revised our operational plan to focus on maximizing sales of our existing products, particularly Sular, we may not be able to increase Sular prescriptions.

The potential growth rate for Sular may be limited by the contraction of the market for the class of drugs to which Sular belongs.

The calcium channel blocker products market is contracting. This contraction may be due to the following, all or any of which may have an adverse effect on the sales of Sular:

·        published studies showing that other classes of drugs treating hypertension have health benefits in addition to controlling blood pressure;

·        the introduction of new classes of drugs treating hypertension; and

·        a reduction in the number of companies actively promoting calcium channel blockers, which, in turn, has led to there being less available information regarding calcium channel blockers.

Competitors could offer a product competitive with Sular and our other products.

A patent addressing the composition of the active ingredient in Sular expired in 1998 and a patent covering the manufacturing process expired in 2004. Therefore, a competitor could introduce a product competitive with Sular containing its same active ingredient, although Sular remains protected under a patent addressing its coat core tablet. Any such competing product may reduce our potential sales of Sular. Further, as the patent protection for our other products expires, competitors could introduce competitive products which may reduce our sales of such products, adversely impacting our financial performance.

Pohl-Boskamp can terminate our rights to Nitrolingual Pumpspray.

Nitrolingual Pumpspray is one of our key products. Pohl-Boskamp can terminate our distribution agreement for Nitrolingual Pumpspray if a company with a product competitive with Nitrolingual Pumpspray acquires direct or indirect influence or control over us. Pohl-Boskamp’s termination of our distribution agreement could have a material adverse impact on our financial results.

In the future, we may not be able to increase our sales of promoted products sufficiently to compensate for the decrease in sales of our non-promoted products.

We suffered declining sales of our non-promoted products for the year ended December 31, 2006. We plan to compensate for this decline in revenues by increasing sales of our existing actively promoted products and acquiring new products. However, we may not be able to increase sales of actively promoted products or locate attractive acquisition candidates and successfully complete an acquisition to offset the declining sales of non-promoted products.

If we are unable to introduce line extensions of our existing products, we may not achieve our sales plan.

Part of our operating plan includes the introduction of line extensions of our existing products to create marketing advantages and extend the life cycles of our products. If we are unable to introduce line extensions for any reason, including our, or our third party developers’, inability to obtain necessary FDA approval, we may not achieve our sales plan and/or revenue growth.

Introductions of line extensions of our existing products may require us to make unexpected changes in our estimates for future product returns and reserves for obsolete inventory which would adversely affect our operating results.

From time-to-time we may seek to introduce line extensions on an unexpected and expedited basis before we are able to reduce the levels of inventories of product which may be rendered obsolete or otherwise adversely affected by the line extension. This may require us to increase our estimate for returns of product on hand at wholesalers, which is recorded as a reduction of our net revenues, and increase our reserve for obsolete inventory in our warehouse which is recorded as a cost of revenues. Accordingly, the introduction of line extensions may adversely affect our operating results.

Our ability to grow will suffer if we do not acquire or license rights to new products and integrate them successfully.

We depend on acquisitions of rights to products from others as our primary source for new products. Risks in acquiring and integrating new products include the following:

·        we may not be able to locate new products that we find attractive and complementary to our business;

·        the price to acquire or obtain a license for these products may be too costly to justify the acquisition;

·        we may not be able to successfully integrate newly acquired products into our existing operations or the cost of integration may exceed our expectations; and

·        we may not realize our anticipated return on investment from our sales of any such newly acquired products.

We often face significant competition from other pharmaceutical companies in acquiring rights to products, which makes it more difficult to find attractive products on acceptable terms. In addition, integration of new products into our existing structure may require unanticipated investments of time and resources or an expansion of our sales force. If we are unable to acquire or license rights to new products or are unsuccessful in integrating such products, our ability to grow will suffer and our operating results may be adversely affected.

As part of our growth strategy, we may acquire businesses, which will subject us to additional risks.

As an element of our growth strategy, we may acquire businesses with products that complement our current products, and we have evaluated and discussed such opportunities with interested parties in the past. In addition to the risks that we face in locating and consummating new product acquisitions, we face the following risks, the occurrence of any or all of which may adversely affect our business:

·        we may realize substantial acquisition-related expenses, including the amortization of long-lived assets, which would reduce our net income in future years;

·        our investigation of potential acquisition candidates may not reveal problems and liabilities associated with the businesses, technologies or products that we acquire;

·        we may assume liabilities that increase our risks;

·        we may not be able to fully integrate the acquired business or products into our own; and

·        we may underestimate the costs necessary to integrate and operate the acquired business.

In addition, if we conduct acquisitions using convertible debt or equity securities, the increased number of shares may be dilutive to our shareholders, and may result in lower earnings per share.

We may incur charges for intangible asset impairment.

When we acquire the rights to manufacture and sell a product, we record the aggregate purchase price, along with the value of the product related liabilities we assume, as intangible assets. We use the assistance of valuation experts to help us allocate the purchase price to the fair value of the various intangible assets we have acquired. Then, we must estimate the economic useful life of each of these intangible assets in order to amortize their cost as an expense in our statement of operations over the estimated economic useful life of the related asset. The factors that drive the actual economic useful life of a pharmaceutical product are inherently uncertain, and include patent protection, physician loyalty and prescribing patterns, competition by products prescribed for similar indications, future introductions of competing products not yet FDA approved, the impact of promotional efforts and many other issues. We use all of these factors in initially estimating the economic useful lives of our products, and we also continuously monitor these factors for indications of appropriate revisions.

In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated undiscounted future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, we must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, we may be required to record impairment changes for these assets. We review intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If we determine that an intangible asset is impaired, a non-cash impairment charge would be recognized.

As circumstances after an acquisition can change, the value of intangible assets may not be realized by us. If we determine that an impairment has occurred, we would be required to write-off the impaired portion of the unamortized intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs. In addition, in the event of a sale of any of our assets, we cannot be certain that our recorded value of such intangible assets would be recovered.

We may encounter problems in the manufacture or supply of our products that could limit our ability to sell our products.

We depend entirely on third parties to manufacture and supply our products. We do not currently have manufacturing facilities, personnel or access to raw materials to independently manufacture our products. Except for any contractual rights and remedies which we may have with our manufacturers and suppliers, we have no control over the availability of our products or their quality or cost to us. We do not maintain alternative manufacturing sources for any of our products, and we may not be able to locate alternative manufacturers on commercially acceptable terms in the event of a manufacturing interruption or termination of an existing manufacturing agreement.

In addition, third party intellectual property rights limit our ability to manufacture and supply our products. For example, due to the patent held on Nitrolingual by our supplier, Pohl-Boskamp, no alternative source for Nitrolingual exists. Similarly, third parties hold the patents for the composition of the coat core tablet for Sular, the patent rights for Fortamet and Altoprev, the patent rights for the active ingredients, manufacturing processes and other aspects of our products. In the event that these suppliers ceased to supply product to us, we may not be able to locate another manufacturer or supplier who would be able to manufacture or supply the products without violating such patents.

Our third-party manufacturing agreements for the majority of our products require that we purchase our product requirements from the manufacturers that are a party to those agreements. This prevents our entering into more advantageous manufacturing agreements with other manufacturers for these products, except in very limited circumstances.

We face generic and other strong competition that could lower prices and unit sales, and competitors have recently introduced new products and therapies that could make some of our products obsolete.

Many of our products compete with generic products that could decrease our sales or force us to lower prices. In addition, some of our products are not protected by patents and face competition from less expensive products. Competitors could develop new products to compete with these products or could develop generic versions of products with which our products compete. Third-party payors can require substitution and pharmacists can substitute generic or other competitive products for our products even if physicians prescribe them. Government agencies, third-party payors and pharmacies often put pressure on patients to purchase generic or other products instead of brand-name products as a way to reduce healthcare costs. Any further increase in the amount of generic and other competition against any one or more of our products could further lower prices and unit sales which could adversely affect our results of operations.

In addition, our products compete against products sold over-the-counter or by prescription that in some cases are marketed by much larger pharmaceutical companies with greater financial resources for marketing and manufacturing. For example, Pfizer sells a hypertension product called Norvasc which, as of December 31, 2006 had a 44.4% share of the calcium channel blocker market (based on prescriptions according to IMS Health’s National Prescription Audit Plus™ data), and introduced a combination of Norvasc with its popular cholesterol-reducing product Lipitor, called Caduet, which could prove to be an attractive alternative to our product Sular. Also, a competitor is developing a lingual nitroglycerin spray similar to our Nitrolingual product, which could divert prescriptions and reduce sales of Nitrolingual. Also, based on the regulatory status of our Prenate Elite, OptiNate, Robinul, Tanafed, Zebutal, and Zoto-HC

products, barriers to entry for products competing with our products are low, which makes it easier for competitors to enter the market. Competitors may continue to develop new products and surgeons may continue to develop new surgical procedures to treat angina. Competitors are also developing new products to treat short term pain and have recently developed new pain therapies. These new products and procedures may reduce demand for our products. The high level of competition in our industry could force us to reduce the price at which we sell our products or require us to spend more to market our products, or both.

A small number of customers account for a large portion of our sales and the loss of one of them, or changes in their purchasing patterns, could result in reduced sales or adversely impact our financial performance.

For the year ended December 31, 2006, sales to McKesson Corporation represented 34%, Cardinal Health Inc. represented 24% and AmerisourceBergen Corporation represented 11% of our total sales. For the year ended December 31, 2005, sales to McKesson Corporation represented 30%, Cardinal Health Inc. represented 23% and AmerisourceBergen Corporation represented 10% of our total sales. The small number of wholesale drug distributors, consolidation in this industry or financial difficulties of these distributors could result in the combination or elimination of warehouses, which could temporarily increase returns of our products or, as a result of distributors reducing inventory levels, delay the purchase of our products.

If our products under development fail in clinical studies, if we fail or encounter difficulties in obtaining regulatory approval for new products or new uses of existing products, or if our development agreements are terminated, we will have expended significant resources for no return.

We rely on third parties to formulate, develop and manufacture the materials needed for clinical trials for our products under development. We also rely on third parties to conduct clinical trials for us. If our products are not successful in clinical trials or we do not obtain FDA marketing approval, we will have expended significant resources with no return.

We may not receive FDA approvals for products and/or ongoing clinical studies might be delayed or halted for various reasons, including:

·        our products are not shown to be effective;

·        we do not comply with requirements concerning the investigational new drug application requirements or protection of the rights and welfare of human subjects;

·        patients experience unacceptable side effects or die during clinical trials;

·        patients do not enroll in the studies at the rate we expect; and

·        product supplies are delayed, are not sufficient to treat the patients in the studies or are not sufficiently stable.

If third-party payors do not adequately reimburse patients for our products, doctors may not prescribe them.

Because our products are sold by prescription, we depend on third-party payors, such as the government, private healthcare insurers and managed care organizations, to include these products on their lists of products for which third-party payors will reimburse patients. Third-party payors regularly challenge the pricing of medical products and services by substituting cheaper products on their approved lists. Because our Zebutal, Zoto, Robinul line, Ponstel and Furadantin products are susceptible to generic competition and because of products that compete with Sular, Prenate, Nitrolingual Pumpspray, Altoprev, Fortamet, Triglide, Ponstel, Ostiva and Zovirax, we face an increased risk of third-party payors substituting these products. If third-party payors remove any of these products from their lists or choose not to pay for our product prescriptions, patients and pharmacies may not continue to choose our products.

We rely on data obtained from IMS which could be inaccurate.

We rely on operational data obtained from IMS, an industry accepted data source. IMS data may not accurately reflect actual prescriptions (for instance, we believe IMS data does not capture all product prescriptions from some non-retail channels) or trade levels of inventory. If IMS data turns out to be inaccurate or unreliable and our controls are not effective, there could be an adverse effect on our ability to properly manage inventory and our financial performance.

We depend on highly trained management, and we may not be able to keep current management or hire qualified management personnel in the future.

We currently have a limited number of key executive, regulatory, technical and management personnel. We may need to identify and attract new executive, operational and marketing personnel, and we may have difficulty hiring personnel at an acceptable cost. While we periodically address succession planning and the possibility of key employees retiring, our failure to successfully identify and attract such personnel, as and when needed, could limit our ability to continue our business at its current level and/or grow our business.

The incurrence of debt could reduce our growth and profitability.

In March 2004, the Company issued a total of $150.0 million of its 1.75% senior subordinated contingent convertible notes due in 2024 (the “2004 Notes”) in transactions that were exempt from registration in reliance upon Rule 144A and other available exemptions under the Securities Act. In May 2006 and pursuant to a registered exchange offer, the Company exchanged each outstanding 2004 Note with new notes (the “New Notes”) that, among other things, require the Company to redeem the $150.0 million 2004 Notes with cash instead of common stock. As an incentive to the 2004 Note holders to exchange the 2004 Notes for New Notes, the Company paid each exchanging holder an exchange fee equal to 0.75% of the face value of each New Note exchanged. The Company paid an aggregate exchange fee of $1,125,000. The New Notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, which commenced on September 8, 2004. In addition to the interest on the New Notes, after March 8, 2007, the Company will also pay contingent interest during specified six-month periods if the average trading price of the New Notes per $1,000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six-month period equals $1,200 or more. During any period when contingent interest is payable, it will be payable at a rate equal to 0.5% per annum. As this contingent interest feature is based on the underlying trading price of the New Notes, the contingent interest qualifies as an embedded derivative. As of December 31, 2006, management determined that the fair value of this contingent interest embedded derivative was not material. The net proceeds from this issuance, after deducting initial offering expenses, were approximately $145.5 million. Financing costs of $5.0 million were incurred with the original issuance and $1,125,000 with the exchange, which are being amortized on a straight-line basis over the life of the notes, and are included in other assets in the consolidated balance sheet.

On September 18, 2006, the Company and certain of its subsidiaries (together with Sciele, the “Borrower”) entered into a secured credit agreement (the “Credit Agreement”) with UBS Securities LLC and LaSalle Bank National Association as lead arrangers, UBS AG, Stamford Branch, as issuing bank, administrative agent and collateral agent, Regents Bank, Fifth Third Bank and Bank of America, N.A. as co-documentation agents and UBS Loan Finance LLC, as swingline lender. The Credit Agreement provides the Company and its Cayman subsidiary, Sciele Pharma Cayman Ltd., with a five-year revolving credit facility of up to $100 million with an option to expand the facility credit line by up to an additional $75 million. As of December 31, 2006, there was no outstanding balance under the Agreement.

Incurrence of significant indebtedness, including our existing debt, could (1) limit our operating flexibility as a result of requirements by lenders, (2) require us to use a large portion of our cash flow from

operations for debt service payments that could reduce profits and would reduce the availability of our cash flow to fund operations, product acquisitions, the expansion of our sales force and facilities and research and development efforts and (3) limit acquisitions of products or companies due to restrictive covenants under our senior secured credit facility with which we must comply as long as it is in effect.

We expect to need additional funds to acquire or obtain licenses for new products, develop and test new products and potentially to acquire other businesses. We may seek funding through public and private financing and may seek to incur debt, issue shares of our stock, or both, either to finance a transaction or as consideration for a transaction. Adequate funds for these purposes, whether through the financial markets or from other sources, may not be available when we need them or on terms acceptable to us. Insufficient funds could cause us to delay, scale back or abandon some or all of our product acquisitions, licensing opportunities, marketing programs, product development programs, potential business acquisitions and manufacturing opportunities.

The regulatory status of some of our products makes these products subject to increased competition and other risks.

The regulatory status of some of our products may allow third parties to more easily introduce competitive products and may make it more difficult for us to sell certain of our products in the future. Currently, an FDA program allows us, in our opinion, to manufacture and market certain of our products, and permits others to manufacture and market similar products, without submitting safety or efficacy data. In some cases, we do not hold rights in patents protecting us against such competitive pressures. This results in increased competition because other companies can enter the market without having to submit safety and efficacy data to sell competing products. On several occasions, the FDA has considered changing the classification of certain single entity and combination product types of drugs from prescription to over-the-counter use, which permit sponsors to utilize foreign over-the-counter experience data to establish a product as safe and effective for over-the-counter use in the U.S. If the FDA does change the classification, we might have to reformulate certain products or submit safety and efficacy data on those products, which could be costly, or we might have to discontinue selling certain products if the FDA does not approve our marketing application. We could lose third-party reimbursement for these products and face increased competition.

In addition, the FDA considers certain products to be new drugs, but has indicated its intent to exercise enforcement discretion and not pursue regulatory action unless certain conditions occur. If these conditions were to materialize, or the FDA disagreed with our conclusions about the regulatory status of these products, we might be required to submit a NDA and/or cease marketing until the FDA grants approval to do so. The FDA could also, at any time, promulgate new regulations or policies to require the submission of a NDA for each of these products.

Our business is heavily regulated by governmental authorities, and failure to comply with such regulation or changes in such regulations could negatively affect our results.

Many government authorities regulate our business, including, among others, the FDA, the SEC, foreign regulatory authorities, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety and Health Administration, the Centers for Medicare and Medicaid Services, the Environmental Protection Agency, the Department of Labor, state, local and foreign governments and the Internal Revenue Service. We may incur significant expenses to comply with regulations imposed by these authorities. Also, our future results could be negatively impacted by changes in governmental regulation over the pharmaceutical industry, including regulation of Medicare, Medicaid and similar programs, by reducing our revenue and profits and/or increasing our costs and expenses in order to comply with such regulation. In addition, all of our third-party manufacturers, third-party sample distributors and product packaging companies are subject to inspection by the FDA and, in appropriate cases, the Drug Enforcement Administration and foreign

regulators. Some of our third-party manufacturers have received warning letters from the FDA concerning noncompliance with manufacturing requirements. If our third-party manufacturers and other supply and distribution chain partners do not comply with FDA regulations in the future, they may not deliver products to us or deliver samples to our representatives, or we may have to recall products. Even if deficiencies observed by the FDA do not relate to our products, our third-party manufacturers, third-party sample distributors and product packaging companies may be delayed in manufacturing and supplying our products to us in a timely manner until they address their compliance issues with the FDA.

Our warehouse facility is also subject to inspection by the FDA and the Drug Enforcement Administration. If we do not comply with FDA and Drug Enforcement Administration regulations, we may not be able to sell product to our customers.

An adverse judgment in the securities class action litigation in which we and certain directors and executive officers are defendants could have a material adverse effect on our results of operations and liquidity.

The Company, certain former and current officers and directors are defendants in a consolidated securities lawsuit filed on August 22, 2002 in the United States District Court for the Northern District of Georgia. Plaintiffs in the class action alleged in general terms that we violated Sections 11 and 12(a)(a) of the Securities Act of 1933 and that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In an amended complaint, Plaintiffs claim that we issued a series of materially false and misleading statements to the market in connection with our public offering on April 24, 2002 and thereafter relating to alleged “channel stuffing” activities. The amended complaint also alleged controlling person liability on behalf of certain of our officers under Section 15 of the Securities Act of 1933 and Section 20 of the Securities Exchange Act of 1934. Plaintiffs seek an unspecified amount of compensatory damages.

On September 29, 2004, the U.S. District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit. Although the lawsuit was dismissed, the court granted the plaintiffs the right to refile provided that the plaintiffs pay all of the defendant’s fees and costs associated with filing the motion to dismiss the lawsuit. Plaintiffs did not file a second amended complaint as permitted, but instead filed a motion asking the District Court to reconsider its September 29, 2004 order and lift the condition that they must pay defendants’ fees and costs before further amendment. On June 22, 2005, the District Court denied plaintiffs’ motion and gave them another opportunity to amend if they pay defendants’ fees and costs. Once again, plaintiffs chose not to file a second amended complaint. Instead, plaintiffs filed an appeal to the United States Court of Appeals for the Eleventh Circuit.

On September 18, 2006, the Eleventh Circuit Court of Appeals affirmed the District Court’s determination that the Amended Complaint was a “shotgun pleading” which did not satisfy the pleading requirements under the federal rules. The Court of Appeals, however, disagreed with the remedy ordered by the District Court. Instead of dismissing the Amended Complaint with a right to further amend if Plaintiffs paid Defendants’ fees and costs, the Court of Appeals held that the District Court should have ordered Plaintiffs to replead under Federal Rule of Civil Procedure 12(e). The Court of Appeals also held that Plaintiffs’ claims under the Securities Act of 1933 must meet the heightened pleading standards of Federal Rule of Civil Procedure 9(b) because those claims are based on alleged fraud. Accordingly, the Court of Appeals vacated the District Court’s orders and remanded with instructions to order a repleading.

The Company shall continue to vigorously defend this action. No accrual is recorded in the Company’s financial statements related to this case as the Company believes that its risk of loss is remote.

We are subject to risks associated with taxation in multiple jurisdictions.

We are subject to taxation in the U.S. and in certain foreign jurisdictions. Our effective tax rate and tax liability are determined by a number of factors, including the amount of taxable income in particular jurisdictions, the tax rates in these jurisdictions, tax treaties between jurisdictions, the extent to which we

transfer funds to and repatriate funds from our subsidiaries and future changes in laws. An adverse interpretation or ruling by one of the taxing authorities in a jurisdiction in which we operate or a change in law could increase our tax liability or result in the imposition of penalty payments, which could adversely impact our operating results.

If we do not secure or enforce patents and other intellectual property rights, we could encounter increased competition that would adversely affect our operating results.

We do not hold patent rights covering all of the products we are distributing and do not in some cases have the right to enforce patents our licensors hold. Patent rights do not protect our Robinul, Ponstel and Furadantin and Zovirax products from competition. We obtained exclusive distribution rights in the U.S. to distribute our Fortamet, Altoprev, Triglide,and Nitrolingual products, but have no or only limited rights to enforce the patents relating to these products. We obtained exclusive U.S. distribution rights to Sular from Bayer. Bayer holds the patent for the composition of the coat core tablet for Sular. Any exclusivity afforded by any of these patents or rights could cease because we have no rights or only limited rights to enforce patents or to require enforcement actions by the owners of the patents. Proceedings involving our rights in patents or patent applications could result in adverse decisions. In addition, the confidentiality agreements required of our employees and third parties may not provide adequate protection for our trade secrets, know-how and other proprietary information which we rely on to develop and sell our products. If any of our employees or third parties disclose any of our trade secrets or know-how, we could encounter increased competition.

Our products could infringe the intellectual property rights of third parties, which could require us to pay license fees or defend litigation that would be expensive or prevent us from selling products.

The manufacture, use or sale of our products may infringe on the patent, trademark and other intellectual property rights of others. Patent and trademark infringement problems occur frequently in connection with the sale and marketing of pharmaceutical products. If we do not avoid alleged infringement of the intellectual property rights of others, we may need to seek a license to sell our products, defend an infringement action or challenge the validity of the intellectual property in court, all of which could be expensive and time consuming. In addition, if we are found liable for infringing a patent, we may have to stop selling one or more of our products and pay damages. It could be very costly if we have to defend the patents or trademarks covering our products or if we were found liable for infringement which could increase our costs and reduce our margins and net income.

Product liability claims and product recalls could limit sales and increase costs.

Side effects could occur from the use of our products. Side effects or marketing or manufacturing problems pertaining to any of our products could result in material product liability claims or adverse publicity. The defense of these claims would be expensive and could result in withdrawal of approval to market the product or recall of the product. These problems often occur with little or no notice in connection with the sale of pharmaceutical products.

We face an exchange risk on foreign currency.

Our purchases of Nitrolingual from Pohl-Boskamp, our purchases of Triglide from Skyepharma and our purchases of Sular from Bayer are made in Euros or are otherwise impacted by fluctuations in the U.S. dollar—Euro exchange rate. Although we did not enter into any forward contracts in 2006, we may seek to eliminate risks from foreign currency fluctuations after the time of shipment of product by entering into forward contracts for these purchases of inventory at the time of product shipments. The Company’s earnings and cash flows could be adversely affected in the future by the relationship of the U.S. dollar with foreign currencies, and there can be no assurance that any hedging activity will be successful in protecting us from exchange risk.

We face market risk that we could be adversely affected by certain fluctuations in interest rates.

The fair value of our investment portfolio would be negatively affected by an increase in interest rates. Since the majority of the Company’s investments are fixed rate interest-bearing securities and therefore subject to the market risk of loss in market value from an increase in rates or a change in the underlying risk of the issuers of the notes, the Company’s future earnings and cash flows could be affected adversely if the Company were to sell the securities prior to their maturity date. We had realized losses from the sale of investments for the year ended December 31, 2006 of less than $0.1 million. At December 31, 2006, the Company had total net unrealized losses from marketable securities of $0.9 million.

In connection with borrowings incurred under the credit facility with UBS Securities LLC, we could experience market risk with respect to changes in the general level of the interest rates and their effect upon our interest expense. Borrowings under this facility bear interest at variable rates. Because such rates are variable, an increase in interest rates will result in additional interest expense and a reduction in interest rates will result in reduced interest expense. Accordingly, our present exposure to interest rate fluctuations is primarily dependent on rate changes that may occur while borrowings under the senior secured credit facility are outstanding.

The Company’s long-term fixed interest rate debt is comprised of the New Notes, which are also subject to market risk. All other things being equal, the fair market value of the Company’s fixed rate debt will increase as rates decline and will decrease as rates rise. The fixed rate New Notes outstanding, totaling $150.0 million at December 31, 2006, had a fair value of $171.0 million based on quoted market rates as of such date.

Risks Related to our Common Stock

Our stock price has been volatile.

The market price for our securities has been highly volatile. Various factors, including factors that are not related to our operating performance, may cause significant volume and price fluctuations in the market. The following factors, among others, may cause fluctuations in our stock price:

·        failure to meet our financial estimates or expectations of securities analysts;

·        failure to increase prescriptions of our products;

·        the introduction of knock-offs or generics to our products;

·        fluctuations in operating results;

·        rates of product acceptance;

·        timing or delay of regulatory approvals;

·        volatility in the pharmaceutical and specialty pharmaceutical market and stocks;

·        third-party manufacturer interruptions in the supply of raw materials, delays in shipping or regulatory problems and/or delays;

·        developments in or disputes regarding patent or other proprietary rights; and

·        general economic, market and political conditions not related to our business.

Anti-takeover provisions could discourage a third party from making a takeover offer that could be beneficial to stockholders.

Some of the provisions in our restated certificate of incorporation and bylaws, our shareholder protection rights plan, and the anti-takeover provisions under Delaware law could delay or prevent a third

party from acquiring us or replacing members of our Board of Directors, even if the acquisition or the replacements would be beneficial to our stockholders. These provisions could also reduce the price that certain investors might be willing to pay for shares of our common stock and/or New Notes and result in the market price being lower than it would be without these provisions. Our charter and other documents contain anti-takeover devices including:

·        staggered director terms such that only one of the three classes of directors is elected each year;

·        a shareholder rights plan that is designed to protect us from coercive takeover attempts;

·        a supermajority provision requiring at least two-thirds of the shares entitled to vote to approve an amendment of our bylaws;

·        providing our Board of Directors with the authority to issue shares of “blank-check” preferred stock without stockholder approval under any terms, conditions, rights and preferences that the Board determines; and

·        an advance notice requirement for nominations of directors or proposals for consideration at stockholder meetings.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

There are no material unresolved written comments that were received from the Securities and Exchange Commission staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.